Better health.
Within reach.
Every day.
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© Hikma Pharmaceuticals PLC
Annual Report 2018
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. We develop innovative
solutions that transform people’s lives,
for a healthier world wherever we are.
How we have performed
Revenue
($m)
Operating profit/(loss)
($m)
$2,070m
$371m
Core2 operating profit
($m)
$460m
EBITDA3
($m)
$492m
1,950
1,936
2,070
402
381
371
427
409
419
460
386
474
454
473
488
492
1,489
1,440
302
2014
2015
2016
2017
2018
2014
2015
2016
2017 1
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
(747)
Profit/(loss) to shareholders
($m)
Basic earnings/(loss) per share
(cents)
Core basic earnings per share4
(cents)
Dividend per share
(cents)
$282m
117.0c
137.8c
38c
278
252
282
140.4
126.6
155
66.5
151.0
147.3
117.0
137.8
118.5
105.0
32
32
33
34
38
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
2014
2015
2016
2017
2018
(843)
(351.3)
1. In 2017, the Group reported an operating loss of $747 million, primarily due to an impairment
of the intangible assets and property plant and equipment of the Columbus business
2. Core results are presented to show the underlying performance of the Group, excluding
the exceptional items and other adjustments set out in note 6 in the Notes to the financial
statements. A reconciliation from core to reported operating profit is included within the
Consolidated income statement in the Financial statements
3. Earnings before interest, tax, depreciation, amortisation and impairment charges
4. Core basic earnings per share is reconciled to basic earnings per share in note 15
in the Notes to the financial statements
What’s inside
Contents
Strategic report
Investment case
2 What we do
4
Executive Chairman’s statement
6 Chief Executive Officer’s statement
9
10 Delivering our brand promise
12 Our markets
14 Our business model
16 Focusing on our strategy
18 Measuring our progress
Business and financial review
Injectables
20
26 Generics
32 Branded
38 Group performance
Sustainability
42 Sustainability
Risk management
53 Risk management
Corporate governance
63 Message from our Executive Chairman
64 Corporate governance at a glance
66 Board of Directors
68 Executive Committee
69 Governance report
73 Committee reports
81 Remuneration report
105 Directors’ report
Financial statements
pg 6
Sustainability
109 Independent auditors’ report
116 Consolidated financial statements
121
168 Company financial statements
170 Notes to the Company financial statements
Notes to the consolidated financial statements
pg 42
Shareholder information
175 Shareholder information
176 Principal Group Companies and Advisers
What we do
pg 2
Executive
Chairman’s
statement
pg 4
Chief Executive
Officer’s statement
Business and financial review
pg 20
Financial
statements
pg 108
Read more content online
www.hikma.com
Hikma Pharmaceuticals PLC | Annual Report 2018
1
What we do
Our markets
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.
62%
Group revenue
(2017: 62%)
c.1,900
employees
US
c.8,400 employees
30 manufacturing plants in 12 countries
Our business segments
Segmental
revenue
$826m (2017: $776m)
$692m (2017: $615m)
$542m (2017: $536m)
7 R&D centres
650+ compounds
2
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | What we do
US
Our large manufacturing facilities –
one for injectables and one 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 sustainable growth.
MENA
We sell branded generics and in-licensed
patented products across the region.
We have manufacturing facilities in seven
markets, including US FDA-inspected
plants in Jordan and Saudi Arabia. Around
2,000 sales representatives market our
brands to healthcare professionals across
18 markets.
Europe and the
rest of the world
We have injectable manufacturing facilities
in Germany, Italy and Portugal, with a range
of capabilities including dedicated capacity
for oncology and cephalosporins. These
facilities supply injectable products to the
US and MENA and a growing number of
markets in Europe.
6%
Group revenue
(2017: 5%)
c.900
employees
Europe
& rest
of the
world
32%
Group revenue
(2017: 33%)
c.5,600
employees
MENA
Injectables
Our Injectables business
develops and manufactures
generic injectable products.
Our products are sold
globally and are primarily
used in hospitals.
Generics
Our Generics business
develops and manufactures
oral and other non-injectable
generic products. Our
products are sold in the
US retail market.
Branded
Our Branded business
develops, manufactures
and markets branded generic
and in-licensed patented
products in MENA. Our
products are sold in the
retail and hospital markets.
For more information see page 20
For more information see page 26
For more information see page 32
Hikma Pharmaceuticals PLC | Annual Report 2018
3
Executive Chairman’s statement
It was more than 40 years ago that my father
founded Hikma with the purpose of making
high-quality medicines accessible to those
who need them. I am proud that our business
has always remained true to this purpose.
Transformational change
in leadership
It has been more than 30 years since I first held
an executive leadership role at Hikma. During
this period, the Group has grown significantly,
expanding into the US and Europe and
solidifying our position as the leading local
pharmaceutical company in MENA.
In order to deliver the next chapter of growth,
the Board and I felt that this year was the right
time to bring in new leadership. On 20 February
2018, we announced the appointment of
Sigurdur (Siggi) Olafsson as our new Chief
Executive Officer (CEO).
As Executive Chairman, I am working closely
with Siggi to set and deliver the strategic vision
for the Group. I have known and admired Siggi
for many years and I am confident that he is
the right person to strengthen our business,
accelerate our growth and to help us achieve
our goal of putting better health within reach
for patients across our markets.
Strong corporate governance
Over a number of years, we have been evolving
and strengthening the governance of Hikma.
This year, we continued on this trajectory, most
notably by appointing the first non-family
CEO, as discussed above. We also completed
the implementation of our succession plan
for longer-serving independent directors.
Details of the activities of the Board, and its
Committees, are laid out in the Corporate
governance section of this report.
Supporting our communities
My father’s vision was that Hikma would enrich
the communities in which we operate and
enable a better quality of life for the patients
we serve. We strive to fulfil this commitment
by increasing access to high-quality medicines
across our markets, as well as through
donations, fundraising and volunteering. This
year, we were very proud to form a four-year
global partnership with Direct Relief, one of the
This is an exciting time for Hikma as we embark on our next
chapter of growth. As we invest in the future, we maintain
our commitment to strong corporate governance, the highest
quality standards and to improving the lives of our patients
and our communities.”
4
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Executive Chairman’s statement
world’s leading medical relief organisations,
and to become a Patron of The Prince’s Trust,
the UK’s leading youth charity.
Our continued commitment to strong
environmental, social and governance (ESG)
practices continues to be recognised as
demonstrated by our inclusion in
the FTSE4Good Index in 2018. Further
information on our commitment is provided
in the Sustainability section of this report.
Strong financial performance
and shareholder returns
The Group has delivered a strong set of results
in 2018, ahead of our expectations. Group core
operating profit increased by 19% and core
basic earnings per share increased by 31%.
Our improved financial performance and
significant strategic progress this year has
been reflected in our share price which
increased by 51% to 1,716p at 31 December
2018. Hikma has a long track record of creating
value for shareholders. Over the last five years,
we have delivered a total shareholder return
of 53%, exceeding the FTSE 100 and the
FTSE Pharmaceutical indices of 21% and
49% respectively, over the same period.
Total shareholder returns, 2013–2018
150
130
110
90
70
50
30
10
(10)
(30)
(50)
We remain committed to delivering consistent
dividend payments. The Board has
recommended a final dividend of 26 cents
per share (approximately 20 pence per share),
bringing the total dividend for the full year
to 38 cents per share (approximately 29 pence
per share), up from 34 cents per share
(approximately 24 pence per share) in 2017.
Through our venture capital arm, Hikma
Ventures (HV), we are investing in the growing
global digital health space. In 2018, we
expanded our portfolio with new investments
in Click Therapeutics and Nebula Genomics.
HV also completed its first successful exit
when one of its early portfolio investments
was acquired in 2018.
Investing in the future
Across our markets, where increasing
competition is putting downward pressure
on prices, we need to continuously develop
new, more differentiated products to deliver
sustainable long-term growth, making pipeline
development a key strategic focus.
In recent years, we have made good progress
strengthening our R&D capabilities through
acquisitions and new hires. However, there
is still much to do to increase the number of
more specialised products in the pipeline and
improve the pace of new product launches.
We have recently strengthened our business
development capabilities and we will continue
working with global partners to co-develop,
license and acquire products.
Quality without boundaries
As we grow our businesses and expand our
capabilities, we are benefitting from our
reputation as a consistent and reliable partner
in all of our markets. Hikma has been built
on a culture of quality that is reflected not just
in the products we manufacture but in our
people, our relationships and our thinking.
Maintaining a culture with quality at its core
will ensure we continue to deliver the highest
standards in the future.
Looking ahead
Looking ahead to 2019 and beyond, I am
very optimistic for the future of Hikma.
Whilst market conditions are likely to remain
challenging, we have demonstrated the
resilience of our businesses. I believe we have
set ourselves the right strategic objectives
and have a strong leadership team in place to
deliver sustainable growth over the long term.
Finally, I would like to thank my colleagues
across the Hikma family for their hard work
and dedication, and the healthcare
professionals and other stakeholders that
we serve for their continued support.
53%
49%
21%
Said Darwazah
Executive Chairman
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Hikma Pharmaceuticals PLC
FTSE 100
FTSE 350 Pharmaceuticals & Biotechnology
Hikma Pharmaceuticals PLC | Annual Report 2018
5
Chief Executive Officer’s statement
I am very pleased and excited to have joined Hikma
as Chief Executive Officer. It has truly been a
fantastic year and I want to thank all of our employees
for welcoming me so warmly into the Hikma family.
Since joining Hikma in February 2018, I have
visited many of our sites worldwide and had
the opportunity to speak with employees
across the Group and meet with a number of
our customers. Having worked in the industry
for many years, I have been very impressed
with the quality of our facilities and operations
and the talent and commitment of our people.
Building a stronger leadership team
To enable stronger decision-making, execution
and accountability I have made some changes
to simplify our organisational structure. These
have included changes to the composition of
the executive team, a redefinition of individual
roles and responsibilities and the creation of
new corporate functions.
Across the Group, we have made a number
of new hires to support our leadership teams.
The expertise we have added has significantly
strengthened our key functions, including
our operations, commercial, R&D, business
development, legal and compliance teams.
We will continue to bring in new talent and
expertise where we need it.
Returning to growth
I am very pleased with the performance of the
Group this year. Group revenue was $2.1 billion,
operating profit was $371 million and core
operating profit was $460 million. Each of our
three businesses achieved both revenue and,
more importantly, profit growth.
The strong performance of our Injectables
business in an environment where competition
is intensifying, demonstrates the resilience of
our portfolio and the scale and flexibility of our
manufacturing facilities. I am proud of our team’s
response to the market shortages of injectable
pain management products in the US this year.
Our investment in additional capacity and
people to rapidly increase production of
critical medicines for hospitals demonstrated
our commitment to customers and patients
as a high-quality, reliable supplier.
By inspiring and enabling our people to develop a portfolio
that meets the future needs of doctors and patients, we are
building a business that can deliver sustainable growth over
the long term.”
6
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Chief Executive Officer’s statement
2019 is off to a good start
and I’m optimistic about
the year ahead. We have
developed a new strategy,
which I’m confident will deliver
sustainable growth over the
long term.”
During a challenging time for the US retail
generics industry, our Generics business
delivered strong growth in revenue and
profitability this year, exceeding the
expectations we set at the beginning of 2018.
We drove strong demand for our differentiated
portfolio and started to see the benefits of
the commercial and operational improvements
we have initiated.
Our Branded business also achieved good
results in 2018, with steady growth in revenue
and profitability. We continued to improve
patient access to important medicines across
MENA, with new product launches and new
licensing agreements. In 2018, we began
implementing a tiered approach across our
18 MENA markets to prioritise our investments
and resources in the markets that offer the
highest growth potential.
While our businesses performed strongly this
year, we have refined our strategy to ensure we
can withstand increasing competitive pressure
and are positioned to deliver future growth.
We have identified three strategic priorities.
Deliver more from
a strong foundation
Hikma has a solid foundation from which
to build: a broad product portfolio,
a differentiated pipeline, strong commercial
capabilities, high-quality manufacturing
facilities and an extensive network of global
partners. We will leverage these strengths,
maximising the value of our products through
a focus on commercial and operational
excellence and a lean cost base.
Build a portfolio that
anticipates future
health needs
New products that meet the evolving
needs of healthcare professionals and
patients will deliver sustainable growth in
competitive markets. While our pipeline
is good, we can do better. The 6-7% of revenue
that we invest in core R&D each year needs
to deliver a higher return. We will focus on
increasing the number of products in
our pipeline and on adding more differentiated
and specialised products. Over the next five
years, I want our annual revenue from new
launches to increase to 10% of Group core
revenue up from around 6% today.1
Alongside our internal R&D programme,
we will build on our long track record of
successfully working with partners to add
innovative and differentiated products
through licensing and co-development
agreements. A great example of this is the
expansion of our partnership agreement
with Vectura this year. We are very pleased
to be building on our strong relationship to
develop and commercialise generic versions
of GSK’s Ellipta® portfolio, adding to our
pipeline of complex respiratory products.
We continue to leverage our position as
‘partner of choice’ in MENA to add new
in-licensed products to our portfolio. In 2018
this included an agreement to license and
distribute a portfolio of consumer healthcare
products from Omege Pharma Trading NV,
an affiliate of Perrigo Company PLC. We are
also using licensing as a strategy to add more
complex products to our US portfolio. In 2018
this included agreements with Hansoh
Pharmaceutical Group Co., Ltd and Beijing
Sciecure Pharmaceutical Co., Ltd.
1. Percentage of core revenue from products launched in 2018
and the second half of 2017.
Hikma Pharmaceuticals PLC | Annual Report 2018
7
Chief Executive Officer’s statement continued
Inspire and enable
our people
It is ultimately our people that will deliver our
strategy and achieve our ambitious growth
targets. Fostering a culture where people can
thrive is a priority in order to retain our best
people and to continue attracting new talent.
This is the second year that we have
undertaken a global employee survey. The
results pointed to several areas where we are
doing well and also identified others where we
can improve. Employee engagement was 69%
in 2018, which was a promising improvement
over last year. Continued improvement in the
levels of engagement and enablement across
the Group are a priority for all of Hikma’s
leadership team. We want to make Hikma an
inspiring place to work and we are launching
several initiatives to achieve this.
For the first time, we held a Global Leadership
Conference in 2018, which brought together
180 leaders from more than 20 countries
across our organisation. It gave us the
opportunity to collectively discuss the
future growth and direction of Hikma and
was invaluable in connecting and motivating
our global leaders.
In 2018, we launched our refreshed global
brand and transitioned all of our businesses
under the Hikma name. This is proving to
be a powerful tool in unifying our people
behind a shared vision and purpose of putting
high-quality medicines within reach of those
who need them. The brand is helping us be
more aligned and work better together, and
articulates the value Hikma provides for
doctors and patients.
Maintaining high-quality standards
Quality has been a cornerstone of Hikma
since its inception. Our investment and
commitment to quality has always been an
important differentiator for us. In 2018, our
teams were able to supply critical medicines
to hospitals when competitors were struggling
to supply, strengthening our reputation as
a manufacturer that our customers and
our global partners can trust. This was
reinforced by five US FDA inspections at
our manufacturing plants in Cherry Hill,
Columbus, Eatontown, Portugal and Germany
this year; all of these inspections resulted in
zero critical observations.
Outlook
The Group delivered a strong financial
performance in 2018 and we have started
2019 in a good position. We still have work to do
to strengthen our base business and develop
a pipeline that can deliver sustainable growth
over the long term. However, the progress that
we have made so far is considerable and I am
confident that we can build on this to deliver
Hikma’s next chapter of growth.
Our business has a positive and important
impact on people’s lives around the world,
so I want to thank all of our employees,
our customers and our partners for helping
us to put better health within reach every
day for millions of people.
Sigurdur Olafsson
Chief Executive Officer
CEO Siggi Olafsson presenting to Hikma’s management team at the Global Leadership Conference
8
Hikma Pharmaceuticals PLC | Annual Report 2018
Investment case
Strategic report | Investment case
We have a long track record of creating value for our
shareholders. By focusing on our strategic priorities and
leveraging our strengths, we can build upon our success.
Five reasons
to invest
in Hikma
Unique and diversified
business model
Strong market
position
Our business is uniquely
positioned, with three distinct
business segments and strong
foundations in the US, MENA
and Europe. Our products are
sold in both the retail and
hospital markets.
Revenue by business segment
Injectables
Generics
Branded
Other
40%
33%
26%
1%
We are the third largest generic
injectable manufacturer and a top
ten generic company overall in the
US with an increasing market share.
In MENA, we are one of the largest
pharmaceutical companies and
the ‘partner of choice’.
#3
Third largest generic
injectable
manufacturer
in the US
#5
Fifth largest
pharmaceutical
company in MENA
Commitment
to quality
Large and growing
pipeline
Cash
generation
We have built our global
reputation on manufacturing
high-quality medicines. Quality
is embedded in our people,
our relationships and our thinking.
Our excellent track record of
regulatory compliance has made
us a trusted partner for our
customers and patients.
We have a large pipeline, with
an increasing proportion of more
differentiated and complex
products. We complement our
internal development with
partnerships and M&A.
We have consistently generated
strong cash flow. Our disciplined
approach to cash management
and acquisitions ensures we
maintain a strong balance sheet
and gives us the financial flexibility
to support future growth.
5
FDA inspections in 2018
with zero critical observations
300+
Products in our pipeline
70%
Free cash flow/core
operating profit1
1. Free cash flow is defined as net cash inflow from
operating activities less purchases of property, plant
and equipment
Hikma Pharmaceuticals PLC | Annual Report 2018
9
Delivering our brand promise
By creating high-quality products, and making them accessible
to those who need them, we are helping to shape a healthier
world that enriches all of our communities.
Delivering for stakeholders
For more than 40 years, we have been dedicated to
transforming people’s lives by providing the medicine
and support that they need every day. We are committed
to delivering our brand promise for the stakeholders
we come into contact with – the patients who use our
medicines, healthcare professionals, our customers,
our employees and the wider community.
Patients
We are committed to making high-quality medicines
more accessible. We have a broad and growing product
portfolio across multiple therapeutic categories, including
anti-infectives, cardiovascular, diabetes, central nervous
system, respiratory and oncology. We are continuously
investing to expand our capabilities and capacity to meet
the growing demand for our products and to ensure our
customers and patients receive the products they need,
when they need them.
To see more from our stakeholders see pages 22, 28 and 34
10
Hikma Pharmaceuticals PLC | Annual Report 2018
Healthcare professionals
By continuously working to better understand the
needs of doctors, nurses, clinicians and pharmacists,
we are ensuring we develop a pipeline of products and
technologies that meet the future needs of patients.
In MENA, we have around 2,000 sales representatives
that meet with doctors on a daily basis and support them
in improving the healthcare available to their patients. We
regularly provide a forum for bringing together key opinion
leaders, doctors and global research institutes to share
knowledge and raise awareness.
Strategic report | Delivering our brand promise
We are committed to ensuring
our customers and patients
have the products they need,
when they need them.”
We are proud to work for
a business that positively
impacts the lives of millions
of people every day.”
Our people
It is the passion and commitment of our people that make
it possible for our business to positively impact the lives of
millions of people every day. Across our organisation, our
teams are building strong and trusted relationships with
patients, healthcare professionals and our customers.
Our people are proud to work for Hikma and to enrich the
communities in which we operate. We continuously invest
in important partnerships globally, including Direct Relief
and The Prince’s Trust, that provide unique volunteering
opportunities for our people and enable us to give back
to our community.
Hikma Pharmaceuticals PLC | Annual Report 2018
11
Our markets
Our strategic priorities are influenced by
the key industry trends shaping our markets.
The global context
Geopolitical tension around the
world is contributing to economic
uncertainty. Despite this, demand
for healthcare continues to grow,
driven by demographic shifts and
changes in lifestyle. Over the next
five years, the global pharmaceutical
market is expected to grow at a
compound annual growth rate
(CAGR) of 3-6%.1
Global generic pharmaceutical
market size2
2020
$225
billion
2016
$184
billion
Growing population
Chronic diseases
1 billion+
By 2030, there will be an additional
one billion people around the world
50%
of global healthcare expenditure will be
directed at three therapeutic areas in 2020
A growing population is leading to increased
demand for healthcare. Between 2000 and
2016, global average life expectancy increased
by around six years, the fastest increase since
the 1960s.3 The United Nations predicts that
by 2030, there will be an additional one billion
people around the world.4
Changes in lifestyle are driving demand for
healthcare. Worldwide obesity has nearly
tripled over the last 40 years, leading to
a significant growth in related diseases.3
By 2020, it is expected that 50% of global
healthcare expenditure will be directed
at just three therapeutic areas – cancer,
respiratory and cardiovascular diseases.
Our strategic response:
Across our three core geographies,
we continue to invest in our manufacturing
capacity and capabilities to enable us
to meet current and future demand.
We are committed to improving access
to high-quality, affordable medicines.
Our strategic response:
We regularly meet with key stakeholders to
identify unmet demand. Our R&D teams use
this information to help select products for our
pipeline. We are focused on providing patients
with the products that they need.
1. IQVIA, ‘The global use of medicine in 2019 and outlook to 2023’, 2019
2. UBS, ‘Longer term investments, Generics’, 2017
3. World Health Organisation, 2018
4. United Nations, ‘World population prospects’, 2017
12
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Our markets
Population growth and increased prevalence
of chronic diseases are driving demand for better,
more accessible healthcare. Hikma is well-positioned
to respond to this growing demand.”
Key industry trends
Pricing and access
Drug shortages
Competition
Government regulations
50%
drop in price when two generic
products enter the market
110
products remain on
the US shortage list
90%
of all US retail generics were
sold to three customers
#5
largest pharmaceutical
company in MENA
The increased demand for
healthcare is putting pressure on
government budgets. As a result,
governments around the world
are looking for ways to lower the
cost of medicines.
In the US, the price of medicines
has become a prominent public
issue, with political campaigns
and media attention directed at
pharmaceutical companies and
their approaches to drug pricing.
In this environment, companies
are under significant pressure
to maintain or lower drug prices.
Over the past six years, the
number of new drug shortages in
the US has declined significantly
from 251 newly-reported shortages
in 2011 to 35 in 2017. Despite this
improvement, around 110 products
remain on the shortage list and
drug shortages continue to have
a significant impact on patients.
Manufacturing issues are the
primary cause of shortages.6
Outside the US, shortages are
also presenting challenges in
Europe and MENA.
Our strategic response:
Generics are part of the solution
to lower drug pricing. Our focused
investment in R&D enables us to
continuously bring new generic
products to market.
Our strategic response:
We are committed to helping
alleviate drug shortages. In the
last two years, we have launched
15 injectable products into
shortage situations in the US.
When two generic products enter
a branded market, the price
typically drops by around 50%.
The discount accelerates as
more generic products enter
the market.5
We continue to invest in our
manufacturing capabilities and
capacity, enabling us to ramp
up production of products as
required. We also continue to
grow our broad product portfolio
to ensure we have the products
that patients need.
5. FDA, 2017, available at https://www.fda.gov/AboutFDA/CentersOffices/
OfficeofMedicalProductsandTobacco/CDER/ucm129385.htm
6. FDA drug shortages, 2018, available at https://www.fda.gov/Drugs/DrugSafety/
DrugShortages/ucm441585.htm
7. Association for Accessible Medicines, Ensuring the future of accessible medicines
in the U.S., 2018
The generics industry is highly
competitive. In the US,
consolidation has reduced the
number of buyers so that 90% of
all retail generics are sold to three
buying consortia.7 At the same
time, the number of competitors is
increasing and the FDA is approving
a record number of ANDAs.
In Europe, governments
have introduced tendering to
encourage competitive bidding.
Across MENA, there has been an
increase in local pharmaceutical
companies, as well as an influx of
generic manufacturers from Asia.
Our strategic response:
To offset price erosion, it is
critical that we have a steady
stream of new launches. We
invest 6-7% of revenue in core
R&D and are focused on
developing differentiated
products, which we expect
will have limited competition.
While price is very important to
our customers, there are other
factors which impact purchasing
decisions. We continue to focus
on strengthening our relationships
with customers by demonstrating
that we are a reliable partner.
Many governments in MENA
have introduced regulation to
protect local companies and
promote local manufacturing.
Some regulations restrict the
importation of products when
there is a local manufacturer.
Local manufacturers may also
be given preferential treatment
in government tenders or faster
approval times for new products.
Our strategic response:
Our focus is on strengthening
our presence in our core MENA
markets. Our local management,
operations and sales teams are
experienced in navigating
challenging market conditions.
We have invested in local
manufacturing facilities in MENA
markets, including FDA-inspected
plants in Jordan and Saudi Arabia.
Hikma Pharmaceuticals PLC | Annual Report 2018
13
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
Financial
Investment in R&D, manufacturing
facilities and M&A enables us to
expand our product portfolio,
technical capabilities and
manufacturing capacity.
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
high-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 shared objectives.
Capabilities
We have extensive manufacturing
capabilities across our global markets
focused on operational excellence
and efficiency.
Our strategy
For a full explanation of
our strategy see page 16
Deliver more from a
strong foundation
Our activities
Our activities are diversified across our business
segments and markets and are aligned with our
purpose to make high-quality medicines accessible
to the people who need them.
p and innovate
elo
v
e
D
M
a
n
u
f
a
c
t
u
r
e
a
n
d
m
a
i
n
t
a
i
n
q
u
a
l
i
t
y
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
14
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Our business model
Find out more about our key performance indicators
see page 18
Find out more about how we are managing risk
see page 55
The value we create
Patient benefits
We provide our patients with access
to high-quality medicines.
650+
Compounds
Employee engagement
By focusing on the empowerment and development
of our people, we provide long and rewarding
careers for our talented and diverse workforce.
69%
Employee engagement score
Shareholder returns
We have a long history of creating value
for our shareholders.
53%
Total shareholder return over last five years
Sustainable business
By acting responsibly and with integrity, we are
benefitting the communities in which we operate.
– Partnership with Direct Relief
– Patron of The Prince’s Trust
Hikma Pharmaceuticals PLC | Annual Report 2018
15
Build a portfolio that
anticipates future
health needs
Inspire and enable
our people
Develop and innovate
We are developing broad and differentiated portfolios of generic,
branded generic and in-licensed patented products through
internal R&D, co-development partnerships, licensing agreements
and acquisitions.
6%
Group revenue invested in core R&D (2017: 6%)
Manufacture and maintain quality
We are committed to maintaining high-quality standards in all
of our manufacturing facilities. We have 30 plants across the Group
that supply our global markets with a broad range of injectable and
non-injectable products, including 11 US FDA-inspected plants
and 11 EMA-inspected plants.
30
manufacturing
plants
11
US FDA-inspected
plants
11
EMA-inspected
plants
Market across geographies
We actively promote, sell and distribute our products in our markets
through experienced sales and marketing teams. In the MENA region,
around 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.
c. 2,000
sales representatives market our products across MENA
Focusing on our strategy
As a leading provider of high-quality
medicines, our strategy is to make healthcare
more accessible by delivering more from our
strong foundation, building a portfolio that
anticipates future health needs and inspiring
and enabling our people.
Deliver more
from a strong
foundation
Build a portfolio
that anticipates
future health
needs
Inspire and enable
our people
Our purpose
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
enriches all of our communities.
Our strategy
Deliver more from
a strong foundation
Better health.
Within reach.
Every day.
Build a portfolio
that anticipates
future health needs
Inspire
and enable
our people
16
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Focusing on our strategy
We have a unique business model,
a differentiated footprint and a
commitment to quality. We are
strengthening and enhancing these
assets to drive sustainable growth.
Our focus is on:
— Maximising value from our current portfolio
— Building stronger customer relationships
— Driving efficiencies and cost savings
KPIs:
— Core revenue
— Core operating profit
— Return on invested capital
Today’s pipeline is tomorrow’s
product. We are investing in our
pipeline to meet the future needs
of patients and increase access
to high-quality medicines.
Our focus is on:
— Building R&D capabilities to add
differentiated and complex products
— In-licensing other innovative products
— Leveraging partnerships and M&A to fill
pipeline gaps and add new capabilities
KPI:
— Core revenue from new products launched
Our people are delivering
our strategy. Our strong brand
and clear purpose support
a culture that enables us
to achieve our goals.
Our focus is on:
— Building a culture of collaboration
— Creating an environment where people
can do their best
— Recruiting and retaining the best talent
KPIs:
— Employee enablement
— Employee engagement
Hikma Pharmaceuticals PLC | Annual Report 2018
17
Measuring our progress
We are delivering our strategy through our three strategic
priorities and measuring our performance with relevant
key performance indicators (KPIs).
Strategic
priority
Deliver more from
a strong foundation
(%)
6%
65%
(%)
69%
Find out more
about our
strategy
see page 16
Find out more
about how we are
managing risk
see page 55
Find out more
about our
remuneration
report see
page 81
KPI
Core revenue
($m)
Core operating profit
($m)
Return on invested capital2
(%)
Core revenue from
new product launches
(%)
Employee enablement
Employee engagement
$2,076m
1,950 1,936
2,076
1,489 1,440
$460m
460
427
409
419
386
18.6%
23.0 23.4
18.6
15.1
10.6
2014 2015 2016 2017
2018
2014 2015 2016 2017
2018
2014 2015 2016 2017
2018
Description
Total annual revenue generated
across all businesses within the Group
Core operating profit generated by
the Group
Core operating profit after interest
and tax divided by invested capital
(calculated as total equity plus net debt)
contribution from products launched
in 2018 and the second half of 2017
Percentage of core revenue
Global employee enablement score
Global employee engagement score
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 efficiency
in allocating capital to
profitable investments
This demonstrates our ability to
This measures whether people find
This measures people’s pride in
offset price erosion and other
their work fulfilling and rewarding,
working for Hikma, their willingness
competitive pressures
and whether they feel supported
to recommend Hikma as an employer
to achieve their full potential
and their desire to stay long term
2018 performance Group revenue increased by
7% reflecting strong growth in
our Generic, Injectable and
Branded businesses
The increase in core operating profit
was driven primarily by a significant
improvement in the profitability of
our Generics business
The increase in return on invested
capital reflects the significant
increase in core operating profit,
primarily in our Generics business,
and lower borrowings, resulting from
the paydown of debt in 2018
We had a high number of low value
Our employee enablement score
The increase in our employee
launches across the Group. As we
decreased. During 2019, we will
engagement score reflects improved
improve the potential of our pipeline,
do more to remove barriers that
communications and collaboration
we expect the percentage of core
hinder employees’ ability to do
across the Group
revenue from new launches to
their best work
increase towards 10%
Link to
remuneration
R
1
R
R
1. As one of the performance criteria for determining the Executive Directors’ remuneration,
core operating profit is adjusted to be before R&D
2. See reconciliation on page 41
18
Hikma Pharmaceuticals PLC | Annual Report 2018
R
R
Strategic report | Measuring our progress
KPI
Core revenue
($m)
Core operating profit
Return on invested capital2
($m)
(%)
$2,076m
$460m
18.6%
Build a portfolio
that anticipates
future health needs
Core revenue from
new product launches
(%)
6%
Inspire and enable
our people
Employee enablement
(%)
Employee engagement
(%)
65%
68
65
69%
67
69
Find out more
about our
strategy
see page 16
Find out more
about how we are
managing risk
see page 55
Find out more
about our
remuneration
report see
page 81
Description
Total annual revenue generated
Core operating profit generated by
Core operating profit after interest
across all businesses within the Group
the Group
and tax divided by invested capital
(calculated as total equity plus net debt)
Percentage of core revenue
contribution from products launched
in 2018 and the second half of 2017
2017
2018
2017
2018
Global employee enablement score
Global employee engagement score
Why is it a KPI?
This measures our ability to extract
This measures our ability to grow
This measures our efficiency
value from our product portfolio
revenue, deliver efficiencies and
in allocating capital to
across our global markets
ensure cost control, while maintaining
profitable investments
high-quality manufacturing facilities
This demonstrates our ability to
offset price erosion and other
competitive pressures
This measures whether people find
their work fulfilling and rewarding,
and whether they feel supported
to achieve their full potential
This measures people’s pride in
working for Hikma, their willingness
to recommend Hikma as an employer
and their desire to stay long term
2018 performance Group revenue increased by
The increase in core operating profit
The increase in return on invested
7% reflecting strong growth in
our Generic, Injectable and
Branded businesses
was driven primarily by a significant
capital reflects the significant
improvement in the profitability of
increase in core operating profit,
our Generics business
primarily in our Generics business,
and lower borrowings, resulting from
the paydown of debt in 2018
We had a high number of low value
launches across the Group. As we
improve the potential of our pipeline,
we expect the percentage of core
revenue from new launches to
increase towards 10%
Our employee enablement score
decreased. During 2019, we will
do more to remove barriers that
hinder employees’ ability to do
their best work
The increase in our employee
engagement score reflects improved
communications and collaboration
across the Group
Link to
remuneration
R
1
R
R
1. As one of the performance criteria for determining the Executive Directors’ remuneration,
core operating profit is adjusted to be before R&D
2. See reconciliation on page 41
R
R
Hikma Pharmaceuticals PLC | Annual Report 2018
19
Injectables
20
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Injectables
Our Injectables business
develops and manufactures
generic injectable products.
Our products are sold globally
and are primarily used in hospitals.
Hikma Pharmaceuticals PLC | Annual Report 2018
21
Injectables continued
Bringing important 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.
Increasing our manufacturing output
of injectable pain management products
2018
83m
units
2017
53m
units
Case study:
Working with our customers to address
critical shortage
Hikma continues to play a major role in helping to alleviate
drug shortages. In the last two years, we have helped
hospitals, doctors and patients by launching 15 products
into shortage situations.
In 2018, US hospitals faced a critical shortage of injectable
medicines used for patient pain management after a
competitor experienced a significant manufacturing
disruption. The shortage had a substantial impact on
hospitals, as these medicines had to be rationed, which
at times resulted in surgeries being delayed.
In response to this shortage, we significantly increased
production of these products at our US manufacturing
facility, by adding production lines, recruiting additional
staff and manufacturing around the clock. We also worked
closely with the FDA and US Drug Enforcement Agency
to ensure we had the required raw materials.
57%
increase
2222
Hikma Pharmaceuticals PLC | Annual Report 2018
Stakeholder perspective
Strategic report | Business and financial review | Injectables
With these essential medicines in short
supply, we were concerned about our
hospitals and their patients since they
were facing some difficult decisions.
By working together with us and US
government agencies, Hikma was
able to ramp-up production of these
important medicines, helping to ease
the shortage.”
Lee Perlman
President, Greater New York Hospital
Association Ventures, Inc.
Hikma Pharmaceuticals PLC | Annual Report 2018
23
Injectables continued
Overview
Financial highlights
$ million
Revenue
Core revenue
Gross profit
Core gross profit
Core gross margin
Operating profit
Core operating profit
2018
826
832
497
503
2017
776
776
480
480
Change
Constant
currency change
6%
7%
4%
5%
6%
7%
4%
5%
60.5%
61.9%
(1.4)pp
(1.2)pp
305
335
293
315
4%
6%
5%
8%
Core operating margin
40.3%
40.6%
(0.3)pp
0.2pp
Injectables core revenue by region
2018
2017
832
776
US
MENA
Europe and ROW
607 (73%)
120 (14%)
105 (13%)
US
MENA
Europe and ROW
586 (76%)
103 (13%)
87 (11%)
Core revenue ($m)
Core operating margin (%)
2017
2018
Outlook
776
832
2017
2018
40.6
40.3
In 2019, we expect global Injectables revenue to be in the range of $850 million to
$900 million. We expect core operating margin to be in the range of 35% to 38%.
24
Hikma Pharmaceuticals PLC | Annual Report 2018
Business review
In 2018, our global Injectables business
performed well, with core revenue up 7% to
$832 million (2017: $776 million). In constant
currency, global Injectables core revenue
was also up 7%.
US Injectables core revenue was $607 million,
up 4% (2017: $586 million). While competition
on certain products increased significantly,
strong demand from our hospital customers
for our large and diversified portfolio, recent
product launches and our flexibility in
responding to market shortages enabled
our US business to deliver growth.
MENA Injectables revenue was $120 million,
up 17% (2017: $103 million). In constant currency,
MENA Injectables revenue increased by 21%,
reflecting a strong performance in Saudi
Arabia and a significant increase in sales of
Remsima®, our infliximab biosimilar product
licensed from Celltrion.
European Injectables revenue was $105 million,
up 21% (2017: $87 million). In constant currency,
European Injectables revenue increased by
15%, reflecting the contribution from recently
launched products and expanded capacity
for our lyophilised products.
Injectables core gross profit increased to
$503 million (2017: $480 million) and core
gross margin remained relatively stable at
60.5% (2017: 61.9%), reflecting a favourable
product mix. Core operating profit, which
excludes the amortisation of intangible assets
other than software and exceptional items1,
was $335 million (2017: $315 million). Core
operating margin remained extremely strong
at 40.3% (2017: 40.6%). This reflects the
strong gross margin, which more than offset
increased investment in R&D.
1. Exceptional items include the costs related to the
consolidation of our distribution facilities in the US.
Refer to note 6 for further information
During the year, the Injectables business
launched 15 products in the US, 17 in MENA
and 20 in Europe. We submitted 130 filings to
regulatory authorities across all markets and
signed a number of licensing agreements to
add more complex products to our pipeline.
In the US, this included licensing agreements
with Hansoh Pharmaceutical Group Co., Ltd.
(Hansoh), for a portfolio of injectable
oncology medicines, and Beijing Sciecure
Pharmaceutical Co., Ltd (Sciecure) for one
of their niche injectable anti-viral medicines.
In MENA, we signed a licensing agreement
with Laboratorios Farmaceúticos Rovi SA
(Rovi) for their enoxaparin.
In 2019, we expect global Injectables revenue to
be in the range of $850 million to $900 million.
We expect revenue growth from new product
launches and good demand for our in-market
portfolio to more than offset continued price
erosion and an easing in demand for products
on shortage. We expect core operating margin
to be in the range of 35% to 38%.
Riad Mishlawi
President of Injectables
Strategic report | Business and financial review | Injectables
Our Injectables business
delivered strong growth in
all our markets. Our broad
product portfolio and flexible
manufacturing capabilities
enabled us to rapidly respond
to the needs of our customers
and we continued to bring
important new products
to market.”
Hikma Pharmaceuticals PLC | Annual Report 2018
25
Generics
26
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Generics
Our Generics business develops
and manufactures oral and other
non-injectable generic products.
Our products are sold in the US
retail market.
Hikma Pharmaceuticals PLC | Annual Report 2018
27
Generics continued
We think creatively and act practically
Our dedication to practicality, creativity and
innovation is demonstrated by 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.
Supporting ritonavir patients
2828
Hikma Pharmaceuticals PLC | Annual Report 2018
Case study:
Improving patient’s access to ritonavir
At Hikma, we are focused on providing patients with the
medicines they need. This year, we launched ritonavir,
an important, life-saving medicine used to help patients
manage their human immunodeficiency virus (HIV-1)
infections. Hikma’s ritonavir is the first generic version
of Norvir® for the US market.
To improve access to generic ritonavir, we engaged with
patient advocacy groups to understand how we could
best support patients and healthcare providers during
the launch of the first available generic. We implemented
an education and awareness campaign and helped
patients access co-pay assistance. These activities were
unconventional for a generic pharmaceutical launch,
but provided patients and healthcare providers with
the support they needed for this essential medicine.
Stakeholder perspective
Strategic report | Business and financial review | Generics
Providing new, generic treatment
options for people living with HIV
is very important, and we were
impressed that Hikma worked so
hard to understand what ritonavir
patients would want to know about
this first-to-market generic alternative.”
Kathie Hiers,
CEO, AIDS Alabama
Hikma Pharmaceuticals PLC | Annual Report 2018
29
Generics continued
Overview
Financial highlights
$ million
Revenue
Gross profit
Core gross profit
Core gross margin
Operating profit/(loss)
Core operating profit
Core operating margin
2018
692
279
295
42.6%
40
93
13.4%
2017
615
219
225
36.6%
(1,082)
22
3.6%
Change
13%
27%
31%
6.0pp
N/A
323%
9.8pp
Revenue ($m)
Core operating margin (%)
615
2017
3.6
692
2018
13.4
2017
2018
Outlook
We expect Generics revenue to be in the range of $650 million to $700 million in 2019
and core operating margin in the mid-teens.
Business review
In 2018, our Generics business performed
extremely well, exceeding the expectations
we set at the beginning of the year. Revenue
grew 13% to $692 million (2017: $615 million).
While the US retail generics market remains
competitive, we benefitted from our enhanced
commercial capabilities and strengthened
business operations. Good growth from our
more differentiated product portfolio and new
product launches more than offset the impact
of continued price erosion.
Generics gross profit was $279 million
(2017: $219 million). As previously announced,
we consolidated our manufacturing and
distribution facilities during the year and
restructured our Columbus facility. Excluding
related costs, core gross profit was $295
million (2017: $225 million). Gross margin was
40.3% (2017: 35.6%), and core gross margin
increased to 42.6% (2017: 36.6%), reflecting
an improvement in the product mix, operating
leverage and a significant reduction in
overheads, partly due to closure of our
Eatontown plant.
Generics core operating profit, which excludes
the amortisation of intangible assets other
than software and exceptional items1,
increased to $93 million (2017: $22 million). This
primarily reflects the strong improvement in
gross profit. Core operating margin was 13.4%
(2017: 3.6%). On a reported basis, Generics
operating profit was $40 million compared to
an operating loss of $1,082 million in 2017 that
arose as a result of an impairment of the
intangible assets and property, plant and
equipment of the Columbus business.
1.
Exceptional items include the expenses related to a repeat clinical endpoint study for
generic Advair Diskus®, the restructuring of our Columbus facility and the closure of
our Eatontown manufacturing plant. Refer to note 6 for further information
30
Hikma Pharmaceuticals PLC | Annual Report 2018
During the year, the Generics business
launched 13 products, including a first-to-file
Paragraph IV product with market exclusivity.
We continued to invest in pipeline development,
submitting eight filings to regulatory authorities,
as well as adding products through licensing
and partnership agreements. In particular, we
expanded our partnership with Vectura with
an agreement to develop and commercialise
their Open, Inhale, Close (OIC) dry powder
inhaler (DPI) platform, including generic
versions of GSK’s five Ellipta® DPI products.
The generic respiratory market is a key area of
focus for us and this agreement leverages the
investment we have made and the experience
we are gaining through our generic Advair
Diskus® development programme.
As previously announced, we initiated a repeat
clinical study for generic Advair Diskus® during
the year. The study is progressing well and we
expect to submit a response to the FDA with
new clinical data in 2019.
We expect Generics revenue to be in the
range of $650 million to $700 million in 2019.
This reflects continued price erosion on our
marketed portfolio, which we expect to be
partially offset with market share gains and
new product launches. We expect our focus
on cost reduction and operational efficiencies
to enable us to achieve a core operating
margin in the mid-teens.
Brian Hoffmann
President of Generics
Strategic report | Business and financial review | Generics
The performance of our
Generics business exceeded
our expectations in 2018.
Actions we’ve taken to
strengthen our commercial
and business operations
have successfully returned
this business to growth,
despite the challenging
market conditions.”
Hikma Pharmaceuticals PLC | Annual Report 2018
31
Branded
32
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Branded
Our Branded business develops,
manufactures and markets
branded generic and in-licensed
patented products in MENA.
Our products are sold in the
retail and hospital markets.
Hikma Pharmaceuticals PLC | Annual Report 2018
33
Branded continued
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.
Launching dimethyl fumarate across MENA
2018
20191
Jordan
Egypt
Saudi Arabia
Algeria
Kuwait
Libya
20201
Tunisia
Morocco
Iraq
Sudan
1. Pending regulatory approval
34
Hikma Pharmaceuticals PLC | Annual Report 2018
Case study:
Improving access to an important
MS treatment
In MENA, many patients do not have access to the range
of healthcare solutions that are available elsewhere in
the world.
Through discussions with key stakeholders, we identified
that an important medicine, dimethyl fumarate (DMF),
used for the treatment of multiple sclerosis (MS) was not
available in many MENA countries. This year, we became
the first company to launch this product in two markets
and we expect to launch it in a further eight markets by
the end of 2020.
We are engaging with healthcare professionals to help raise
awareness and develop the skills required in the treatment
and diagnosis of MS. Many of these physicians helped
advocate for fast-track approval of Hikma’s DMF to speed
up access to this critical medicine for their patients.
Stakeholder perspective
Strategic report | Business and financial review | Branded
Multiple sclerosis is a progressive
disease which we have to stop.
DMF represents a very suitable
option for patients with moderate
disease activity.”
Dr Nevin Mohieldin
Professor of Neurology,
Cairo University
Hikma Pharmaceuticals PLC | Annual Report 2018
35
Branded continued
Overview
Financial highlights
$ million
Revenue
Gross profit
Gross margin
Operating profit
Core operating profit
5%
7%
1.3pp
17%
15%
2.1pp
21.3
21.6
Business review
On a reported basis, Branded revenue was
$542 million, up 1% (2017: $536 million). On
a constant currency basis before adverse
movements against the US dollar, primarily in
the Sudanese pound and the Algerian dinar,
Branded revenue grew 5% to $560 million.
Egypt delivered double-digit revenue growth,
reflecting strong underlying market growth, an
improvement in our product mix and new
product launches. This strong performance in
Egypt more than offset lower revenue in Saudi
Arabia and Algeria. Revenue in Saudi Arabia
decreased slightly, reflecting the timing of
sales. A strong pipeline of new launches is
expected to drive a return to growth in 2019.
In Algeria, planned upgrades at our general
formulation plant impacted revenue growth in
the first half of the year. We expect a stronger
performance in 2019 now that the plant is back
on line and manufacturing has commenced at
our recently-acquired cephalosporin facility.
Our businesses in Iraq, Jordan, Libya and
Sudan delivered strong growth in constant
currency during the year.
Revenue from in-licensed products
represented 36% of Branded revenue (2017:
37%). During the year, we strengthened and
expanded our partnerships, adding new
in-licensed products to our portfolio. We signed
a partnership agreement with Omega Pharma
Trading NV, an affiliate of Perrigo Company PLC
(Perrigo), for the exclusive right to license and
distribute more than 30 consumer healthcare
products across MENA, with the exception of
current agreements in place. We also have the
right of first refusal to the full range of Perrigo’s
OTC medicines in the region.
During the year, the Branded business
launched 57 products and submitted 68 filings
to regulatory authorities.
Change
Constant
currency change
2018
542
271
2017
536
265
1%
2%
50.0%
49.4%
0.6pp
111
117
107
114
4%
3%
Core operating margin
21.6%
21.3%
0.3pp
Revenue ($m)
Core operating margin (%)
2017
2018
Outlook
536
2017
542
2018
We expect Branded revenue to grow in the mid-single digits in constant currency in 2019.
36
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Branded
Branded gross profit was $271 million, up 2%
(2017: $265 million) and gross margin was
50.0% (2017: 49.4%). In constant currency,
gross profit increased by 7% and gross margin
increased to 50.7% (2017: 49.4%), reflecting
the receipt of an allowance from a supplier to
compensate for changing market dynamics.
Core operating profit, which excludes the
amortisation of intangibles, was $117 million,
up 3% (2017: $114 million), and core operating
margin was 21.6%. In constant currency, core
operating profit grew 15% and core operating
margin increased to 23.4%, up 210 basis points.
This primarily reflects the improvement in the
gross margin and the release of doubtful debt
provisions following collection during the year.
We expect Branded revenue to grow in the
mid-single digits in constant currency in 2019.
Other businesses
Other businesses, which is primarily comprised
of Arab Medical Containers, a manufacturer of
plastic specialised medicinal sterile containers,
International Pharmaceuticals Research
Centre, which conducts bio-equivalency
studies, Hikma Emerging Markets and Asia
Pacific FZ LLC, and the chemicals division
of Hikma Pharmaceuticals LLC (Jordan)
contributed revenue of $10 million in 2018
(2017: $9 million) and an operating loss of
$5 million (2017: $(4) million).
Mazen Darwazah
Executive Vice Chairman & President
of MENA
During the year, we continued
to leverage our unique
footprint to deliver good
growth. We formed new
partnerships and expanded
existing agreements,
reinforcing our position as the
‘partner of choice’ in MENA.”
Hikma Pharmaceuticals PLC | Annual Report 2018
37
Group performance
Strategic highlights
— Appointed new Chief Executive Officer and strengthened leadership
— Restructured our global R&D function to improve productivity and
teams across the Group
increase returns on investment
— Leveraged our high-quality injectables manufacturing facilities
and broad product portfolio to deliver critical medicines to our
hospital customers
— Strengthened our Generics business, by enhancing commercial
capabilities and streamlining operations
— Reinforced our position as ‘partner of choice’ in MENA, adding
important in-licensed products
— Launched 122 new products across all markets, expanding our global
product portfolio
— Strengthened our pipeline through a long-term agreement with
Vectura to develop and commercialise generic versions of GSK’s
Ellipta® products
Summary financial results
Core1 results
Core revenue
Core operating profit
Core EBITDA
Core profit attributable to shareholders
Core basic earnings per share (cents)
Reported results
Revenue
Operating profit/(loss)
EBITDA
Profit/(loss) attributable to shareholders
Basic earnings/(loss) per share (cents)
2018
$ million
2,076
460
549
332
137.8
2018
$ million
2,070
371
492
282
117.0
2017
$ million
1,936
386
468
252
105.0
2017
$ million
1,936
(747)
488
(843)
(351.3)
Growth
7%
19%
17%
32%
31%
Growth
7%
N/A
1%
N/A
N/A
Constant
currency2
growth
8%
24%
21%
39%
38%
Constant
currency
growth
8%
N/A
5%
N/A
N/A
1. Core results are presented to show the underlying performance of the Group, excluding the exceptional items and other adjustments set out in note 6. EBITDA is earnings before interest,
tax, depreciation, amortisation and impairment charge. Core results and EBITDA are non-IFRS measures. Reconciliations to reported IFRS measures are provided on page 41
2. Constant currency numbers in 2018 throughout the document represent 2018 numbers re-stated using average exchange rates in 2017, excluding price increases in the business which
resulted from the devaluation of currencies
38
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Group performance
Group
Group revenue grew 7% to $2,070 million in 2018 and Group core
revenue grew 7% to $2,076 million (2017: $1,936 million), reflecting good
demand for our in-market products and new product launches. Group
gross profit was $1,050 million (2017: $967 million). As previously
announced, we consolidated our Generics manufacturing facilities and
our US distribution facilities and we restructured our Columbus facility.
Excluding the related costs, Group core gross profit grew 10% to $1,072
million (2017: $973 million), primarily due to a strong improvement in the
profitability of our Generics business. Group gross margin was 50.7%
(2017: 49.9%) and core gross margin was 51.6% (2017: 50.3%).
Group operating expenses were $679 million, compared to $1,714 million
in 2017. Group operating expenses in 2017 included exceptional items of
$1,084 million that arose as a result of an impairment of the Columbus
intangible assets and property, plant and equipment. Excluding the
amortisation of intangible assets other than software and exceptional
items, Group core operating expenses were $612 million (2017: $587
million). The paragraphs below address the Group’s main operating
expenses in turn.
Sales and marketing (S&M) expenses were $224 million (2017: $236
million). Excluding the amortisation of intangible assets other than
software and exceptional items, core S&M expenses were $191 million
(2017: $188 million), up 2%. This slight increase reflects enhanced
commercial activities in the US and MENA and investments to
strengthen our sales and marketing capabilities.
General and administrative (G&A) expenses were $246 million (2017:
$239 million), up 3%, due to the cost of strengthening our corporate
functions and higher employee benefits. Net impairment reversals on
financial assets were $11 million, which related to the release of doubtful
debt provisions following collection during the year.
R&D expenses were $147 million (2017: $121 million). Excluding
exceptional items1, core R&D expenses were $118 million (2017: $115
million). This reflected increased investment in our Branded and
Injectables R&D programmes, which was partially offset by a reduction
in R&D expenditure for our Generics business following a detailed
review of our R&D pipeline in 2017. Core R&D was 6% of Group core
revenue, in line with 2017.
Other net operating expenses were $73 million (2017: $1,118 million).
Excluding exceptional items, core other net operating expenses
increased to $68 million (2017: $46 million), primarily reflecting a foreign
exchange loss in 2018 compared to a gain in 2017.
The Group reported operating profit of $371 million (2017: $(747) million).
Excluding the impact of amortisation other than software and
exceptional items, Group core operating profit increased by 19% to
$460 million (2017: $386 million) and core operating margin was 22.2%
(2017:19.9%).
Research & development
Our investment in R&D and business development is enabling us to
continue expanding the Group’s product portfolio. During 2018, we had
122 new launches and received 136 approvals. To ensure the continuous
development of our product pipeline, we submitted 206 regulatory filings.
Hikma product pipeline
US
MENA
Europe
Injectables
Generics
Branded
Total
2018 submissions2
2018 approvals3
2018 launches4
20
76
34
8
68
206
14
34
33
9
46
136
15
17
20
13
57
122
1. In 2018, Hikma incurred $29 million of R&D costs related to a repeat clinical endpoint
study for generic Advair Diskus®. In 2017, Hikma recognised a $29 million contingent
consideration gain from Boehringer Ingelheim as compensation for failure to receive
FDA approval of generic Advair Diskus® before 24 December 2017. To obtain approval,
the FDA requires the completion of an additional clinical endpoint study. Both the
contingent consideration and the repeat clinical study have been treated as exceptional
items. See note 6 for further information
2. Submissions for new products includes Marketing Authorisations, NDAs, ANDAs, supplements,
line extensions, and re-introduction of legacy products by country, submitted in 2018
3. New product approvals includes technical approvals and tentative approvals, line extensions,
and the re-introduction of legacy products by country, approved in 2018
4. New product launches includes line extensions and the re-introduction of legacy products
by country, launched in 2018
Hikma Pharmaceuticals PLC | Annual Report 2018
39
Group performance continued
Net finance expense
Core net finance expense decreased 12% to $51 million (2017: $58 million),
due to lower debt in the year. After recognising a non-cash expense of
$26 million, which primarily resulted from the remeasurement of the
contingent consideration related to the Columbus business acquisition,
net finance expense was $77 million. We expect Group core net finance
expense to be around $50 million in 2019.
Profit/(loss) before tax
The Group reported profit before tax of $293 million (2017: $(738)
million). Core profit before tax was $408 million (2017: $328 million).
Tax
The Group incurred a tax expense of $8 million (2017: $101 million).
The reported effective tax rate was 2.7% (2017: (13.7)%), primarily due
to the recognition of previously unrecognised deferred tax assets and
favourable prior year tax rulings in the US.
Excluding exceptional items, Group core tax expense was $73 million
(2017: $72 million). The core effective tax rate decreased to 17.9%
(2017: 22.0%), primarily due to a reduction in the effective tax rate
in the US and smaller uncertain tax positions in 2018. We expect the
Group core effective tax rate to be around 21% in 2019.
Profit attributable to shareholders
Profit attributable to shareholders was $282 million, compared with
a loss of $843 million in 2017. Core profit attributable to shareholders
increased by 32% to $332 million, compared with $252 million in 2017.
Earnings per share
Core basic earnings per share increased by 31% to 137.8 cents
(2017: 105.0 cents) and core diluted earnings per share increased by
31% to 137.2 cents (2017: 104.6 cents). Basic earnings per share was
117.0 cents (2017: (351.3) cents). The basic loss per share in 2017 arose
as a result of an impairment of the intangible assets and property,
plant and equipment of the Columbus business.
Dividend
The Board is recommending a final dividend of 26 cents per share
(approximately 20 pence per share) (2017: 23 cents per share) bringing
the total dividend for the full year to 38 cents per share (approximately
29 pence per share) (2017: 34 cents per share, approximately 24 pence
per share). The proposed dividend will be paid on 22 May 2019 to
eligible shareholders on the register at the close of business on 5 April
2019, subject to approval at the Annual General Meeting on 17 May 2019.
Net cash flow, working capital and net debt
The Group generated strong operating cash flow of $430 million
(2017: $443 million). Group working capital days were down 15 days to
210 days, primarily driven by improved cash collections and improved
supplier payment terms across the Group in 2018.
Capital expenditure was $107 million (2017: $107 million). Of this, around
$45 million was spent in the US to expand the manufacturing capacity
and capabilities of our Generics and Injectables businesses. In MENA,
around $44 million was spent on strengthening our manufacturing
capabilities in Algeria and upgrading our facilities in Jordan, Algeria
and Egypt to manufacture new in-licensed products. In Europe,
we spent approximately $18 million, primarily on the expansion of
our manufacturing facilities in Portugal. We expect Group capital
expenditure to be in the range of $120 million to $140 million in 2019.
The Group’s net debt (excluding co-development agreements
and contingent liabilities) was $361 million at 31 December 2018
(31 December 2017: $546 million)1. The significant decrease was due
to the paydown of debt during the year. We continue to have a very
strong balance sheet with a net debt to core EBITDA ratio of 0.66x.
In January 2019, a litigation matter with an external party was concluded
in Hikma’s favour and Hikma received compensation of $32 million.
Balance sheet
Net assets at 31 December 2018 were $1,697 million (31 December 2017:
$1,528 million). Net current assets were $775 million (31 December 2017:
$777 million).
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 core numbers may be calculated
differently to other companies.
Adjusted measures are not substitutable for IFRS results 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. Our core results exclude the exceptional items and other
adjustments set out in note 6.
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 2018 represent reported 2018 numbers
re-stated using average exchange rates in 2017, excluding price increases
in the business which resulted from the devaluation of currencies.
1. Group net debt is calculated as Group total debt less Group total cash. Group net debt
is a non-IFRS measure, see page 41 for a reconciliation of Group net debt to reported
IFRS results
40
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Business and financial review | Group performance
EBITDA
EBITDA is earnings before interest, tax, depreciation, amortisation and
impairment charge.
Outlook
2018
$million
2017
$million
Group
The Group delivered a strong financial performance in 2018 and
we made good strategic progress.
EBITDA
Reported
operating profit
Depreciation, amortisation and
impairment
Reported EBITDA
Research and development costs
Contingent consideration gain
Acquisition, integration and other costs
Core EBITDA
371
121
492
29
–
28
549
(747)
1,235
488
-
(29)
9
468
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 multiplied by 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.
Group net debt
Bank overdrafts and loans1
Long-term financial debts
Obligations under finance leases
Total debt
Cash and cash equivalents
Net debt
Dec-18
$million
Dec-17
$million
(75)
(539)
(23)
(637)
276
(361)
(87)
(670)
(20)
(777)
231
(544)
ROIC
ROIC is calculated as core operating profit after interest and tax divided
by invested capital (calculated as total equity plus net debt). This
measures our efficiency in allocating capital to profitable investments.
ROIC
Core operating profit
Interest income
Total tax
Core operating profit after tax
Net debt
Equity
Invested capital
1. Includes obligations under finance leases
2018
$million
460
4
(81)
383
360
1,697
2,057
2017
$million
386
3
(75)
315
545
1,528
2,073
Looking beyond 2019, we expect to benefit from our continued
investment in R&D across our businesses and we will look to fill
pipeline gaps through business development.
Injectables
Going forward, we expect global Injectables revenue to be in the
range of $850 million to $900 million in 2019. We expect revenue
growth from new product launches and good demand for our
in-market portfolio to more than offset continued price erosion
and an easing in demand for products on shortage. We expect
core operating margin to be in the range of 35% to 38% in 2019.
Generics
We expect Generics revenue to be in the range of $650 million to
$700 million in 2019. This reflects continued price erosion on our
marketed portfolio, which we expect to partially offset with market
share gains and new product launches. We expect our focus on cost
reduction and operational efficiencies to enable us to achieve a core
operating margin in the mid-teens.
Branded
We expect Branded revenue to grow in the mid-single digits in
constant currency in 2019.
Net finance expense, tax and capital expenditure
We expect Group net finance expense to be around $50 million
in 2019 and the core effective tax rate to be around 21%. We expect
Group capital expenditure to be in the range of $120 million to
$140 million.
Hikma Pharmaceuticals PLC | Annual Report 2018
41
Sustainability
42
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Sustainability
We pride ourselves on being
a responsible organisation that
is committed to helping people
and improving the communities
in which we operate.
In our sustainability strategy we have prioritised
four key areas.
Operating responsibly and ethically
see page 44
Supporting our patients and communities
see page 46
Enabling our people
see page 50
Monitoring and minimising our environmental impacts
see page 52
Hikma Pharmaceuticals PLC | Annual Report 2018
43
Sustainability continued
Operating responsibly and ethically
Operating responsibly and ethically is vital to our long-term
organisational success. Through a continuous focus on
strengthening our governance frameworks, building trusted
and transparent partnerships and upholding high standards of
human rights and ethical conduct, we are building a sustainable
platform for the future.
Upholding high standards
of ethical conduct
Our culture is built upon shared values
of integrity, respect, excellence and
transparency. We have developed a robust
programme of internal controls to reduce the
risk of bribery and corruption. As a publicly-
listed company on the London Stock
Exchange (LSE), we abide by the regulations
of the UK Listing Authority. We operate in
compliance with the UK Bribery Act 2010,
the Foreign Corrupt Practices Act and the
Physician Payments Sunshine Act, as well as
local laws and regulations. We also remain
founding members of the Partnering Against
Corruption Initiative, an offshoot of the World
Economic Forum dedicated to promoting
compliance and eliminating corruption on
a global scale. For four years we have been
members of the Business 20 Anti-Corruption
Working Group, which operates under the
umbrella of the G20 international forum of
governments with the mandate of helping
companies improve their ethical conduct.
Our Compliance, Responsibility and Ethics
Committee (CREC) – a Board-level committee
established in 2010 which is chaired by an
independent non-executive director – leads
our efforts to strengthen anti-bribery and
corruption (ABC) policies and manage
associated risks.
Our Code of Conduct provides all employees
with a clear understanding of the principles
of business conduct, standards and ethical
behaviours. The Code of Conduct is publicly
available on our website, communicated
annually through Group-wide e-learning
training modules to all employees with
management support to engage their teams,
reinforce messages, and ensure understanding.
We maintain an ‘open-door’ policy and have
in place a process that enables stakeholders
inside or outside Hikma to confidentially
raise concerns about incidents that do
not align with our values. We review 100%
of reported incidents and respond to all
substantiated cases with the necessary
actions. All cases are reviewed by our
Preliminary Investigations Committee,
which includes members of our Legal,
Human Resources and Compliance teams.
Defending the principles
of human rights
We respect and uphold the principles of the
Universal Declaration of Human Rights both
within Hikma and across our value chain. We
are also committed to upholding the principles
of the Modern Slavery Act (MSA) – taking
measures to ensure that modern slavery in
the form of forced or compulsory labour and
human trafficking does not exist in any of our
businesses or in those of our partners and
suppliers. These principles are articulated
within our Code of Conduct, and
communicated to all our people through
annually distributed e-learning modules.
We conduct regular audits to assess MSA
compliance for major spend suppliers, and
maintain a zero-tolerance policy towards
violations of these principles.
44
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Sustainability
Eliminating discrimination
Our Code of Conduct upholds Principle 6 of
the United Nations Global Compact on the
elimination of discrimination in the workplace.
We welcome variety and treat all employees
equally regardless of any actual or perceived
characteristic. We are 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.
Our inclusion in the
FTSE4Good Index
In 2018, we maintained our membership of
the FTSE4Good Index Series – an index of
LSE-listed companies that demonstrate strong
Environmental, Social and Governance (ESG)
practices as measured against international
benchmarks. The FTSE4Good assesses
companies’ effectiveness in addressing issues,
such as human rights, anti-corruption,
environmental impacts, health and safety, and
community engagement. Their assessments
are used by a wide variety of market
participants to develop responsible investment
funds and other products. We increased our
FTSE4Good score to 3.5 out of 5, placing us
in the 70th percentile amongst member
companies. We will continue strengthening our
ESG monitoring and performance in the future.
Addressing anti-microbial resistance
As a manufacturer of anti-infective
medications, we consider it our responsibility
to educate patients, healthcare professionals
and policymakers, particularly in MENA, about
the rising threat of anti-microbial resistance
(AMR) and to encourage the responsible use
of our products. Throughout the year, we
undertook several activities to address the
threat of AMR in the MENA region.
— In November, we sponsored ‘The Rational
use of Antibiotics and Antimicrobial
Stewardship Summit’ in Jordan. The
objectives of the summit were to share
developments amongst regional
policymakers and industry peers about
the role of government in curbing AMR,
the possibility of collaboration to promote
national awareness and the role
of conventional and novel diagnostic and
therapeutic techniques to confront AMR.
— Working alongside the Jordan Food and
Drug Administration (JFDA), the Ministry of
Health and the Pharmaceutical Association
of Jordan, we organised and sponsored
the ‘National Action Plan for Containment
of Antimicrobial Resistance’ initiative –
developing local solutions to manage
AMR in Jordan.
Aligning with the United Nations Sustainable Development Goals
The United Nations Sustainable Development Goals (SDGs) are a set of 17 goals adopted
by the United Nations to drive sustainable development.
In 2017, we selected six goals that are aligned with our business and values. We have made
good progress towards these goals and will continue to focus on them in 2019.
Our adopted goals
Hikma Pharmaceuticals PLC | Annual Report 2018
45
Sustainability continued
Supporting our patients and communities
Ensuring access to medicine
Addressing drug shortages
We are committed to improving access
to medicines for patients in need and are
dedicated to addressing drug shortage
situations in the US and elsewhere. Shortages
are a major public health risk. As a top three
manufacturer of injectables in the US with
a broad portfolio of more than 100 different
products, we recognise our responsibility
for ensuring patients maintain reliable and
consistent access to vital medicines during
supply shortages. During 2018, we worked
with the US FDA and DEA to address this
issue in the US.
More information on our efforts to address
shortages can be found on page 22.
Providing access for those in need
We strive to put better health within reach
for patients. By providing in-kind medicine
donations we are addressing unmet
healthcare needs for refugees and low-income
groups in MENA as well as patients in the US
without sufficient medical insurance. The chart
below gives information about our in-kind
medicine donations in 2017 and 2018.
Across our business and in our communities, our activities
are directed towards four themes that align most closely
with our values and our brand promise:
— Ensuring access to medicine
— Supporting education
— Raising awareness of healthcare needs
— Empowering women
In-kind medicine donations – number of units donated 2017–2018
2017
2018
15,000
44,000
330,000
405,000
MENA
US
46
Hikma Pharmaceuticals PLC | Annual Report 2018
Partnering with Direct Relief
2018 marked the start of our collaboration
with Direct Relief – a global NGO dedicated
to providing tailored medical solutions for
vulnerable and at-risk populations around the
world. In our first year of the partnership, we
delivered regular in-kind donations to support
US safety net clinics near our operations.
Direct Relief maintains the largest charitable
medicine programme in the US with a network
of safety net clinics that provide comprehensive
health services to more than 27 million patients
each year, where nearly 70% of those patients
have incomes below the federal poverty level
and roughly 23% lack health insurance.
We aim to expand the scope of donations
beyond the US, sustain our financial
contributions and incorporate employee
volunteering opportunities that will help
create tangible benefits on the ground.
Supporting education
Our partnership with
The Prince’s Trust
In 2018, we began a four-year partnership with
The Prince’s Trust, a UK-based organisation
dedicated to providing capacity-building and
job readiness opportunities to young people
facing barriers to education and employment.
As Patrons of The Prince’s Trust, we are
committed to supporting the organisation
through financial contributions and by enabling
our employees to volunteer as mentors.
Strategic report | Sustainability
In 2017 and 2018, The Prince’s Trust supported
more than 66,000 young people across the
UK, and we are hopeful that our partnership
will contribute meaningfully to their goal of
assisting one million young people over the
next ten years.
Funding for STEM-related activities
A significant portion of our financial
assistance for The Prince’s Trust is directed
towards supporting STEM (Science,
Technology, Engineering and Maths)
education through the implementation of
a series of STEM-enrichment workshops.
The workshops are aimed at providing young
participants with the tools and knowledge
to diversify their capabilities and secure
future employment opportunities.
Volunteering activities
We also organised several volunteering
opportunities where our people could directly
offer their support. During the ‘World of Work
Day’, we welcomed young participants to our
offices in London, where they spent the day
with our employees developing their
interpersonal skills, enhancing their curriculum
vitae and practising interviews. We also
participated in the ‘Palace to Palace’ cycle
challenge to raise funds for the Trust – helping
them exceed their fundraising goal by 169%.
The participants absolutely
loved it! We were so impressed
with how well Hikma had
managed to tailor the day to
the young people and make
it fun yet really informative.”
Laura Guy, Lead Specialist Mentor at The
Prince’s Trust, reflecting on ‘World of Work Day’
Through our partnership with Direct Relief, we aim to deliver medical solutions to those in need
Taking part in The Prince's Trust ‘Palace to Palace’
cycling fundraiser challenge
Hikma Pharmaceuticals PLC | Annual Report 2018
47
Sustainability continued
Supporting our patients
and communities
continued
Providing opportunities for refugees:
our partnership with MIT ReAct
We continue to develop and support
programmes that assist displaced people.
The Massachusetts Institute of Technology
(MIT) ReAct programme was developed in
2017 to provide educational and professional
opportunities for displaced people around
the world. The programme combines the
university’s educational strengths with
networking and internship opportunities.
MIT ReAct also incorporates workshops in
innovation, entrepreneurship and soft skills,
generating an individualised, contextualised,
and blended learning experience.
In 2018, we hosted five interns – two of
whom have become permanent employees.
We plan to build on the success of the
programme and expand our support in
2019 by hosting ten interns.
Supporting cancer research
For the second consecutive year, cancer
specialists from across MENA gathered to
attend the ‘Hikma Cancer Network – Middle
East and North Africa Forum’ which was
organised in collaboration with the
Department of Leukemia at the University
of Texas MD Anderson Cancer Center. The
two-day forum, held in Jordan, attracted more
than 200 regional cancer specialists and key
opinion leaders, offering educational sessions
and opportunities to share information about
the latest advances in cancer treatments. This
forum reflects our dedication to ensuring that
medical professionals across the MENA region
are sharing best medical practices and the
latest advances in the field of cancer.
Adopting the Sweimeh School for
Girls in Jordan
The Sweimeh School for Girls is located in the
Balqa province in Jordan, where less than half
of women are enrolled in basic education and
the illiteracy rate for women and girls is more
than double that of men and boys. In 2015, we
began to work with the school in an effort to
reduce dropout rates and raise the graduation
rate, which had been zero for the previous five
years. We also provided financial assistance
to improve the school’s infrastructure, and
employees volunteered to assist with
renovations as well as taking part in mentoring
and teaching activities. We continue offering
mentorship and training to improve the
students’ employability after graduation.
We are proud that since we began to work
with Sweimeh there has been a noticeable
improvement. The number of graduates
has increased to three in 2017 and then
seven in 2018.
Employees in Sudan distributed school supplies helping rebuild Sondos School for Girls
Volunteers had the opportunity to help teach
classes at the Sweimeh School for Girls in Jordan
48
Hikma Pharmaceuticals PLC | Annual Report 2018
Rebuilding the Sondos School
for Girls in Sudan
Following heavy rains and flooding in
Sudan in 2017, the Sondos School for Girls’
infrastructure collapsed. For months,
students attended their classes outdoors.
Our employees in Sudan assisted with the
rebuilding effort. Through a combination of
financial donations and volunteer assistance
over a period of several months we were able
to complete the necessary infrastructure
repair that enabled the school’s 403 students
to return to classrooms in July 2018.
Raising awareness of
healthcare needs
Addressing iron deficiency
This year, in both Lebanon and Jordan, we
collaborated with public and private entities
to raise awareness of the dangers of iron
deficiency. Iron deficiency affects almost
one-third of the world’s population and has
a high prevalence in the MENA region. Our
teams partnered with ministries of health in
Jordan and Lebanon, along with the medical
diagnostics company Biolab, to organise a
large-scale awareness and testing programme
in both countries. Through the campaign, we
used public booths and TV broadcasts to
spread awareness, and provided free testing.
Strategic report | Sustainability
Fighting leukaemia
The ‘Light the Night’ walk helps fund research
for people in the US living with or in remission
from leukaemia, lymphoma or myeloma.
For the seventh year, employees across our
US locations participated in ‘Light the Night’
walks. More than 80 volunteers took part
in the walk this year, and even more helped
with fundraising. Through a combination of
employee donations and Hikma sponsorships,
we were able to raise more than $15,000
in 2018.
Empowering women
in the community
Supporting women entrepreneurs
As part of our effort to empower women
in our communities, we established the
Hikma Fellowship in Support of Women
Entrepreneurs Programme in Jordan in 2016.
The programme offers workshops to help
women entrepreneurs develop their
businesses. The programme also provides
opportunities to network and share ideas.
We recently expanded the programme to
include opportunities for our people to ‘adopt’
startups and offer them mentorship and
assistance. In 2018, we adopted four startups
in Jordan. We aim to expand the scope of the
programme to other markets in MENA over
the next few years.
Strengthening women’s leadership
in the health sector
The ‘Strengthening Women’s Leadership
in the Health Sector Conference’ was held
in 2018 in Jordan, where stakeholders and
policymakers identified major opportunities
and barriers facing professional women in the
healthcare sector. Several representatives
from Hikma attended the event, which was
organised by USAID. Following the conference,
participants established the Women Leaders
in Health Steering Committee. The goal of the
Committee is to help women in Jordan attain
leadership positions, particularly in healthcare.
Sandra Shaqareq, a member of our Hospital
Unit team, was selected as Vice Chair of
the Committee.
More than 80 volunteers across our US locations participated in the ‘Light the Night’ walk to help fund
research for leukaemia, lymphoma and myeloma
Hikma Pharmaceuticals PLC | Annual Report 2018
49
Sustainability continued
Enabling our people
Our people are our most valuable asset and the driving force
behind our success. We are committed to investing in the
development of our workforce and in protecting their health
and safety.
Investing in our people’s growth
and development
A key achievement in 2018 was the launch of
the Hikma Academy, an institution dedicated
to consolidation and optimisation of all of
our learning and development (L&D) efforts
under a global training hub. The Academy is
intended not only for employee training, but
also for students and interns to strengthen
their employment prospects. The Academy
oversees employee development on a
Group level with systems including a global
learning management system that allows
Hikma to deliver high-quality employee
learning activities.
Supporting continuing education
for our people
We are committed to enabling our people to
realise their full potential. To support this, we
began our Continuing Education programme
in 2010 – offering our employees with
opportunities to advance their formal
education through partial or full scholarships.
Through these opportunities, employees can
further their education at the undergraduate,
graduate or doctoral level. Through the
programme, 47 people have attained higher
education diplomas.
The Hikma International Professional
Excellence (HIPE) programme
HIPE was launched in 2016 as a cross-
functional rotation programme for exceptional
employees and fresh graduates, providing
them with opportunities to gain exposure
to the operational, financial and commercial
aspects of our organisation. The programme
includes workshops, team-building activities
and regular skills assessments to provide a
comprehensive learning experience.
HIPE exemplifies our approach to nurturing
employee potential – combining on-job
training and experience with managerial
and leadership skill development. Launched
in Jordan, the programme is currently being
rolled out internationally.
What our
people say
about HIPE…
I consider myself extremely
fortunate to have been taught
and supported by many great
leaders at Hikma. Management
strongly believe in young
people, their energy and
their willingness to learn and
this has supported me in my
professional journey with HIPE.
Soula Alhaj Asad, Senior
Packaging Supervisor, Jordan,
and former HIPE participant
I gained an understanding of
the whole company and the
links between departments on
territory and corporate levels.
Firas Momani,
HIPE participant
I’m proud to have been able
to positively contribute to
each team I have worked
with, build a good reputation
in the company, and grow
my professional network
by meeting great people
across different sites and
departments.
Sahag Pailian,
HIPE participant
50
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Sustainability
Monitoring ethnic diversity
Our inclusive corporate culture contributes
to our diverse workplace. Although we are
committed to diversity, we do not set ethnic
diversity quotas. We actively monitor ethnic
diversity where required by local laws,
including at all our US locations.
Ethnicity breakdown – our US locations
15%
Asian
Black or
African American
14%
5%
Hispanic or Latino
Two or more ethnicities 2%
64%
White
Innovation and Leadership
Advisory Board
For the third consecutive year, our Innovation
and Leadership Advisory Board (ILAB) has
served as a channel for young people in Hikma
to nurture and develop new ideas. ILAB has
achieved much success, most notably by:
— representing young employees across
the organisation
— helping foster an innovative culture
— identifying and implementing innovative
and creative solutions to address
business issues
Amongst the most successful ILAB projects
has been i-Tech, a series of events designed
to showcase ideas and companies that are at
the forefront of innovation and technology.
Our latest i-Tech event was held as a panel
discussion amongst industry experts around
the theme ‘Healthcare Disrupted?’.
We also organised our second Hikma
Innovation Competition (HIC), a company-
wide competition where colleagues propose
innovative ideas to help achieve business
goals, of which the most practical and
feasible is selected by a committee of judges.
The winning idea in 2018 was the ‘Visual Expiry
Indicator’ – a colour-coded indicator that,
once activated by a patient, will change
colours as the product nears expiry, thereby
keeping the patient continuously aware of the
product’s shelf-life.
Ensuring health and safety
It is fundamental to our business success
that we secure a safe and healthy workplace
for our employees. We continue to prioritise
Occupational Health, Safety, Environment
and Energy (OHSEE) management. We
provide information, training and support
to all our employees to ensure we have safe
working environments and processes.
All our units comply with stringent industry
standards, which we monitor across all our
operations. We are continually refining our
production processes, equipment and training
to minimise potentially harmful situations
and to prevent and manage environmental
accidents and emergencies. This year, we
expanded the monitoring of Lost Time Injury
Rates (LTIR) to include all of our locations.
The chart below illustrates LTIR across our
US facilities between 2013 and 2018.
Lost time injury rate – US facilities
3
2
1
0
2013
2014
2015
2016
2017
2018
All US Facilities
— LTIR is defined as number of injuries x 200,000/number
of total working hours.
— Injuries defined as those resulting in one or more days
away from work.
Ten years of ‘You are Hikma’
campaign
2018 marked the tenth year of our global
‘You are Hikma’ campaign, which focuses
on spreading employee awareness about
relevant health and safety issues as well as
the importance of community engagement
and environmental stewardship. Activities
across our sites vary based on local needs,
and include awareness lectures, blood drives
and fire safety tutorials.
In our US locations, we hosted our first
‘Household Hazardous Waste Takeback Day,’
helping our employees safely dispose of 4,000
pounds of potentially harmful substances,
such as pesticides, paints and electronic
waste. Across many of our other locations,
we provided free medical testing, and blood
drives, and worked alongside public servants
to provide firefighting training to our
employees. We also held sessions on the
reduction of energy consumption, first aid
treatments, and informational sessions on
our Compliance, Process Improvement and
Technical Management (CPITM) Committee
roles and functions.
Enabling a culture of diversity
and inclusion
We believe in equality for all employees and
are an equal opportunity employer. We
oppose discrimination in all its forms and pride
ourselves on the diversity of our people.
Empowering women in
our workplace
We continue to develop programmes and
policies to promote women’s empowerment
within our organisation. Our ‘Dare to Dream
Big’ programme in Jordan – a series of monthly
educational sessions targeting capacity-
building and the development of leadership
skills amongst women – was rolled out to five
more MENA countries in 2018.
2018 also marked the beginning of our
mentorship programme with the Business and
Professional Women Association (BPWA) in
Jordan. The BPWA is a non-profit organisation
dedicated to facilitating the empowerment of
professional women in the Jordanian workforce.
Through our partnership, 32 women from the
BPWA will serve as mentors to women at Hikma
over a six-month period, helping to promote
their professional and career development.
Winners of the Hikma Innovation Competition
accept their prize from CEO Siggi Olafsson
Hikma Pharmaceuticals PLC | Annual Report 2018
51
Sustainability continued
Monitoring and minimising
our environmental impacts
We are committed to monitoring and minimising our environmental impacts. We continue to achieve
progress in making our Company more energy efficient, and are making improvements in our
management of waste and water consumption.
Measuring our emissions
The table and graph on this page show our
emissions performance for the last two years.
Emissions are reported from sites which
represent 86% of all employees. Non-
manufacturing facilities with less than 150
employees, and joint ventures with less
than 50% holdings are not included in our
greenhouse gas (GHG) reporting scope.
Performance
Our reported GHG emissions decreased by
0.8% in 2018 compared with 2017. By relying
more on the use of cleaner fuels, such as
natural gas and liquefied petroleum gas
(LPG) rather than diesel, we were able to
offset the emissions that resulted from
our production increases.
103,191
76,456
26,735
Greenhouse gas emissions: 2017–2018
Scope 1 – combustion of fuel and operation of facilities (tCO2e)
Scope 2 – (location-based) – electricity (tCO2)
Total Scope 1 and 2 emissions (location-based)
Scope 3 – indirect emissions from waste (tCO2e)
Scope 3 – indirect emissions from water (tCO2e)
Total Scope 3 emissions
2018
2017
38,404
89,873
36,839
92,421
128,277
129,260
468
328
796
N/A
N/A
N/A
129,260
129,073
92,421
89,873
36,839
38,404
Scope
1
Scope
2
Total
Scope
1
Scope
2
Total
Scope
1
Scope
2
Scope
3
Total
2016
2017
2018
796
Data notes:
— Emissions from the consumption of electricity are reported in tonnes of carbon dioxide (tCO2) rather than tonnes of carbon
dioxide equivalent (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
— The full-time equivalent (FTE) employee figures used to calculate the reported intensity metric cover the sites for which
emissions data was provided rather than the total FTE figure for the organisation as a whole
52
Hikma Pharmaceuticals PLC | Annual Report 2018
Strategic report | Sustainability
Improving energy efficiency
This year, we completed several projects
that improved our energy efficiency,
most notably:
— We completed upgrades to building
management systems (BMS) for
buildings within our facilities in Jordan
and Algeria. The upgrades resulted in
electricity consumption reductions of
18,600 kilowatt hours (kWh) in Jordan
and 11,000 kWh in Algeria.
— The installation of Light Emitting
Diode (LED) fixtures across six
of our sites resulted in electricity
consumption decreases of around
1.2 million kWh.
— The refurbishment of our boiler and
energy recovery infrastructure in
one of our facilities in Tunisia led to
335,000 kWh of energy savings.
Our emissions from the consumption of
electricity (scope 2) declined 3% despite the
expansion of many of our facilities. This is due
to energy efficiency measures that were
implemented throughout the year.
Emissions/FTE (tCO2e)
18.06
16.88
Our emissions per full-time employee (FTE)
increased 7% in 2018 compared with 2017.
This is primarily a result of the reduction
in the number of our employees, as well
as operation expansions.
As part of our commitment to refine the
accuracy of our environmental reporting,
we are now measuring indirect emissions
resulting from waste management and water
consumption (scope 3). Improvements to our
reporting will enable us to achieve greater
efficiency in the future.
Year-on-year change by emission source
2017
2018
Europe
and
ROW
2017
2018
MENA
2017
2018
USA
2017
2018
0K
5K
10K
15K
20K
25K
30K
35K
40K
45K
50K
55K
60K
65K
Emissions tCO2e
Electricity
Natural gas
Diesel/Gasoil
Owned Vehicles
F-Gas
Petrol/Gasoline
Other fuels
Hikma Pharmaceuticals PLC | Annual Report 2018
53
Sustainability continued
Non-financial disclosures
The table below summarises our position on matters relevant to the Non-Financial Reporting Directive, in line with the requirements of the
Companies Act 2016 sections 414C(7)(b). All references made are to publicly accessible information.
Position, performance and impact
Further information
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.
— Annual Report, page 14
Principal risks
— Our risk management framework is designed to ensure we
— Annual Report, Risk section, pages 58 to 60
take a comprehensive view of risk. This includes non-financial
risks that may impact our business and stakeholders.
Environmental
matters
Employees
— Our approach is to identify and capitalise on opportunities
— Annual Report, Monitoring and minimising our
to improve our energy efficiency and address our
environmental impacts.
— In support of this approach, we are developing an
Environmental Policy to identify risks and set KPIs.
— Our people are our most valuable asset and the driving force
behind our success. We are committed to investing in the
development of our workforce and in protecting their health
and safety. We have around 8,400 employees across the US,
MENA, Europe and ROW.
— Code of Conduct
— Occupational Health, Safety, Energy, Environment Policy
environmental impacts, page 52
— Principal risk: Annual Report, Reputation, page 58
— Annual Report, Upholding high standards of anti-corruption
and ethical conduct, page 44
— Code of Conduct: https://www.hikma.com/about/ethics-
and-compliance/code-of-conduct/
— Annual Report, Our people, page 50
— Occupational Health, Safety, Energy, Environment Policy:
https://www.hikma.com/media/2069/ohsee-english.pdf
— Principal risk: Annual Report, Organisational development,
page 58
Social matters
— Our CSR activities address social challenges primarily across
— Annual Report, Supporting our patients and communities,
Respect for
human rights
Anti-bribery
and corruption
Non-financial KPIs
four themes:
— Ensuring access to medicine
— Supporting education
— Raising awareness of healthcare needs
— Empowering women
— Our position on addressing drug shortages
— Animal Testing Policy
— We respect and uphold the principles of the Universal
Declaration of Human Rights both within Hikma and across
our value chain.
— Code of Conduct
— Modern Slavery Policy Statement
— Our position on the use of our products for capital
punishment
— Our Compliance, Responsibility and Ethics Committee
(CREC) leads our efforts to strengthen anti-bribery and
corruption (ABC) policies and manage associated risks.
— As a publicly-listed company on the London Stock Exchange
(LSE), we abide by the regulations of the UK Listing Authority.
We operate in compliance with the UK Bribery Act 2010,
the Foreign Corrupt Practices Act (FCPA) and the Physician
Payments Sunshine Act, as well as local laws and regulations.
— Code of Conduct
— We monitor the position, performance and impact of Hikma
across a wide range of financial and non-financial KPIs.
Non-financial KPIs are used to measure progress towards
our strategic priorities (see page 18), our exposure to risks
(see page 55), and are in place in other areas throughout
the organisation as part of Hikma’s long-term sustainable
growth strategy and our commitment to helping people and
improving the communities in which we operate.
page 46
— Annual Report, Addressing drug shortages in the US,
pages 22 and 46
— https://www.hikma.com/about/our-policies-and-positions/
— Animal Testing Policy Statement: https://www.hikma.com/
sustainability/protecting-our-planet/
— Principal risk: Annual Report, Reputation, page 58
— Annual Report, Operating responsibly and ethically, page 44
— Modern Slavery Policy Statement: https://www.hikma.com/
about/ethics-and-compliance/
— Use of products for capital punishment: https://www.hikma.
com/about/our-policies-and-positions/use-of-products-in-
capital-punishment/
— Principal risk: Annual Report, Reputation, page 58
— Annual Report, Upholding high standards of anti-corruption
and ethical conduct, page 44
— Code of Conduct
— Principal risk: Annual Report, Ethics and compliance, page 59
— Annual Report, Environmental matters: Carbon emissions
(Scope 1, 2 and 3), pages 52 and 53
— Annual report, Employees: Engagement and Enablement,
page 19
54
Hikma Pharmaceuticals PLC | Annual Report 2018
Risk management
Managing the uncertainties
In 2018, we embedded risk processes into our
management practices and developed a range
of enterprise-wide key risk indicators to monitor
our risk exposure.
56 Risk management framework
57 Risk management activities
58 Principal risks and uncertainties
61 Going concern
61 Longer-term viability
Hikma Pharmaceuticals PLC | Annual Report 2018
Hikma Pharmaceuticals PLC | Annual Report 2018
55
Strategic report | Risk management Risk management continued
Risk management framework
Risk context
We develop, manufacture and market a broad range of branded and
non-branded generic pharmaceutical products across the US, MENA
and Europe. We are also a leading licensing partner in MENA.
Risks are inherent in our business. They may be related to our
strategy and delivery of our objectives, the fundamental activities
and processes of the organisation, meeting the expectations of our
stakeholders, or through key relationships and dependencies.
The ‘Our markets’ section on pages 12 and 13 and the ‘Our business
model’ section on pages 14 and 15 provide an overview of the external
and internal context for risk management at Hikma.
Risk strategy
Effective management of risk is fundamental to delivering long-term
success for the Group. We operate an Enterprise Risk Management
(ERM) framework to ensure that we are comprehensive in our approach.
This provides an informed and thorough view on risk to support our
decision-making and enables alignment, effectiveness and efficiency
of our strategic, tactical, operational and compliance processes. The
holistic approach ensures we fulfil our obligations and have integrated
assurance that our activities are appropriately controlled.
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.
It forms the foundation of the ERM framework, guides management
decision-making across the Group and is reviewed and updated annually.
Risk governance
The Board has ultimate responsibility for the Group’s overall approach
to risk management and internal control. On behalf of the Board, the
Audit Committee oversees risk management for the Group as part 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. The Chair of the Audit
Committee is a standing member of the Compliance, Responsibility
and Ethics Committee (CREC) ensuring connection between the Board
committees with risk oversight.
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 75.
The ERM office enables and drives the implementation of effective risk
management practices by management and partners with global risk
owners in assessing and reporting their risks.
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 with divisional risk owners and management teams to
ensure risk exposure is managed appropriately and in accordance
to the risk appetite.
Roles
Responsibilities
Board of Directors
Audit Committee
— Define and communicate the Group’s risk appetite
— Determine principal risks and uncertainties
— Effectiveness of the risk management framework
— Review risk management key outcomes
— 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 the Compliance, Responsibility and Ethics Committee
— Full committee responsibilities available on page 71
Internal audit
— Provide independent assurance of the effectiveness of the Group’s risk management and internal control systems
CEO and Executive Committee
— Review regular risk and assurance reports to ensure Group operates within risk appetite
— Take enterprise view of risk exposure, consider interrelation of risks and significant emerging risks
— Make decisions on prioritisation for risk response
ERM office
— Enable and drive the implementation of effective risk management practices by management and assist global risk
owners in assessing and reporting their risks
Compliance and control functions
— Develop, implement and monitor compliance to enterprise-wide and functional policies and standards
Global risk owners
— Implement effective risk management practices to identify, assess and manage risks within the business
— Coordinate risk management activities across the organisation
— Report on risk management status
Divisional risk owners
and management teams
— Own and manage risks
— Implement Group-wide policies and procedures
— Implement and monitor internal controls
56
Hikma Pharmaceuticals PLC | Annual Report 2018 Risk management activities
Risk management activities occur at all levels of the organisation. The risk governance framework provides structure for these activities to ensure
consistency of approach, alignment to the risk appetite and monitoring of our risk exposure. The ERM office coordinates regular risk assessments
with global risk owners to review management of existing risks, and to identify new and emerging risks. These assessments are consolidated through
a risk management process coordinated by the ERM office and reported to the Executive Committee and the Audit Committee by the global risk
owners. In addition to the core reporting and communication processes described, key risk management activities during the year included:
Key risk management activities in 2018
Invested in
technology solutions
to enable integration
of different layers
of assurance and
control
Reviewed and updated
the risk management
framework, risk
appetite, and principal
risks
Developed significant
risk event scenarios
based on principal
risks for stress and
sensitivity analysis,
and for longer-term
viability assessment
(see page 61)
Brexit
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 cross-functional
reviews continue to assess that the exposure for Hikma is low and
manageable. We have a small footprint in the UK and 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.
Expanded set of
enterprise-wide key
risk indicators for
ongoing monitoring
of risk exposure
Priorities for 2019
In addition to our core risk management activities, in 2019 we will
continue to strengthen our global risk management process with a
focus on simplification. We will further roll out our risk management
technology, develop our risk culture, and reinforce partnerships
between compliance and control functions to enhance our risk
management capability and bring greater assurance for the Group.
Restructured
organisation to move
ERM office into new
Business Operations
Division
Our key risk indicators help us monitor our
risk exposure and ensure we are operating
in line with our risk appetite.”
Hikma Pharmaceuticals PLC | Annual Report 2018
57
Strategic report | Risk management Risk management continued
Principal risks and uncertainties
The Group faces risks from a range of sources that could have a material impact on our financial commitments and ability to trade in the future.
The Board of Directors has performed a robust assessment to determine the principal risks for the Group considering our risk context and with
input from executive management. Effectively managing these risks is directly linked to the performance of our strategic KPIs and the delivery of
the strategic priorities we have outlined on pages 18 and 19. Our principal risks are set out below with examples of management actions that help to
control the risk. The Board recognises that certain risk factors that influence these risks are outside the control of management. The Board is
satisfied that the principal risks are being managed appropriately and consistently with the target risk appetite. The set of principal risks should not
be considered as an exhaustive list of all the risks the Group faces.
Industry earnings
What does the risk cover?
Management 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 key talent to manage complex commercial environment and develop our business
— Growth and expansion in existing markets with new products and in new therapeutic areas
— Portfolio management programmes to focus on strategic products that support revenue,
profit and margin targets
Product pipeline
What does the risk cover?
Identifying, developing and registering new products that meet
market needs to provide continuous source of future growth.
— Development of capacity and diversification of capability through differentiated technology
— Capital investment in the countries in which we operate to ensure continued market access
— Active product life cycle and pricing management
— 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
Management actions
— Align selection process for pipeline products to ensure optimal use of our expansive
global product portfolio with increased focus on specialty products with high value and
differentiation
— Strategic oversight of pipeline delivery through dedicated global project management office
— Product-related acquisitions to bolster pipeline
— Third-party pharmaceutical product specialists brought in to assist in the development of
manufacturing processes for new generic products
Organisational development
What does the risk cover?
Management actions
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.
— Strengthening teams with key talent appointed to fill strategic regional and global positions
— Deployment of Group-wide human capital management system
— Developing global programmes that attract, manage and develop talent within the organisation
— Ongoing updates to organisation design, structures and accountabilities to maintain
empowerment in decision-making and bring appropriate level of governance
Reputation
What does the risk cover?
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.
Management actions
— Internal and external monitoring of issues that may impact reputation
— Increasing investment in corporate social responsibility initiatives including sustainability
reporting
— Establishment and development of strategic industry and community partnerships
— Communication and engagement programmes on appropriate use of products
— Strengthening communication and corporate affairs capabilities in our core geographies
58
Hikma Pharmaceuticals PLC | Annual Report 2018 Principal risks and uncertainties continued
Ethics and compliance
What does the risk cover?
Management actions
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.
— Board level oversight from the Compliance, Responsibility and Ethics Committee (see pages
79 and 80 for details)
— Code of Conduct approved by the Board, translated into seven languages and rolled out
to all staff
— 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
— Implementation of third-party due diligence and oversight programme
Information, technology and infrastructure
What does the risk cover?
Management 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
Legal, regulatory and intellectual property
What does the risk cover?
Management actions
Adapting to changes in laws, regulations and their application,
managing litigation, governmental investigations, sanctions,
contractual terms and conditions, and potential business
disruptions.
— Continuous assessment of developments in legal and regulatory frameworks and impact
on the organisation
— Internal communication and training on policies and processes drives awareness and
understanding and builds a compliance culture
— External advice procured to provide independent services and ensure highest standards
— Strengthened experience and capability for managing intellectual property matters
Inorganic growth
What does the risk cover?
Management actions
Identifying, accurately pricing and/or realising expected benefits
from acquisitions or divestments, licensing, or other business
development activities.
— Extensive due diligence of each acquisition in partnership with external support, including
financial and legal advisers, investment banks, and industry specialists in order to
strategically identify, value, and execute transactions
— Executive Committee review of major acquisitions before they are considered by the Board
— The Board spends a significant amount of time reviewing major acquisitions to ensure
strategic alignment
— Dedicated integration project teams led by the business head responsible
— Post-acquisition performance (financial and non-financial) monitored closely to ensure
integration and delivery on business plan
— Post-transaction reviews highlight opportunities to improve effectiveness of processes
Hikma Pharmaceuticals PLC | Annual Report 2018
59
Strategic report | Risk management Risk management continued
Principal risks and uncertainties continued
Supply chain and active pharmaceutical ingredient (API) sourcing
What does the risk cover?
Management actions
Maintaining continuity of supply of finished product and
managing cost, quality and appropriate oversight of third parties
in our supply chain.
— Continuity of API supply maintained for high-value products through alternative API
suppliers, stocking strategies, and supply chain modelling
— Rigorous selection process for API suppliers and focus on building long-term supply
contracts
— Vertically integrated plant in Jordan to synthesise selected strategic injectable APIs
— Strengthening trade compliance capability to ensure compliance and drive efficiency
— Programmes rolled out across the Group to ensure compliance with serialisation
requirements for US, Europe and MENA
Crisis response and continuity management
What does the risk cover?
Management actions
Preparedness, response, continuity and recovery from crisis
events, such as natural catastrophe, economic turmoil,
operational issues, political crisis, and regulatory intervention.
— Continued strengthening of central oversight of systems, processes, and capabilities to
enhance our Group-wide resilience and crisis preparedness
— Updated crisis management framework to enhance our ability to respond effectively to
crises, and to expedite the restoration of critical processes after disruption
— Identified key third parties involved in preparedness, response and recovery with updated
framework
— Corporate insurance programme aligned to ensure appropriate coverage of high-impact,
low-likelihood events
Product quality and safety
What does the risk cover?
Management actions
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.
— Quality culture driven throughout the organisation by global quality initiatives, and regularly
reinforced by communication from senior executives
— Global implementation of quality systems that ensure valid consistent manufacturing
processes leading to the production of quality products
— Facilities maintained as inspection-ready for assessment by relevant regulators
— Documented procedures continuously improved and regular staff training
— Continued environment and health certifications
— Global pharmacovigilance programme in place
Financial control and reporting
What does the risk cover?
Management 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
financial compliance monitoring programme
— Network of banking partners maintained for lending and deposits
— Management monitors debtor payments and takes precautionary measures and action
where necessary
— Selected hedging of exchange rate and interest rate exposure
— External advice to help manage tax exposures and upgraded internal tax control systems
60
Hikma Pharmaceuticals PLC | Annual Report 2018 Strategic report | Risk management
Going concern
A full assessment of the Group’s financial position is used to assess
the going concern position, including the following matters (as at end
of 2018):
— Cash flow: Net cash flow from operating activities was $430 million.
— Net debt: The Group’s overall net debt position was $361 million
(0.66 times EBITDA).
— Available borrowing capacity: The Group has $1,456 million of
undrawn short-term and long-term banking facilities, in addition to
$268 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.
The analysis shows that Hikma is well-placed to manage its business
and financial risks successfully despite current uncertainties and
confirms that the going concern basis should be used in preparing
the financial statements.
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 (see pages 58 to 60), 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, ending on 31 December 2021. This is the timeframe for
acquisitions and business development opportunities to become
integrated into our business, and for pipeline products to contribute
as marketed products. Our forecasts are more accurate in the near
term than in the long term and so the limitation also applies to our
viability assessments.
Assessment of position and prospects
The position and prospects of the Group are assessed at Executive
Committee meetings and at the end of the financial year. The
assessments consider strategic and operational updates from each
member of the Executive Committee, including review of the principal
risks to the industry and business set out on pages 58 to 60, financial
reporting and forecasting from the Chief Financial Officer, and through
the development of a business plan. The business plan takes into
account our current position, specific risks and uncertainties facing the
business and known changes to our organisation and business model.
The Executive Committee assesses the future strategic positioning
of Hikma as a company in the context of the changing macroeconomic
and healthcare environment. Aspects of this analysis is shown in ‘The
global context’ (see page 12) and ‘Key industry trends’ (see page 13).
These various assessments are presented to the Audit Committee
and Board of Directors. The Board also receives regular updates on
operational, strategic and financial matters from executives.
Assumptions
Financial modelling for the business plan and therefore the viability
assessment 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
— effective tax rate being within the current guidance range
Stress testing and sensitivity analysis
Management identified several realistic and severe risk scenarios
that could impact the business adversely and modelled the impact
of these over the forecast period. The risk scenarios were chosen
considering the Group’s strategic objectives and principal risks and
were defined with management input, using real-world examples
and the financial modelling assumptions listed above. Realistic but
extremely severe adjustments were further applied to the financial
models for sensitivity analysis:
— Scenario 1: significant adverse changes to the pricing environment
in the US (principal risk: industry earnings)
— Scenario 2: failure of pipeline to deliver strategic new products
(principal risk: product pipeline)
— Scenario 3: prolonged regulator-imposed restriction of one of our
major US FDA-inspected manufacturing plants (principal risk:
product quality and safety)
— Scenario 4: escalation of political or social instability in one of
our major MENA markets (principal risk: crisis response and
continuity management)
— Scenario 5: long-term shortage of API for a strategic product
(principal risk: supply chain and API)
The assessment shows that although the risk scenarios are severe
events they do not threaten the viability of Hikma. The assessment
and analysis did not rely on management actions that could be taken
in the circumstances to reduce the impact and consequences of the
risk events. Such actions, and the ongoing implementation of the ERM
programme and investment in infrastructure and change initiatives are
anticipated to continue to enhance organisational resilience and
support longer-term viability.
The outcome of these various quantitative and qualitative assessments
leads management to believe that Hikma is resilient to risk event
shocks. This is largely as a result of our financial position (in particular
our strong balance sheet and low levels of debt) and is supported by
the fact that our business is well-diversified through geographic spread,
product diversity, and large customer and supplier base – see the
‘Our markets’ (pages 12 and 13) and the ‘Our business model’ (pages
14 and 15) sections for details.
Hikma Pharmaceuticals PLC | Annual Report 2018
61
Corporate governance
During the year, we continued to advance our
Hikma values, which are integrity, respect,
excellence and transparency.
Corporate governance at a glance
63 Message from our Chair
64
66 Board of Directors
68 Executive Committee
69 Governance report
73 Committee reports
81
105 Directors’ report
Remuneration report
62
Hikma Pharmaceuticals PLC | Annual Report 2018
Message from our Chair
Evolving governance
Corporate governance
Dear Shareholders
During 2018, we have successfully advanced
the governance of Hikma through role
changes, succession developments, dialogue
with stakeholders on remuneration and
responding to the evolving governance
regulatory landscape. We have evolved from
a family company, to a global company with
family values.
Chief Executive Officer
Earlier in the year, Siggi Olafsson joined Hikma
as Chief Executive Officer (CEO) and became
a member of the Board. Since that point, Siggi
and I have worked very closely on transitioning
the responsibilities I previously held in the
capacity of CEO under the combined role of
Chairman and Chief Executive. Over 2018,
a significant proportion of my time has been
spent empowering our new CEO and
developing strategy together. I am delighted
that Siggi has joined us, he significantly
strengthens our team and we have already
made significant progress due to his
leadership of the executive.
Board composition
At our AGM in May we bade Ron Goode
farewell. Ron’s retirement brings to a close the
era of the Independent Directors who joined
early in Hikma’s listed life and were instrumental
in developing our capabilities and leadership.
Under Ron’s guidance, the Compliance,
Responsibility and Ethics Committee and our
business integrity programme were created.
We owe him a great deal.
I am delighted to confirm that Cynthia
Schwalm will be joining the Board as an
independent non-executive director with
effect from 1 June 2019. Cynthia brings a
wealth of pharmaceutical experience which
is invaluable following Ron’s retirement.
Additionally, her appointment ensures that
we continue to make progress enhancing
gender diversity on the Board.
Over the course of the next year we will further
develop our succession planning for both
the non-executive directors and the
executive team.
Committees
Our Board Committees undertake a significant
workload of important governance and
listing related tasks that enable the Board
to concentrate on business performance,
strategy and risk related issues. I am pleased
to report that the performance evaluation
exercise highlighted that the Committees are
operating highly effectively. I would like to
thank the Chairs of our Committees for their
commitment and dedication.
Said Darwazah
Executive Chairman
Effectiveness
Having undertaken an extensive evaluation
exercise in 2017 that contributed towards
some of the governance changes that I have
outlined today, we undertook a shorter form
evaluation in 2018. It was clear from the most
recent exercise that the changes we have
made and the manner in which we have
executed them were both rated very highly.
There are some areas that we will be working
on over the course of 2019 which are discussed
later in this report.
Employee engagement
Our founder, my father, was fundamentally
committed to supporting, empowering and
developing the people who worked for him.
Accordingly, I am delighted that, going forward,
Nina Henderson will be engaging with our
people and bringing further employee
perspective to our decision-making.
If there are any matters that you wish to
discuss, please do not hesitate to contact me.
Said Darwazah
Executive Chairman
We have evolved from a family
company, to a global company
with family values.”
Hikma Pharmaceuticals PLC | Annual Report 2018
63
Corporate governance
at a glance
Highlights 2018
Priorities 2019
— Initiated a search process for a new Independent Director
— Increase the level of independent representation on the Board
— Transitioned from a combined Chairman and Chief Executive
— Further enhance gender diversity in the boardroom
to separate roles and responsibilities
— Develop a new executive succession plan reflecting recent role
— Restructured executive responsibilities with a more focused
and people changes to the leadership
leadership team
— Enhanced our employee engagement programme by
allocating specified responsibilities to a Board Director
— Discussed the approach to remuneration with the
governance community and responded accordingly
— Oversee management’s delivery of employee enablement
enhancements
— Implement recommendations arising from the recent externally
facilitated Board evaluation
— Enhance the consideration of employee perspectives in the
— Enhanced the appraisal process for the Executive Chairman
boardroom
— Enhanced our strategic leadership and oversight of cyber-risk
— Simplified objectives for executive directors, in line with
shareholder observations
Board experience
Geographical experience
Business ethics and integrity
Listed environment
Manufacturing
Sales
Finance
Governance
Commercial
Pharmaceutical
Human resources
Regulatory and political
Strategy and risk
50%
70%
90%
90%
100%
80%
MENA
90%
UK
80%
Europe
80%
US
100%
Multinational
Country of origin
Iceland
UK
Ireland Germany
Jordan
USA
90%
100%
100%
100%
100%
100%
64
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | At a glance
Board attendance
Board’s time
Directors
Said Darwazah
Siggi Olafsson1
Mazen Darwazah
Robert Pickering
Ali Al-Husry
Dr Ronald Goode2
Pat Butler3
Dr Pamela Kirby
Dr Jochen Gann4
John Castellani
Nina Henderson
Meetings attended
(7 scheduled and
2 unscheduled)
9/9
6/6
9/9
9/9
9/9
5/5
8/9
9/9
7/9
9/9
9/9
%
100%
100%
100%
100%
100%
100%
89%
100%
78%
100%
100%
Corporate governance
Financial performance
Operational developments
Risk1
Strategy and acquisitions
2018
24%
20%
20%
16%
20%
2017
24%
33%
23%
2%
18%
2018
2017
1. Siggi Olafsson joined the Board as of March 2018
2. Dr Ronald Goode retired following the May 2018 AGM
3. Pat Butler was unable to attend one meeting due to timing change made by Hikma
4. 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
1. During 2017 risk related tasks were primarily undertaken by the Audit Committee. During
2018 the Board increased its direct oversight of risk
Board composition
Independent NED tenure (as at 12 March 2019)
Executive Chairman and Chief Executive Officer
Other Executive Directors
Non-Independent NED
Independent NED
March
2019
20%
10%
20%
50%
March
2018
18%
9%
18%
55%
0–3 years
4–6 years
7–9 years
Number
2
2
1
%
40%
40%
20%
2019
2018
Diversity (as at 12 March 2019)
Board
Executive Committee
Group as a whole
Women 2 (20%)1
8 (80%)
Men
BAME2 3 (30%)
7 (70%)
White
Women 3 (33%)
6 (67%)
Men
BAME2 5 (56%)
4 (44%)
White
Women 2,899 (35%)
5,444 (65%)
Men
BAME2
White
677 (36)%3
1,204 (64)%3
1. When Cynthia Schwalm joins the Board on 1 June 2019 the
2. BAME: Refers to people who identify as either Black, Asian
3. Data from Hikma’s US operations only
ratio will change to 27% women and 73% men
or Minority Ethnic
Hikma Pharmaceuticals PLC | Annual Report 2018
65
Board of Directors
Said Darwazah, 61
Executive Chairman
Siggi Olafsson, 50
Chief Executive Officer
Mazen Darwazah, 60
Executive Vice Chairman, President of MENA
Appointed: 1 July 2007 | Joined Hikma: 1981
Nationality: Jordanian
Appointed: 20 February 2018 | Joined Hikma: 2018
Nationality: Icelandic
Appointed: 8 September 2005 | Joined Hikma: 1985
Nationality: Jordanian
Board experience:
Board experience:
Board experience:
Committee membership:
None
Experience: Said served as Chief Executive from
July 2007 to February 2018 and has served as Chair
since May 2014. Said has over 37 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: Chairman of the Queen
Rania Foundation and Royal Jordanian Airlines.
Director of the Central Bank of Jordan and Dash
Ventures Limited.
Committee membership:
Committee membership:
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. Trustee of the American-
Scandinavian foundation.
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 HM King Abdullah
Economic Policy Council.
Robert Pickering, 59
Senior Independent Director
Ali Al-Husry, 61
Non-Executive Director
Patrick Butler, 58
Independent Non-Executive Director
Appointed: 1 September 2011 | Joined Hikma: 2011
Nationality: British
Appointed: 14 October 2005 | Joined Hikma: 1981
Nationality: Jordanian
Appointed: 1 April 2014 | Joined Hikma: 2014
Nationality: Irish
Board experience:
Board experience:
Board experience:
Committee membership:
C
Experience: Robert became Senior Independent
Director in May 2014. Robert was Chief Executive of
Cazenove Group PLC and subsequently J.P. 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.
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 Capital
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:
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: Chairman of Aldermore PLC.
Director of The Ardonagh Group and Res Media
Limited. Governor of the British Film Institute.
Trustee of the Resolution Foundation.
66
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | Board of Directors
Dr Pamela Kirby, 65
Independent Non-Executive Director
Dr Jochen Gann, 54
Non-Executive Director
John Castellani, 68
Independent Non-Executive Director
Appointed: 1 December 2014 | Joined Hikma: 2014
Nationality: British
Appointed: 29 February 2016 | Joined Hikma: 2016
Nationality: German
Appointed: 1 March 2016 | Joined Hikma: 2016
Nationality: American
Board experience:
Board experience:
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
and Novo Nordisk.
Qualifications: First-class BSc degree in
Pharmacology, and 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:
None
Experience: Dr Gann is Global Head of Corporate
Finance/M&A and Corporate Vice President at
Boehringer Ingelheim. Dr Gann leads Boehringer
Ingelheim’s mergers and acquisitions activities
across all businesses.
Qualifications: Doctorate Degree in International
Finance from the University of Hohenheim. Master’s
Degree in Business Administration and Science from
University of Karlsruhe.
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: 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.
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.
Board experience:
Business ethics
and integrity
Commercial
Finance
Governance
Manufacturing
Pharmaceutical
Regulatory
and political
Sales
Human resources
Strategy and risk
Listed environment
Committees:
Audit Committee
Compliance, Responsibility and Ethics Committee
Nomination and Governance Committee
Remuneration Committee
C Chair
For detailed Directors’ biographies go online:
www.hikma.com/about/leadership/
Hikma Pharmaceuticals PLC | Annual Report 2018
67
Nina Henderson, 68
Independent Non-Executive Director
Appointed: 1 October 2016 | Joined Hikma: 2016
Nationality: American
Board experience:
Committee membership:
Experience: Nina assumed Board-level
responsibility for employee engagement in January
2019. 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, Vice Chair of
the Board of Drexel University, Director of the Foreign
Policy Association and Visiting Nurse Service of New
York, Inc.
Executive Committee
The full biographies of Hikma’s Executive Committee
can be found on the Hikma website:
www.hikma.com/about/leadership/
Siggi Olafsson
Chief Executive Officer
Joined: 2018
Nationality: Icelandic
For further biographical details please see page 66.
Khalid Nabilsi
Chief Financial Officer
Joined: 2001
Nationality: Jordanian
Role: Khalid is responsible for Group finance,
including reporting and capital management. Khalid
has held several financial positions during 18 years
with Hikma, including VP Finance.
Qualifications: Certified Public Accountant. MBA
from the University of Hull.
Mazen Darwazah
Executive Vice Chairman, President of MENA
Joined: 1985
Nationality: Jordanian
For further biographical details please see page 66.
Brian Hoffmann
President, US Generics
Joined: 2009
Nationality: American
Bassam Kanaan
EVP, Corporate Development and M&A
Majda Labadi
EVP, Organisational Development
Joined: 2001
Nationality: Jordanian
Joined: 1985
Nationality: Jordanian
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.
Role: Bassam has Group level responsibility for
strategic development, acquisitions and alliances.
Bassam has held several executive positions during
18 years with Hikma, including Chief Financial Officer.
Role: Majda has Group level responsibility for
human resources. Majda has held several executive
positions during 33 years with Hikma, including
VP Injectables and VP MENA Operations.
Qualifications: BA in Business Administration
from Boston University. MBA from the University
of Chicago.
Qualifications: US Certified Public Accountant and
Chartered Financial Analyst. BA from Claremont
McKenna. International Executive MBA from Kellogg/
Recanati Schools of Management.
Qualifications: BA from the American University
of Beirut. Master’s degree from Hochschule
Fur Okonomie, Germany. Advanced Management
Program at INSEAD.
Riad Mishlawi
President, Injectables
Joined: 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.
Henriette Nielsen
EVP, Business Operations
Joined: 2018
Nationality: Danish
Susan Ringdal
EVP, Strategic Planning and Global Affairs
Joined: 2005
Nationality: American
Role: Henriette leads the Group’s legal, compliance,
risk, IT, business improvement, pharmacovigilance
and digital functions.
Qualifications: Law Degree from the University
of Copenhagen. Master of Laws from the University
of Edinburgh.
Role: Susan is responsible for strategic planning,
investor relations, corporate affairs and business
intelligence. Prior to joining Hikma, Susan worked
for Alliance Unichem and Morgan Stanley.
Qualifications: BA in History from Cornell University.
MBA from London Business School.
68
Hikma Pharmaceuticals PLC | Annual Report 2018
Governance report
Corporate governance | Governance report
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, the division
of responsibilities between the Executive Chairman and the CEO
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 shareholders, with many of the original investors from
before listing still investing and supporting Hikma today. Over the
circa 14 years since flotation Hikma has maintained the highest
standards of shareholder engagement, which is reflective of the
importance placed in maintaining strong investor relations and
governance.
— 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 rigorously reviewed and considered the independence of
each Non-Executive Director during the year as part of the annual
corporate governance review, which included consideration of
progressive refreshment of the Board. The Board considers Robert
Pickering, Pat Butler, Dr Pamela Kirby, John Castellani and Nina
Henderson to be independent. The Board considers Cynthia Schwalm,
who will join on 1 June 2019, 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 does not view Ali Al-Husry as an Independent Director
due to the length of his association with Hikma, holding an executive
position with Hikma prior to listing and his involvement with Darhold
Limited, Hikma’s largest shareholder. However, he continues to bring
to the Board broad corporate financial experience, in depth awareness
of the Group’s history, 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 is in accordance with 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.
UK 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 Market Law). The report on pages 69 to 104 describes
how the Board has applied the Main Principles of the UK Code and
Markets Law throughout the year ended 31 December 2018. 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 Market Law.
The Board acknowledges that Said Darwazah holding the position of
Chairman and Chief Executive until February 2018 and, since that point,
Executive Chairman, requires explanation under the UK Code. Should
shareholders require any further information, questions may be
directed to the Company Secretary. Other than the Executive Chairman
position and one Independent Director (who retired at the 2018 AGM)
serving for more than nine years, 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, having previously served as Chief Executive Officer, and his
tenure as a director are departures from the UK Code.
The role was created in February 2018, following the appointment of
Siggi Olafsson as CEO. Previously, Said Darwazah was the Chairman
and Chief Executive. The change of roles and appointment of a CEO
has caused a reduction in Said’s executive responsibilities, whilst still
retaining his strategic input. The Board considers the transfer of
responsibilities from Said to Siggi has been very successful and that the
CEO has been fully empowered by the Executive Chairman. The Board
is pleased with the progress made and considers it is important to
retain corporate memory and important relationships. Therefore, it is
essential to retain Said Darwazah’s services in a strategic capacity.
The Board consulted shareholders prior to Said’s appointment as
Chairman and Chief Executive in May 2014 and following the change
to the position of Executive Chairman to in February 2018. The
Independent Non-Executive Directors met twice during 2018 to review
the Board structure and concluded that the Executive Chairman role
should continue.
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:
— Continuity of strategy: Said Darwazah has been a driving force
behind the strategic success of the business since 2007 and the
Board believes that it is important for the continued success of the
Group that he remains in a strategic role.
— Executive Chairman’s role: The Executive Chairman position is
highly visible inside and outside Hikma, acting as an ambassador
with business partners and adviser to the divisions.
— Business partners: A significant number of Hikma’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 Executive Chairman remains key.
Hikma Pharmaceuticals PLC | Annual Report 2018
69
Governance report continued
UK Code changes
The 2018 UK Corporate Governance Code applies to the next
accounting period ending 31 December 2019. Whilst the Board has
time to make adjustments, it fully embraces early adoption of the Code
enhancements. The Board has considered the amendments to the
UK Code, and has resolved to:
— Employee Engagement: Nina Henderson accepted the Board’s
request to be responsible for enhancing, where appropriate, the
consideration of employee perspectives in the Board’s decision-
making processes. During 2019, Nina will engage with employees
at Hikma’s sites by participating in employee activities. Nina has
become a member of each Board Committee in order that there
is an opportunity to ensure that the employee voice is heard in each
key decision-making forum.
— Remuneration: Other than considering a post-employment share
ownership policy, Hikma’s approach to remuneration is already
compliant with the 2018 UK Code. During 2019, the Remuneration
Committee will develop a relevant policy.
Evaluation and performance
The Board considered its first full, externally moderated, interview-
based evaluation in 2017 and will repeat the exercise every three years.
For 2018, the Board undertook a questionnaire-based evaluation,
which was externally moderated.
Process
The process was coordinated by the Senior Independent Director
at the request of the Executive Chairman. Lintstock, an external
moderator which has no other connection with Hikma, led the process
with a thematic questionnaire. Lintstock reported independently to the
Executive Chairman and the Senior Independent Director. The results
were discussed at the Board and action points agreed.
The results of the 2018 evaluation process formed part of the Executive
Chairman’s appraisal of the overall effectiveness of the Board and its
members. Additionally, during the period between assessments, the
Directors suggest and promote improvements as they arise.
Progress on 2017 recommendations
Observations
Action taken
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. The
Executive Chairman role enables the
entrepreneurial talents of Said Darwazah to
be retained.
The executive team has been enhanced by
the clarification of roles and centralisation of
support-related functions under an executive
with significant external experience.
To enhance the communication of and
discussion around more challenging
matters, the Board has allocated more time
at meetings to hold open discussions without
executives present.
Columbus
integration
The Board has reviewed a presentation from
the executive team reviewing the key learnings
of the Columbus acquisition and integration.
70
Hikma Pharmaceuticals PLC | Annual Report 2018
New action points
Observations
Action being undertaken
Further
Independent
Director required
The Board began a search process for an
additional Independent Director with
pharmaceutical experience in 2018 and has
appointed Cynthia Schwalm.
Monitoring of
individual
strategic plans
The CEO has enhanced the executive report
to include detail on the progress against each
strategic initiative that was discussed at the
strategic review.
Senior
Independent
Director
succession
The Nomination and Governance Committee
has been asked to consider succession for the
Senior Independent Director over the course
of 2019.
Focus of the Board
agenda
The Company Secretary has categorised the
Board agenda in strategic, performance and
governance segments with a view to focusing
decision making.
Conclusions and action
The Board considered that it continued to operate effectively with
particular strengths in the following areas:
— the transfer of responsibilities to and empowerment of the new CEO
— the strategic review held in October was considered to be a significant
success with several enhancements embraced by directors
— interaction and atmosphere providing for good, healthy discussions
and challenges
— Non-Executive Directors provide support and constructive challenge
to management
— oversight of risk management and advancement of the risk agenda
Executive Chairman’s appraisal
The Senior Independent Director met with the Executive Chairman
at year-end to perform an appraisal based on the key performance
indicators and profile for the roles. The Independent Non-Executive
Directors regularly met in private during the course of the year. The
performance of the Executive Chairman and the Board was discussed
during these meetings. The conclusion of this process was that the
Executive Chairman provided strong leadership to the Board.
Director appraisal
The Executive 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 be recommended to shareholders for
re-election at the 2019 AGM.
Corporate governance | Governance report
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
The Executive Chairman is responsible for running the Board, mentoring the CEO and developing strategy.
CEO
Hikma’s executives report to the CEO, who reports to the Executive Chairman.
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 Executive Chairman
— providing a communication channel between the Executive Chairman and the Non-Executive Directors (NEDs)
— 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.
Employee engagement
Nina Henderson is responsible for ensuring, where appropriate, that employee perspectives are taken into account
in the Board’s decision-making processes.
Company Secretary
The Company Secretary reports to the Executive Chairman and supports each board member in the delivery of their
duties and specific responsibilities.
The role profiles are reviewed annually and detailed on the Hikma website at www.hikma.com/investors/corporate-
governance/board-roles-and-responsibilities/:
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-bribery
and corruption
— Ethics
— Speak up
— Code of Conduct
— Trade Sanctions
Compliance
Remuneration
— Remuneration policy
— Executive
remuneration
— Performance plans
— Management
incentivisation
See page 73
See page 77
See page 79
See page 81
Executive Committee
The CEO chairs the Executive Committee, which develops strategic proposals to the Board, makes operational
decisions and oversees risk control within the parameters of the Matters Reserved to the Board.
Hikma Pharmaceuticals PLC | Annual Report 2018
71
Governance report continued
Governance
Investor engagement summary 2018
Shareholder engagement
The Directors undertook a series of meetings with major investors
and relevant bodies in order to discuss the governance and
remuneration aspects of the Chairman and CEO roles. During the
year the Chair of the Remuneration Committee met with members
of the governance community to enhance dialogue related to
remuneration. The Board is taking these comments into consideration
in its plans for further development of remuneration policy over the
course of 2019 and beyond.
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 Executive Chairman and the CEO meet major shareholders
periodically to discuss governance and strategy issues in order to
understand their views on Hikma 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.
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.com.
Electronic communications
Hikma’s preference is to communicate through Hikma’s website,
rather than in paper form. Shareholders are encouraged to visit the
website to access Hikma’s Annual Reports and half-year and final
results presentations. Shareholders who wish to receive paper
communications can elect to do so through Hikma’s registrars,
Link Asset Services (www.hikmashares.com).
For and on behalf of the Board of Directors of Hikma
Pharmaceuticals PLC
Peter Speirs
Company Secretary
12 March 2019
March
— Preliminary
announcement
— Roadshow in London,
New York and Boston
May
— Annual General Meeting
— Roadshow in Edinburgh
July
— Roadshows in Paris,
Zurich and Frankfurt
September
— Roadshows in New York
and Boston.
— Healthcare conferences
in New York and London
December
— Roadshows in Boston
and Edinburgh
72
Hikma Pharmaceuticals PLC | Annual Report 2018
January
— Healthcare
conference in
San Francisco
April
— 2017 Annual report
published
— Roadshow in
Oslo, Stockholm,
Copenhagen and
Helsinki
June
— Healthcare conference
in San Francisco and
New York
— Two healthcare
conferences in London
August
— Interim
announcement
— Roadshow in London
November
— Trading update
— Capital markets day
in London
— Healthcare conference
in London
Audit Committee
Letter from the Chair
Corporate governance | Committees | Audit
Raising capabilities
and improving resilience
Pat Butler
2018 Highlights
— Reviewed the effectiveness of the internal audit and risk management
programmes, and suggested changes to priorities and processes
— Requested the attendance of the CEO to better understanding the
operational context and management focus
— Assessed the impact of new accounting standards
— Re-assessed our medium-term projections and longer-term prospects and
asset valuations, and assessed potential for impairments and writebacks
— Assessed management’s progress on improving financial and operational
processes
2019 Priorities
— Considering and assessing the impacts of the change in operational
structure on reporting
— Improving the strategic information from the risk management programme
— Overseeing the strengthening of information technology platforms
— Enhancing the financial reporting, processing and forecasting capabilities
Allocation of time
Corporate governance
External audit
Financial reporting
Forecasts
Internal audit
Risk
7%
15%
31%
20%
14%
13%
Members and attendance
Member
Pat Butler (Chair)1
Dr Ronald Goode2
Robert Pickering
Dr Pamela Kirby
John Castellani
Nina Henderson
Meetings
Attendance
9/9
5/5
9/9
9/9
9/9
9/9
100%
100%
100%
100%
100%
100%
1. 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 Hikma is operating. Dr Ronald Goode,
Dr Pamela Kirby and John Castellani all have extensive pharmaceutical experience
2. Dr Ronald Goode retired following the 2018 May AGM
3. Cynthia Schwalm is to join the Committee on 1 June 2019
Dear Shareholders
This report, summarises the work of the Committee over the last year,
including the matters that we have found most challenging, where
careful judgement has been required.
Commentary
The 2018 year has been successful for the Audit Committee. The
finance team has been strengthened over the year with several new
senior appointments in areas, such as forecasting and leadership of
the US (where circa 62% of our business is based). The team is well
positioned to grow and develop with the business and is continuing
to strengthen the accounting platforms and processes. As a result,
the recent year-end financial reporting process has been smooth.
Following the impairment at the 2017 year end, the Committee reviewed
management’s 2018 reassessment and is pleased to report that each
cash generating unit (business division) has appropriate headroom.
We also considered the impact of the impairment on distributable
reserves and concurred with management’s assessment that Hikma
has sufficient reserves for its dividend programme.
The Committee received and reviewed regular capital expenditure
and treasury reports from management and projected investment
requirements of Hikma. During the year, Hikma has reduced its overall
debt using free cash flow, whilst ensuring that sufficient facilities are
available to fund future capital projects.
We reviewed the progress of the Chief Information Officer’s programme
to improve cyber resilience. We will continue to monitor this programme,
as well wider programmes associated with business continuity.
The Committee oversees the work of Hikma’s risk function, which
is reported on pages 55 to 61. The Board undertook a robust
assessment of the principal risks and uncertainties during the year,
as detailed on pages 58 to 60 and reviewed Hikma’s risk appetite,
as detailed on page 56.
The Enterprise Risk Management process, has become well embedded
in the organisation. In 2018 the organisation made particularly good
progress in developing quantitative risk indicators.
The Committee was delighted that Siggi Olafsson accepted the request
to attend meetings where appropriate, to provide greater operational
context to the reports received in the discharge of the Committee’s
responsibilities. Siggi’s involvement has particularly helped in
responding to internal audit recommendations and clarifying ownership
of principal risks.
Hikma Pharmaceuticals PLC | Annual Report 2018
73
Audit Committee continued
Significant judgements
The Audit Committee considered and discussed the following
important financial matters:
— Impairment: The Committee asked management to assess the
impairment position early in the audit process and to develop
a policy for impairment reversal. The Committee reviewed and
challenged the estimate of the fair value of assets and liabilities.
Following the impairment incurred last year, the changes to
management’s medium-term expectations for Hikma were not
significant and led to an impairment of $9 million (2017: $1,084 million).
The policy for impairment reversal has been agreed in principle and
its application will be further developed during 2019.
— Exceptional items: The major exceptional items for Hikma were
related to product development clinical studies, acquisition related
costs and software. The Committee reviewed the treatment of these
items and management’s assessment of their impact.
— Legal matters: The Committee reviewed management’s conclusions
regarding the appropriate accounting treatment for the settlement of
legal claims in Hikma’s favour. Hikma has claims against other parties,
claims from third parties against Hikma, and formal information
requests from regulatory authorities relating to a wide range of
matters that are in the normal course of business for a generic
pharmaceutical company.
— Investment in subsidiaries and distributable reserves: Hikma’s fixed
and intangible assets are held in various subsidiaries. As the 2017
impairment was applied across Hikma, the value of the assets in
those subsidiaries was re-assessed. The Committee reviewed the
re-assessment exercise and the resulting implications for
distributable reserves of the holding company. The Group continues
to have sufficient distributable reserves.
— Accounting standards: Management reviewed the application of
new accounting standards related to revenue recognition (IFRS 15),
the measurement of financial assets and liabilities (IFRS 9), and
the treatment of leases (IFRS 16). The Committee considered and
challenged management’s assessments. The impact of these
changes is detailed in note 44 of the financial statements.
— Revenue recognition: The Committee reviewed the Group’s policies
for revenue recognition and the application by management of those
policies in relation to significant products where the potential for
returns and rebates was high. The Committee assessed the reports
on the processing of chargebacks and rebates in the US. This is a
judgemental area and applies to a significant proportion of Group
revenue. In response to recommendations by the internal auditors
that were endorsed by the Committee, management has enhanced
the control environment. The Committee considered modelling
environment and the appropriateness of associated provisions.
— Taxation: Hikma’s worldwide operations are highly integrated and
involve a number of cross-border supply chains, which results in
judgement being required to estimate the potential tax liabilities in
some jurisdictions. The Committee took advice from professional
services firms and management in this regard, and considered the
resulting impact on the effective tax rate and the deferred tax assets
in key markets. The Committee reviewed the appropriateness of
the disclosures in the Annual Report, and reviewed and approved
Group’s tax strategy statement, which is available on the website.
The Committee reviewed management’s proposals to deliver
sufficient financial resources for certain subsidiaries.
— 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. See page 61.
— Viability: The Committee reviewed the medium-term business
projections and considered the scenarios that could impact those
projects and the ability of Hikma to remain viable. See page 61.
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. Mr Mark Gill was appointed as the senior
statutory auditor in May 2017.
During the year, the Committee reviewed the work of PwC and
concluded that they provide an effective audit and have constructive
relationships with the relevant parties. As part of this review the
Committee examined the following areas:
— Audit quality and technical capabilities: The Committee considered
that the auditors undertook an effective and in-depth assessment
and verification exercise and that the level of expertise PwC brought
to bear was high.
— 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. The Committee’s approval
is required to instruct PwC’s services.
The Committee provides feedback on the auditor’s performance as
part of the regular meetings with them without management present,
takes into account the reports and analysis of the Financial Reporting
Council, and believes that there is an open and appropriately
challenging relationship between the audit leadership team, the Audit
Committee and management.
The Committee confirms that the statutory audit services for the
financial year under review were conducted in compliance with the
Competition and Markets Authority Order, and a competitive audit
tender process was undertaken in 2015.
Auditor’s fee ($m)
$2.6m
PwC
1 Jan –
31 Dec 2018
1 Jan –
31 Dec 2017
0%
0%
100%
$2.6m
100%
$0.0m
100%
$2.4m
$0.0m
74
Hikma Pharmaceuticals PLC | Annual Report 2018
Audit related fees
Tax services
Other non-audit services
Non-audit related fees
Internal control
The Board confirms that it is ultimately responsible for ensuring
that Hikma’s systems of internal controls and risk management
remain effective.
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 Hikma companies and associates together
with direct support from Hikma’s finance function
— Annual budgets, updated forecasts and long-term business plans
for Hikma that identify risks and opportunities and that are reviewed
and approved by the Board
— A defined process for controlling capital expenditure which is
detailed in the governance framework
The Board is satisfied that Hikma’s systems for internal control accord
with the FRC’s guidance, and 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 53 to 61, that forms a fundamental part
of Hikma’s approach to designing and implementing new and
enhancements to existing controls
— Internal audit: The Committee receives regular reports from the
internal auditors who assess Hikma’s processes, identify areas for
improvement, monitor progress, and undertake their own
assessment of the risks facing Hikma
— Financial performance: Hikma’s financial performance and
forecasting reports are reviewed by the Board to aid the
understanding of the underlying performance of the business,
deviations from expectations and management’s operational
challenges and responses
— 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 auditor: The regular and confidential dialogue with the
external auditor
The Board monitors the ongoing effectiveness of the internal control
systems and encourages continuous improvement. In the Committee’s
2017 report to shareholders, we identified five areas for improvement
which are not considered significant, and have since been addressed:
— The Committee receives regular updates on management’s upgrades
to the financial systems in accordance with a project plan with
clear milestones
— The changes to the finance department are reported in the Chair’s
letter on page 73
— Significant improvements have been made processing returns
and rebates following leadership change
Corporate governance | Committees | Audit
— Payroll and salary review processes have been segregated, except
for those at very small facilities where it is not practical to do so
— A group level CFO has been assigned to oversee the financial
aspects of R&D and each project is now segregated and monitored
independently
During the year, the Board reviewed and approved management’s
plans for making these enhancements which will take place during
2019 and 2020.
Internal audit
The internal audit of Hikma is performed by EY, who report directly
to the Chair of the Committee. EY assess each Hikma facility 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 six months. There is a regular programme
of interaction between EY and the Committee.
During the year EY identified the following key areas for strengthening
of controls which the Committee considers are being appropriately
progressed by management:
— Updating fixed registers more frequently
— Implementing further improvements to the IT and access
environment and associated operational procedures
Key internal audit events
During the year, the Committee reviewed the controls for ensuring
the independence of the internal auditors as part of its review of the
effectiveness of the programme and assessment of EY’s interaction
with the business. The Committee concluded that EY maintained their
independence and conducted an effective internal audit programme.
May
July
The Committee Chair meets EY
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 priority areas that are
identified 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
Hikma Pharmaceuticals PLC | Annual Report 2018
75
Siggi’s involvement has particularly
helped in responding to internal audit
recommendations and clarifying ownership
of principal risks.”
Additional information
Copies on the work and policies of the Committee are available at Hikma’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/
Audit Committee continued
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, risk, communications and governance, and is
supported by divisional and functional heads, as required. The
Reporting Committee’s activities include:
— Initiating the review process for the Annual Report significantly
before the year end, considering external developments, issuing
guidance to contributors and identifying areas for improvement
— Obtaining input from external advisers, including the auditors,
designers, brokers and public relations advisers
— Appointing a project manager to ensure liaison between
departments and delivery to the agreed plan
— Undertaking several multi-functional offsite reviews of the
disclosures as a whole prior to the publication of the Annual Report
— Overseeing a verification process to ensure the accuracy of
disclosures
Each member of the Audit Committee and the Reporting Committee
was satisfied that the 2018 Annual Report is fair, balanced and
understandable and recommended the adoption of the report and
accounts to the Board.
Board of Directors’ going concern statement
The Directors considered the going concern position as detailed on
page 61. 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.
Board of Directors’ viability statement
The Directors, having considered the longer-term viability position as
detailed on page 61, confirm that they have a reasonable expectation
that Hikma will be able to continue in operation and meet its liabilities
over the viability period which ends on 31 December 2021.
As ever, if you have any questions, please do not hesitate to contact me.
Pat Butler
Chair of the Audit Committee
12 March 2019
76
Hikma Pharmaceuticals PLC | Annual Report 2018
Nomination and Governance Committee
Letter from the Chair
Corporate governance | Committees | Nomination and Governance
Robert Pickering
2018 Highlights
— Initiated an extensive search process for an additional Independent Director
— Developed a new succession plan for Independent Directors
— Implemented an appropriate response to forthcoming changes to the UK
Governance Code
— Enhanced the controls related to defence and the delegation of authority
to the CEO
2019 Priorities
— Developing a new plan for the succession of the Executive Directors
and Executive Committee Members
— Complete the appointment and induction of an additional Independent
Director
— Consider succession planning for the Senior Independent Director
and Committee Chair
Allocation of time
Corporate governance
Diversity
Independence
Skills and experience
Succession
29%
14%
14%
17%
25%
Members and attendance
Member
Meetings
Attendance
Robert Pickering (Chair)
Mazen Darwazah
Pat Butler1
Nina Henderson
6/6
6/6
5/6
6/6
100%
100%
83%
100%
1. Pat Butler was unable to attend one meeting due to timing change made by Hikma
2. Cynthia Schwalm is to join the Committee on 1 June 2019
Enhancing leadership and
strengthening governance
Dear Shareholders
During the year, the Nomination and Governance Committee has
continued to lead succession planning for Independent Directors
and executive management, governance, board structure and
board effectiveness.
Executive succession
As reported last year, in February 2018 the Committee completed its
search for a new Chief Executive Officer (CEO). This resulted in Siggi
Olafsson joining Hikma, becoming the first non-family CEO of Hikma.
In late 2018, Siggi made some adjustments to the Executive Committee.
As the changes become fully embedded and new team members
become more established in their roles, the Committee will develop
a new executive succession plan later in 2019, which will include the
Executive Directors.
Independent succession
With the retirement of Dr Ronald Goode in May 2018, Hikma completed
the 2014 succession plan which related to Independent Directors who
joined when the Group listed. During 2018, the Committee developed
new arrangements for the succession of the current Independent
Directors and considered candidates for additional appointments, with
a particular emphasis on gaining additional US healthcare experience,
as well as enhancing gender diversity. This process led to the
appointment of Cynthia Schwalm as an Independent Non-Executive
Director with effect from 1 June 2019. The Committee is committed to
ensuring an independent majority on the Board and enhancing diversity.
The Company Secretary has developed a tailored induction
programme for Cynthia, including presentations and advice from
external experts. During 2019, the Committee will further develop the
plans for medium-term succession for the Independent Directors.
This will include consideration of my roles, being the positions of Senior
Independent Director and Chair of this Committee.
The Committee’s policy on tenure is that the Independent Non-
Executive Directors are normally expected to serve for a period of up
to nine years. Their appointments are formally reviewed after three
years and at six years a more rigorous review process is undertaken.
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, where succession for a Committee
Chair is taking place, the transfer of knowledge and relationships
associated with the particular committee. Additionally, the Board
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
Hikma Pharmaceuticals PLC | Annual Report 2018
77
Nomination and Governance Committee continued
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, investor perceptions and governance
Hikma supports Directors in their continued development.
As the Directors are highly experienced, their training needs tend to
be related to either ensuring awareness of changes in the business,
political and regulatory environment, or bespoke training and
mentoring on a particular area for development. Therefore, Hikma
financially supports specific training requests and ensures that
Directors are briefed by internal and external advisers on a regular
basis. Additionally, the Chair of this Committee and Company Secretary
arranged briefings for directors during the year on matters such as
global politics, the pharmaceutical regulatory and competitive
environment, capital markets and listing related developments.
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 considers that Hikma gains more from high-quality
directors, than occasional situations where full attendance cannot
be achieved. Having reviewed commitment and attendance during
the year, 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.
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. The Committee reviews Hikma’s
entire governance arrangements on an annual basis. This year, the
Committee focused on enhancing the defence procedures and the
matters reserved to the Board, reflecting the separation of the
Executive Chairman and CEO roles, and the forthcoming changes
to the UK Governance Code.
Re-election
Each member of the Board will stand for election or re-election at
the 2019 AGM. The position of each Board member was closely
reviewed during the year as part of the consideration of succession
arrangements, independence issues, the Board and Committee
evaluation processes and the ongoing dialogue between the Executive
Chairman and the Senior Independent Director.
Diversity
Hikma’s diversity policy applies to the whole Company, including
the Board. 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
78
Hikma Pharmaceuticals PLC | Annual Report 2018
The Committee is committed to ensuring an
independent majority on the Board
and enhancing diversity.”
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. This diversity policy has been included in our updated Code
of Conduct and communicated to all employees. Further detail on
employee diversity is provided in the Sustainability report on page 51.
The Committee was pleased to be able to improve gender diversity
over the past few years, including the recent appointment of Cynthia
Schwalm. The Committee considers that the current level of gender
diversity needs to at least be maintained, if not enhanced (please see
the gender diversity information on page 65). The Board has not set
specific, measurable diversity objectives because it needs flexibility
to recruit the right candidates. The Board considers that it has
demonstrated strong ethnic diversity since the formation of Hikma
and that this diversity continues to be evident today.
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
12 March 2019
Additional information
Copies on the work and policies of the Committee are available at Hikma’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/
remuneration-committee/
Compliance, Responsibility
and Ethics Committee
Letter from the Chair
Corporate governance | Committees | Compliance, Responsibility and Ethics
John Castellani
2018 Highlights
— Completed an independent risk re-assessment of US ABC programme
— Appointed an Executive Committee member with overall responsibility
for all ABC, trade sanctions and compliance related matters
— Achieved independent confirmation that the main Jordanian entities’
ABC programme is in compliance with international guidelines
— Advanced Hikma’s approach to data protection through a risk assessment
and cross-functional process enhancement exercise
2019 Priorities
— Consolidate Hikma’s extensive sustainability activities under one
global strategy
— Further develop our assessment of our suppliers and service providers’
compliance programmes
— Implement and test the ABC enhancements from recent assessments
Allocation of time
ABC
Anti-trust and trade sanctions
Corporate governance
Sustainability
27%
15%
25%
33%
Members and attendance
Member
John Castellani (Chair)
Siggi Olafsson1
Mazen Darwazah2
Pat Butler3
Dr Ronald Goode4
Dr Pamela Kirby
Nina Henderson1
Meetings
Attendance
7/7
2/2
6/7
6/7
3/3
7/7
2/2
100%
100%
86%
86%
100%
100%
100%
1. Siggi Olafsson and Nina Henderson became members of the Committee on
7 November 2018
2. Mazen Darwazah was unable to attend one meeting due to illness
3. Pat Butler was unable to attend one meeting due to a timing change made by Hikma
4. Dr Ronald Goode retired following the May 2018 AGM
Building on our commitment
to integrity and quality
Dear Shareholders
The Committee has had another busy year advancing our commitment
to integrity and the communities in which we operate. This year we
welcomed Siggi Olafsson, Chief Executive Officer (CEO), and Nina
Henderson, who has board-level responsibility for overseeing employee
engagement, to the Committee. They significantly strengthen the
Committee, particularly due to their direct relationship with our people.
During the year, Henriette Nielsen became EVP, Business Operations,
assuming overall responsibility for all Anti-Bribery and Corruption
(ABC), trade sanctions and legal issues at an Executive Committee level.
The Committee considers that the coordination of these efforts under
one highly experienced individual greatly enhances our capabilities.
This report focuses on the matters that the Committee addressed
during the year. Further details related to the structure of our ABC
compliance and integrity programme are available on our website.
Commitment to integrity
The Committee is very proud of Hikma’s commitment to high standards
of business integrity, which is one of the four pillars of our values. It
includes the Board’s long-standing zero-tolerance of bribery and
corruption which has been demonstrated by being a founding member
of the World Economic Forum’s Partnering Against Corruption Initiative.
Hikma operates in some markets that are considered higher risk by ABC
advisers, however; the Committee is pleased that Hikma’s performance
and leadership on business integrity has been recognised by several of
our customers and suppliers in these jurisdictions.
The Committee is pleased to report that at several points during the
year, the CEO highlighted the importance of the ABC programme to
our people at events, via Hikma’s intranet, and at the Global Leadership
Conference.
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.
Good Corporation have continued their independent risk assessment
of our ABC procedures. This year, they re-assessed our Generics and
Injectables operations in the US. The report detailed certain
enhancements that are being implemented by the EVP, Business
Operations during 2019 and will be re-assessed later in the year.
Hikma Pharmaceuticals PLC | Annual Report 2018
79
Compliance, Responsibility and Ethics Committee
continued
During the year, we instructed Kroll Associates to undertake an
independent assessment of our ABC practices of our main Jordanian
entities as part of our global ABC programme. The Committee is
pleased to report that the assessment was successful and the areas
identified for improvement will be addressed over the course of 2019.
Code of Conduct
The Committee continues to oversee the development and promotion
of Hikma’s Code of Conduct, which embodies the important moral and
ethical values that Hikma promotes. The Code guides all the Committee’s
activities and is the key reference point for all our employees.
Training
Hikma undertakes direct integrity training programmes for its sales and
marketing employees. Additionally, it has an online ABC training module
that has been integrated with our HR on-boarding activities. The Board
has fully supported the training programme, which all directors, officers
and executive committee members have completed.
Speak-up
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 continued to receive regular reports on issues
identified through the Group-wide speak-up arrangements, which
include confidential reporting lines that report directly to the
Investigations Committee.
Anti-trust and trade sanctions
The General Counsel oversees Hikma’s compliance with the anti-trust,
and trade sanctions legislation and reports to the Committee in this
regard. Hikma has established extensive policies and procedures to
ensure compliance, which have been reviewed by management during
the year. During the year, the General Counsel provided advice to the
Committee on the changing sanctions landscape and how this affects
Hikma’s operations and strategy. Furthermore, the legal team
undertook a Group-wide training programme on anti-trust and trade
sanctions, and finalised an online training tool during the year.
Compliance with Criminal Finances Act
The Committee has overseen the implementation of processes in
response to the prevention of tax evasion legislation from the UK
Government. Hikma’s processes and procedures are proportionate
to its risk of failure to prevent the facilitation of tax evasion. Hikma is
steadfast in applying the principles of the UK tax evasion legislation
across all its businesses within Hikma 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
— engaging on the issue with supply chain partners
The CEO highlighted the importance of the
ABC programme to our people at events,
via Hikma’s intranet, and at the Global
Leadership Conference.”
Sustainability
The Committee has overseen, encouraged and supported the
Sustainability 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 Sustainability
report is contained on pages 42 to 54. For 2019, the Committee has
requested that management further consolidate Hikma’s sustainability
activities into a global programme that supports a small group of
strategic objectives linked to the direction and history of Hikma.
Ethical issues
The Committee oversaw Hikma’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
12 March 2019
Additional information
Copies on the work and policies of the Committee are available at Hikma’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/
/
— Commitment to integrity
www.hikma.com/sustainability/global-frameworks/
— Code of Conduct
www.hikma.com/about/ethics-and-compliance/code-of-conduct/
80
Hikma Pharmaceuticals PLC | Annual Report 2018
Remuneration Committee
Letter from the Chair
Corporate governance | Committees | Remuneration
Dr Pamela Kirby
2018 Highlights
— Developed performance packages for the new Chief Executive Officer (CEO)
and Executive Chairman positions
— Met with proxy advisory bodies to enhance communication
— Implemented investor and management comments on aligning performance
and remuneration outcomes
— Enhanced the approach to executive compensation by creating a new role
leading executive reward
2019 Priorities
— Three-yearly review of remuneration policy and liaison with stakeholders
— Develop guidelines for post-employment shareholding requirements
— Gaining greater insights into employee perspectives through the
engagement director and employee survey
— Considering the CEO’s first full review of compensation for his
immediate reports
— Reducing the complexity of the EIP through the implementation of the new
performance criteria model
Allocation of time
Wider employee issues
Corporate governance
Developing practices
Remuneration policy
Setting executive remuneration
26%
13%
16%
15%
30%
Members and attendance
Member
Meetings
Attendance
Dr Pamela Kirby (Chair)
Robert Pickering
Dr Ronald Goode1
Pat Butler2
John Castellani
Nina Henderson2
7/7
7/7
5/5
6/7
7/7
6/7
100%
100%
100%
86%
100%
86%
1. Dr Ronald Goode retired after May 2018 AGM
2. Pat Butler and Nina Henderson were unable to attend one meeting due to it being called
at very short notice
3. Cynthia Schwalm is to join the Committee on 1 June 2019
Aligning reward with superior
performance and leadership
Dear Shareholders
Since writing to you last year, I am pleased to say that the leadership
transition has been very successfully implemented and is reflected
in Hikma’s results. The Executive Directors have increased revenue
in an adverse pricing environment, reduced costs across the business,
undertaken a wholesale review of product development, and enhanced
the leadership structure. Whilst there is more work to do over 2019, the
Committee has been very impressed by the 2018 performance.
Rewarding Performance
The performance of the Group is discussed in greater detail on
pages 4 to 19, and 38 to 41.The performance remuneration that the
Committee has determined for the Executive Directors reflects its
assessment of the performance of the whole business, and of each
individual. The Committee is pleased that Hikma returned to growth
in 2018, and each business unit outperformed both the market and
our expectations. US generic pharmaceuticals, our biggest market,
remained highly competitive with significant price erosion. However,
the executive team successfully captured several market opportunities,
leveraging the breadth and quality of our market portfolio. New product
launches further contributed to top line growth, and a focus on process
improvement and efficiency resulted in a significant reduction in costs.
In MENA, our business delivered a solid performance in an environment
of continued political and economic uncertainty. We maintained our
position as the leading local player, and management implemented
several longer-term product development agreements.
The CEO has been instrumental in providing renewed focus to
management, establishing and communicating a clear strategy for
the business, capturing opportunities, strengthening and changing the
executive team, and assessing costs and value throughout Hikma. This
success is reflected in the significant recovery in the share price from
985p when Siggi Olafsson joined to 1,716p at the year-end (an increase
of 74%). As you will see from the graphs in the dashboard (page 83), this
contrasts to the significant losses in shareholder value experienced by
our generic and specialty pharmaceutical peers as a whole.
This is the first year in which Hikma has been led by an external CEO.
The transition of responsibilities from the Executive Chairman to the
CEO has been smooth and reflects the strength of relationship and
experience of the two people occupying those roles. In a transitionary
year in which several changes were made to the executive team, the
Committee has been impressed by the very strong performance of
both individuals.
Overall, it is both the excellent actual and relative performance of
Hikma that the Committee considers is crucial to the determination of
the Executive Directors’ performance remuneration, which range from
87% to 90% of maximum. In light of the exceptionally strong turnaround
Hikma Pharmaceuticals PLC | Annual Report 2018
81
Remuneration Committee continued
in the Group’s performance since Siggi joining, his extensive preparation
work with Hikma that commenced well in advance of that point, and
the short period in 2018 before his appointment, the Committee has
decided not to pro rate Siggi’s performance remuneration.
As I communicated to you last year, in order to recruit a CEO of Siggi
Olafsson’s calibre, the Committee had to offer a package that reflected
the remuneration available to leading US generic pharmaceutical
executives. The US is the only global jurisdiction with a significant
generic pharmaceutical talent pool, chiefly as a result of the US FDA
being the benchmark regulatory standard, and the size of the market.
Therefore, the Committee offered additional potential performance
remuneration for the first year of up to either 150% of base salary or
72,000 shares.
The additional remuneration was chiefly linked to turning around and
rationalising the US Generics operations and restructuring the R&D
approach, which were the underlying causes of 2017’s
underperformance. The Generics business has significantly out-
performed expectations since Siggi restructured the team and reduced
underlying costs. The R&D department has been re-focused into a
team dedicated to each business division with a 5 year target to more
than double the current level of new product revenue and the realistic
means with which to achieve this. The potential of our product pipeline
has been greatly enhanced by the extension of the partnership with
Vectura for five new products. In light of these achievements, the
Committee considers it is appropriate that the full potential first year
performance award is granted to the CEO. The total award will be
capped at 72,000 shares, equivalent to 146% of salary based on the
average share price of $22.33 that is used to determine share awards in
accordance with the standard rules of Hikma's share schemes.
Salaries
Having taken account of the most up-to-date benchmarking
information, the Committee determined that the Executive Chairman,
CEO and Vice Chairman's salaries should remain unchanged. The wider
workforce experienced a salary increase of circa 3% on average.
Stakeholder views
When 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.
During 2018, members of the Board consulted shareholders on the
governance and remuneration changes that were necessary to
accommodate the appointment of the CEO, the role change for the
Executive Chairman, and the future direction of remuneration policy.
The Committee took into account feedback from investors and
governance agencies received at the 2018 AGM, which chiefly related to
the complexity of the performance criteria under the Executive Incentive
Plan (EIP). The Committee will take this feedback into account during the
remuneration policy review that is to be undertaken during 2019.
82
Hikma Pharmaceuticals PLC | Annual Report 2018
The Executive Directors have increased
revenue in an adverse pricing environment,
reduced costs across the business, undertaken
a wholesale review of product development,
and enhanced the leadership structure.”
Engaging with our employees
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. For 2019, the Committee is
expanding its avenues for feedback via the newly-created responsibility
for bringing further employee perspectives into decision-making
activities, which is being undertaken by Nina Henderson, who is also
a Remuneration Committee member. The Committee considers it is
very important to ensure alignment between the compensation for
Executive Directors and all employees.
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
12 March 2019
Additional information
Copies on the work and policies of the Committee are available at Hikma’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/
Corporate governance | Committees | Remuneration
Generic pharmaceutical peers
Hikma operates within a sub-set of the pharmaceutical industry that
focuses on existing (generic) drugs, mainly in the US market. Hikma
requires access to the US generic pharmaceutical environment to
recruit its specialised and extensive talent pool. The Committee
viewed Hikma’s strong relative performance as an important factor
in determining the Executive Directors’ performance awards.
Strong share price recovery following challenging 2017
45.5%
(3.3%)
(8.9%)
(14.8%)
(45.8%)
2 Jan 18
21 Mar 18
6 June 18
26 Aug 18
13 Nov 18
31 Jan 19
Hikma
Large Cap Speciality/Generics
FTSE 100
CEEMEA Healthcare
US Mid Cap Generics
and Injectables
US Mid Cap Generics and Injectables includes Akorn, Endo, Lannett and Mallinckrodt
CEEMEA Healthcare includes Adcock, Aspen, Gedeon Richter and Krka
Large Cap Speciality/Generics include Concordia, Mylan, Perrigo, Teva and Valeant
Shareholder approval
Votes available
Votes cast
For
Against
Withheld1
240,930,604
196,565,877
86.3%
13.6%
0.1%
Annual report on remuneration (19 May 2017 AGM)
Votes available
Votes cast
For
Against
Withheld1
240,380,475
195,676,113
85.5%
13.5%
1.0%
1. Under the Companies Act 2006 votes ‘Withheld’ are not a valid vote and, therefore,
are discounted when considering approval at a general meeting
Remuneration dashboard
TSR and total executive pay
During 2018, Hikma performed better than its UK peers in
Hikma’s index (FTSE 100) and sector (FTSE 350 Pharmaceuticals
& Biotechnology segment, a relatively small group of companies
that are mainly focused on developing new drugs).
Average total pay to
Executive Directors ($m)
6
5
4
3
2
1
0
5.9
4.9
4.3
3.3
3.2
4.3
1.7
1.4
1.7
1.0
1.3
2008
2009
2010 2011 2012 2013 2014 2015 2016 2017 2018
Average Executive Director pay
Hikma Pharmaceuticals PLC TSR
FTSE 100 TSR
FTSE 350 Pharmaceuticals & Biotechnology TSR
TSR
%
600
500
400
300
200
100
0
Value of executive holdings
Hikma’s Executive Directors have substantial equity
interests, which strongly aligns their long-term interests
with shareholders.
200
180
160
140
120
100
80
60
40
20
0
600
500
400
300
200
100
0
33.37
561
30.74
470
19.81
331
523
23.29
493
21.89
347
15.30
2013
2014
2015
2016
2017
2018
35
28
21
14
7
0
Executive Director shareholding
Share price (as at year-end in US dollars)
Executive equity
Executive Directors are required to build
and maintain a minimum shareholding
equal to at least three times base salary.
Executive Director
shareholding value ($m)
Share price
($)
Annual report on remuneration (18 May 2018 AGM)
Executive Director pay
2.5%
Executive Director shareholding
97.5%
0%
20%
40%
60%
80%
100%
Hikma Pharmaceuticals PLC | Annual Report 2018
83
Remuneration Committee continued
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 2017 and 2018
compared with the percentage change in the average of each of those components of pay for employees (excluding the Executive Directors).
Salary
Benefits
Bonus
CEO
$1,100,000 $1,273,080
-13.6%
$237,340
$101,295
134.3% $4,063,690
2018
2017
Percentage
change
2018
2017
Percentage
change
2018
Employees ($m)
Number of employees
291
8,413
284
8,521
Average per employee
$34,589
$33,329
2.5%
-1.3%
3.8%
106
8,413
112
8,521
$12,600
$13,144
-5.4%
-1.3%
-4.1%
55
8,413
$6,538
$4,342
2017
$0
37
8,521
Percentage
change
>100%
48.6%
-1.3%
50.6%
The 2017 CEO data reflects the position of Said Darwazah as Chairman and CEO and 2018 data reflects the annualised salary of Siggi Olafsson as
CEO. As a result, year-on-year comparisons between 2017 and 2018 for the CEO are not reflective of real change. Hikma’s pay review, which took
effect from 1 January 2018, awarded average percentage increases in wages and salaries of 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 2018 were broadly
similar to those in the previous year. The benefits received by the CEO relate to the different circumstances of the new incumbent.
Gender diversity
Hikma has less than 250 employees in the UK and, as a result, is exempt from certain disclosure requirements. The small number of employees
and significant diversity of roles in the UK results in significant challenges in obtaining comparable data. Hikma is committed to paying fairly and
not discriminating on gender grounds.
Relative importance of spend on pay
The following table sets out the total amount spent in 2018 and 2017
on remuneration of Hikma’s employees and major distributions
to shareholders.
Distribution expense
2018
2017
% change
from 2017
to 2018
Employee remuneration
$506m
$485m
4.3%
Distributions to shareholders
$84m
$79m
6.3%
Employment conditions
All employees receive a salary, pension and medical insurance on
a similar basis to the Executive Directors. Additionally, all employees
participate in a cash bonus scheme, which is similar to Element A
of the EIP. The Committee reviews detailed internal and summary
benchmarking data, and is satisfied that the level of remuneration
is proportionate across the HR grades.
Employee cost and average executive pay ($m)
Average Executive Director pay
($m)
Average employee cost
($)
6
5
4
3
2
1
0
5.9
55,762
55,862
50,355
4.9
53,727
4.3
3.2
48,186
4.3
45,139
3.3
2013
2014
2015
2016
2017
2018
Average Executive Director pay
Average employee cost
60,000
55,000
50,000
45,000
40,000
35,000
30,000
Advice and support
The Committee seeks the assistance of senior management on matters relating to policy, performance and remuneration, but ensures that no
officer or employee takes part in discussions relating to their own remuneration or benefits.
Willis Towers Watson (WTW) continued to provide independent advice to the Committee, at the Committee’s request, in relation to market
practice, UK corporate governance best practice, and incentive plan target setting. WTW also provided 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 $139k (2017: $74k). 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. WTW were appointed by the Committee in 2016
following a competitive tender process. WTW adheres to the Remuneration Consultants Group Code of Conduct.
84
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | Committees | Remuneration
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 operating 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
Bonus3
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Share awards exercised4
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Pensions5
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Other benefits
Said Darwazah
Siggi Olafsson
Mazen Darwazah
2017
$1,936m
$386m
1,134p
34 cents
$485m
97.93%
85.49%
7%
19%
51%
12%
4%
2018
$2,076m
$460m
1,716p
38 cents
$506m
86.36%
N/A%
2017 ($000)
2018 ($000)
3,522
N/A
2,796
28%
N/A
8%
4,501
5,261
3,006
-10%
-40%
-11%
2017 ($000)
2018 ($000)
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%
>100%
N/A
284%
-49%
N/A
-61%
-27%
N/A
0%
15%
N/A
-20%
1,018
9432
717
2,245
4,064
1,543
1,050
0
591
72
17
56
116
237
99
0%
17%
0%
-32%
-59%
-30%
27%
0%
22%
0%
871%
0%
0%
0%
0%
2019 ($000)
(estimate)
4,068
3,152
2,671
2019 ($000)
(estimate)
1,018
1,100
717
1,527
1,650
1,076
1,335
0
723
72
165
56
116
237
99
1. Salary: The average rise for salaries across Hikma in 2018 was 3% depending on the jurisdiction. Siggi Olafsson’s salary in 2018 was $1,100,000 on an annualised basis
2. Annualised salary
3. Bonus: The bonus figure comprises Elements A and C of the EIP. See page 89 for further explanation. The 2019 estimate presumes target performance
4. Share awards exercised: 2017 figures represent 2014 LTIP and Element B of the 2015 EIP exercised during that year. 2018 figures represent Element B of the 2016 EIP and Element C of the 2015
EIP exercised during that year. 2019 is an estimation of the value of Element B of the 2017 EIP and Element C of the 2016 EIP that are to vest in that year, using 31 December 2018 vesting
percentages, share prices and exchange rates
5. Pension: Said Darwazah and Mazen Darwazah participate in the same pension plan as Jordanian employees, their country of employment. Siggi Olafsson is entitled to a pension contribution
of 15% of salary in 2018, a contribution of $16,500 was made to his 401K plan in the US. A payment of $125,014 was due to be made in 2019 in lieu of the contractual liability for the year ended
31 December 2018.
Hikma Pharmaceuticals PLC | Annual Report 2018
85
Remuneration Committee continued
Non-Executive Directors’ fees
Non-Executives
Non-Executive Directors’ average total fee1
2017 (£000)
84.6
2018 (£000)
-4%
80.9
18%
2019 (£000)
(estimate)
95.1
1. NED fees: The average Non-Executive Director’s fee includes basic fee, Committee membership fee, fees for specific additional responsibilities, and Committee Chair fees. Full breakdown
of fees on page 103. The average fee changes reflect the handover of Committee responsibilities and retirement and appointment of Non-Executive Directors.
Remuneration Policy Summary
The Directors’ Remuneration Policy (the Policy) is summarised below. It is also 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
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
Fixed elements
Variable elements – Executive Incentive
Plan (EIP)
Element A – cash bonus
Element B – deferred shares
Element C – restricted shares
Total remuneration
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.
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.
Benefits
Provides competitive benefits in the market to enable the
recruitment and retention of Directors.
Benefits may include, but are not limited to: healthcare; school fees; company
cars; and life insurance.
Pension
Provides a minimum level of pension contribution to
support a low fixed cost and highly entrepreneurial
remuneration policy.
A defined contribution scheme and/or cash supplement in lieu of pension
may be provided.
Executives currently participate in the defined contribution benefit plans,
according to the rules relevant to employees in the jurisdiction in which they
reside.
s
t
n
e
m
e
e
d
e
x
i
F
l
86
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | Committees | Remuneration
EIP rationale
The Remuneration Committee considers that the EIP remains appropriate because:
— Global focus: Approximately 32% of Hikma’s business is located in the MENA and 62% in the US, which requires Hikma to compete with local
practices, particularly:
• US: to offer sufficient leverage in the incentives to be reasonably competitive compared to US generic pharmaceutical companies, where
the key talent pool is based
• MENA: the strong short-term remuneration focus in the MENA which is partly reflective of the skills required to successfully navigate
the political and economic environment
• US and MENA: equity based incentives are generally subject to time based vesting following grant, not multi-year performance conditions
— Business Dynamics: Political and economic change in key markets may cause a short-term lack of visibility of revenues and profits that could
discourage longer-term investment and development. Given such evolving, and in some cases highly volatile market conditions, it is difficult
to establish testing but realistic multi-year targets that the participant associates with their own performance
EIP operational overview (EIP)
Maximum award
% of salary
Payout
mechanism
Element
Vesting period
Risks after award
Additional requirements
150%
Cash bonus
Immediate
— Clawback
None
A
B
C
150%
100%
Deferred
Shares
2 years
Restricted
Shares
3 years
— Forfeiture
— Clawback
— Share price
— Employed
— Clawback
— Share price
— Employed
Treatment under the
remuneration regulations
Cash bonus
Share award
All shares vesting are subject
to a holding period after vesting.
These shares may not be sold
until 5 years after grant.
Bonus1 deferred
in shares
1. 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
Hikma discloses the nature and weighting of the 2019 performance targets in the Policy Implementation report on page 88. Details of the 2018
performance targets, their level of satisfaction and the resulting performance remuneration are disclosed on pages 92 to 99.
Policy implementation 2019
Salaries, benefits and pension
Please see the Chair’s letter (page 82) for commentary on salaries. The application of benefits and pension is unchanged.
Executive Director
Executive Chairman
CEO
Individual
Said Darwazah
Siggi Olafsson
Executive Vice Chairman
Mazen Darwazah
2. Annualised salary
Salary
2019
2018
$1,018,464
$1,018,464
$1,100,000
$1,100,0002
$717,155
$717,155
Change
%
0%
0%
0%
Hikma Pharmaceuticals PLC | Annual Report 2018
87
Remuneration Committee continued
Executive Incentive Plan (EIP)
The 2018 performance conditions and their weighting are detailed on this page. The Committee considers that the EIP has been very successful
in aligning Executive Directors’ compensation outcomes with the performance of Hikma.
Performance criteria
For 2019, the Committee has determined that the performance criteria will be:
Area
Description
Financial Revenue
Weight
Rationale
30%
In general, the pricing of generic pharmaceutical products decreases with time. The Committee is
cognisant that this could lead to declining revenue over the longer term, which could ultimately result
in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline.
Core Operating Profit
before R&D
30%
Please see page 18 of the Strategic report for the detail on this target.
Ultimately, Core Operating Profit is the value of Hikma to shareholders. Given the highly competitive
business environment in which Hikma operates, the Executive Directors must focus continuously on
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion.
Please see page 18 of the Strategic report for the detail on this target.
Strategic Strategic Deliverables
40%
The targets are designed to ensure that the Executive Directors deliver the strategic plan that was
approved by the Board during 2018. Further details will be disclosed on measurement.
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 Hikma 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.
Outcome
Forfeiture
Below Minimum
Minimum
Target
Maximum
Elements
A
Cash bonus
B
Deferred shares
C
Restricted shares
Total
0%
0%
25%
100%
150%
0%
0%
25%
100%
150%
0%
0%
50%
50%
100%
0% award + lose 50% outstanding
Element B
0% award
100% award
250% award
400% award
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Hikma Pharmaceuticals PLC | Annual Report 2018
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 2018
and the potential available for 2019 (dependent upon performance).
Said Darwazah
2019
Threshold
Target
Maximum
2018
Actual
Siggi Olafsson
2019
Threshold
Target
Maximum
2018
Actual
Mazen Darwazah
2019
Threshold
Target
Maximum
2018
Actual
1,206
54%
1,206
32%
1,206
23%
1,206
25%
1,502
58%
1,502
35%
1,502
25%
1,197
20%
873
55%
873
33%
873
23%
873
26%
Fixed
Elements A & C
Element B
255
11%
2,225
1,018
27%
764
34%
1,528
41%
2,546
48%
2,245
46%
3,753
1,528
29%
1,377
29%
1,000
2,000
3,000
4,000
Total remuneration $000
Fixed
Elements A & C
Element B
5,280
4,828
5,000
6,000
275
11%
2,602
1,100
26%
825
32%
1,650
39%
2,750
47%
3,521
59%
4,252
1,650
28%
1,289
21%
5,902
6,008
1,000
2,000
3,000
4,000
5,000
6,000
Total remuneration $000
Fixed
Elements A & C
Element B
538
34%
1,076
40%
1,793
48%
1,543
46%
1,000
179
11%
1,590
717
27%
2,666
1,076
29%
3,742
951
28%
3,366
2,000
3,000
4,000
5,000
6,000
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 (eg for the 2019 illustration, the bonus would be paid and the share awards be made in 2020. The share
awards would vest two to three years later). Please note that the Remuneration and performance summary on page 85 uses share awards
vesting (ie 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.
Hikma Pharmaceuticals PLC | Annual Report 2018
89
Remuneration Committee continued
Annual report on remuneration
All of the information presented on the following eleven pages has been audited by PwC. The following information is relevant to this report: the
employee related disclosures on page 84, the ‘Policy Implementation 2019’ on page 87 and the ‘Advice and Support’ disclosure on page 84.
For the year ended 31 December 2018, the implementation of Hikma’s policy on remuneration detailed below.
Single total figure (audited)
The following table shows a single total figure of remuneration in respect of qualifying services for the 2018 financial year for each Executive
Director, together with comparative figures for 2017.
Director
Said Darwazah
Siggi Olafsson
Mazen Darwazah
Year
2018
2017
2018
2017
2018
2017
Salary $
Benefits $
Bonus
(EIP Elements
A & C) $
Shares Vested
(EIP Element B) $
Pension $
Total $
1,018,464
115,795
2,244,788
1,049,998
72,171
4,501,216
1,273,080
101,295
0
2,049,637
98,330
3,522,342
943,428
237,340
4,063,690
–
–
0
–
16,500
5,260,957
–
–
99,405
1,542,690
591,490
56,366
3,007,106
122,500
402,324
1,497,983
55,871
2,795,833
–
717,155
717,155
The EIP performance criteria for 2018 are detailed on pages 92 to 99.
Benefits
Said Darwazah received transportation benefits of $97,418 (2017: $85,000) and medical benefits of $18,377 (2017: $16,295). Siggi Olafsson received
housing benefits of $103,013 (2017: $nil) related to his stay in the UK, transportation benefits of $16,660 (2017: $nil), medical benefits of $39,105
(2017: $nil), life assurance of $562, and taxation benefits of $78,000 (2017: $nil) to ensure he was not disadvantaged by UK taxation to the extent
that UK taxation increased his US taxation. Mazen Darwazah received transportation benefits of $64,603 (2017: $94,000) and medical benefits of
$34,802 (2017: $28,500). Social security payments made in Jordan, that are required to be paid by Jordanian law, are not considered to be a benefit.
Pension
Said Darwazah and Mazen Darwazah participate in the Hikma Pharmaceutical Defined Contribution Retirement Benefit Plan (the Jordan Benefit
Plan) on the same basis as other employees located in Jordan. Under the Jordan Benefit Plan, Hikma matches employee contributions made,
which are fixed at a maximum of 10% of applicable salary. Participants become entitled to all of Hikma’s contributions once they have been
employed for ten years. Before that point, there is a staggered scale which starts at three years of employment. Said Darwazah and Mazen
Darwazah have served for in excess of ten years and receive their benefits under the Jordan Benefit Plan because they are over 60 years of age.
Siggi Olafsson was entitled to a pension contribution of 15% of salary in 2018, a contribution of $16,500 was made to his 401K plan in the US.
A payment of $125,014 was due to be made in 2019 in lieu of the contractual liability for the year ended 31 December 2018. Hikma does not and
has not operated a defined benefit scheme. The Executive Directors do not receive personal pension contributions from Hikma.
90
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | Committees | Remuneration
Vested share awards
During 2018, the following share awards vested for the Executive Directors. The total shares vested in 2018 are summarised in the following two tables.
EIP
In respect of the awards that vested, under the EIP, performance criteria must be met before grant and the full award vests, providing there have
been no forfeiture events.
Said Darwazah – EIP
Maximum number of shares capable of vesting – Element B
Forfeiture
Exercise Price
Number of vested shares
Total value of vested shares1
1. Share price on vesting was £11.02 and there were $1.3889 to £1
Mazen Darwazah – EIP
Maximum number of shares capable of vesting – Element B
Forfeiture
Exercise price
Number of vested shares
Total value of vested shares2
2. Share price on vesting was £11.02 and there were $1.3889 to £1
68,346
nil
nil
68,346
$1,049,998
38,501
nil
nil
38,501
$591,490
Hikma Pharmaceuticals PLC | Annual Report 2018
91
Remuneration Committee continued
2018 Performance outcome: Executive Chairman
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Description
Rationale and Measurement
Performance Condition
Core Revenue
Core Operating Profit
(COP)
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on the performance related to this target.
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
environment in which Hikma operates, the Executive Directors must focus continuously on
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on the performance related to this target.
Return on Investment Hikma invests significant capital in acquiring new generic products to its portfolio and improving its
high-quality manufacturing capabilities. Over the longer term, these activities ensure that margins
can be maintained though manufacturing more complex/speciality products and capturing supply
shortages, respectively. The extensive range of capital investments have various timeframes for
delivering new capabilities and enhancing Hikma’s competitive position. The performance of
previous and existing projects is monitored by the Board on a project by project basis. ROIC
provides a group-level method of assessing the time and cost delivery of projects and their ultimate
returns over a one-year time frame. Please see page 18 of the Strategic report for further detail on
the performance related to this target.
CEO empowerment
Empowering, supporting and transferring responsibilities to the new CEO in order that the external
expertise that the CEO brings may be fully utilised. Providing guidance and support to the Board
in order to effectively maximise the transition of responsibilities. Subsequently assessed by the
Committee, taking into account the Board evaluation exercise.
Section
Financial
Strategic
Total
92
Hikma Pharmaceuticals PLC | Annual Report 2018
Performance Level
Achievement
Weighting
Forfeiture
Minimum
Maximum
Results
30%
Target -30%
Target -10%
$1,392m
$1,789m
Target +10%
Core Revenue
$2,187m
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
30%
Target -30%
Target -10%
Target +10%
COP before R&D
Maximum
120% of salary
$344m
$442m
$540m
of $578m
30%
Target -53%
Target -27%
Target +47%
ROIC of 19%
101% of salary
7%
11%
Target
15%
22%
Target to
maximum
Target
Target
$1,988m
Target
$491m
10%
Committee assessment of CEO empowerment taking into account the
Highly effective
Maximum
40% of salary
results of the board evaluation exercise
support and
empowerment of
the new Chief
Executive
determined by
the Committee
Unacceptable
Acceptable
Good
Excellent
356%
The above performance results
in performance remuneration
under the EIP as follows:
Participant
A
B
C
Executive
Chairman
Total
The information in the above tables has been audited by PwC
Executive
EIP Element
Salary
(% of salary)
% of salary
Value of bonus/shares
Receive
Notes
Calculation
Maximum
potential
Application
150%
135.2%
$1,377,010
$1,018,464
150%
135.2%
$1,377,010
100%
400%
85.2%
$867,778
355.6%
$3,621,798
Receive
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
Corporate governance | Committees | Remuneration
2018 Performance outcome: Executive Chairman
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Section
Financial
Description
Rationale and Measurement
Performance Condition
Core Revenue
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
Performance Level
Achievement
Weighting
Forfeiture
Minimum
30%
Target -30%
$1,392m
Target -10%
$1,789m
Target
Target
$1,988m
Maximum
Results
Target +10%
$2,187m
Core Revenue
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
Core Operating Profit
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
(COP)
environment in which Hikma operates, the Executive Directors must focus continuously on
30%
Target -30%
$344m
Target -10%
$442m
Target
$491m
Target +10%
$540m
COP before R&D
of $578m
Maximum
120% of salary
Strategic
Return on Investment Hikma invests significant capital in acquiring new generic products to its portfolio and improving its
30%
Target -53%
7%
Target -27%
11%
Target
15%
Target +47%
22%
ROIC of 19%
Target to
maximum
101% of salary
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on the performance related to this target.
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on the performance related to this target.
high-quality manufacturing capabilities. Over the longer term, these activities ensure that margins
can be maintained though manufacturing more complex/speciality products and capturing supply
shortages, respectively. The extensive range of capital investments have various timeframes for
delivering new capabilities and enhancing Hikma’s competitive position. The performance of
previous and existing projects is monitored by the Board on a project by project basis. ROIC
provides a group-level method of assessing the time and cost delivery of projects and their ultimate
returns over a one-year time frame. Please see page 18 of the Strategic report for further detail on
the performance related to this target.
CEO empowerment
Empowering, supporting and transferring responsibilities to the new CEO in order that the external
expertise that the CEO brings may be fully utilised. Providing guidance and support to the Board
in order to effectively maximise the transition of responsibilities. Subsequently assessed by the
Committee, taking into account the Board evaluation exercise.
10%
Committee assessment of CEO empowerment taking into account the
results of the board evaluation exercise
Highly effective
support and
empowerment of
the new Chief
Executive
Maximum
determined by
the Committee
40% of salary
Total
Unacceptable
Acceptable
Good
Excellent
356%
The above performance results
in performance remuneration
under the EIP as follows:
Participant
Executive
EIP Element
Salary
Calculation
Maximum
potential
(% of salary)
Application
% of salary
Receive
Value of bonus/shares
Receive
Notes
A
B
C
Executive
Chairman
Total
150%
135.2%
$1,377,010
$1,018,464
150%
135.2%
$1,377,010
100%
400%
85.2%
$867,778
355.6%
$3,621,798
The information in the above tables has been audited by PwC
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
Hikma Pharmaceuticals PLC | Annual Report 2018
93
Remuneration Committee continued
2018 Performance outcome: Chief Executive Officer (Regular EIP)
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Regular EIP Criteria
Section
Financial
Total
Description
Rationale and Measurement
Performance Condition
Core Revenue
Core Operating Profit
(COP)
Quality Execution
Business Growth
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on the performance related to this target.
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
environment in which Hikma operates, the Executive Directors must focus continuously on
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on the performance related to this target.
Manufacturing quality is essential to achieving the maximum benefit from Hikma’s product portfolio
and to meeting our customers’ needs. The executive must ensure that zero warning letters for any
US FDA inspected plant are received. Measurement is a matter of the public record of the US FDA.
Please see page 8 of the Strategic report for further detail on the performance related to this target.
The continuous launch of new products are required to maintain revenue and profitability in
Hikma’s increasingly competitive markets. The executive must deliver new products through
successful investment in in-house R&D and by partnering, licensing or acquiring new products and
technology. The result is a subjective assessment by the Committee of the quality and strategic
value of R&D and business development output. Please see page 7 of the Strategic report for
further detail on the performance related to this target.
Enhanced employee
engagement and
enablement
Our people are essential to our business. The 2017 employee survey indicated areas for
improvement regarding engagement and enablement and the CEO’s actions to inspire and enable
Hikma’s people as detailed on pages 8 and 19 of the Strategic report. The result is assessed by the
Committee taking into account the employee survey.
94
Hikma Pharmaceuticals PLC | Annual Report 2018
Performance Level
Achievement
Weighting
Forfeiture
Threshold
Target
Maximum
Results
30%
Target -30%
Target -10%
$1,392m
$1,789m
Target
$1,988m
Target +10%
Core Revenue
$2,187m
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
30%
Target -30%
Target -10%
Target +10%
COP before R&D
Maximum
120% of salary
$344m
$442m
$540m
of $578
Target
$491m
10%
N/A
N/A
Maximum
40% of salary
1+
warning
letter
deals
nil
warning
letters
3
deals
nil
warning
letters
3+
deals
20%
nil
1
deal
2
deals
significant
significant
significant
significant
significant
Maximum
80% of salary
determined by
the Committee
10%
Committee assessment of the direction of employee engagement and
Significant
Target
25% of salary
enablement, taking into account the employee survey results and the
enhancements to
CEO’s progress on delivering the strategic pillar to inspire and enable
engagement and
determined by
the Committee
enablement
Unacceptable
Acceptable
Good
Excellent
360%
The above performance results
in Performance remuneration
under the EIP as follows:
Participant
A
B
C
Chief
Executive
Officer
Total
The information in the above tables has been audited by PwC
Executive
EIP Element
Salary
(% of salary)
% of salary
Value of bonus/shares
Receive
Notes
Calculation
Maximum
potential
Application
150%
136.6%
$1,502,965
$1,100,000
150%
136.6%
$1,502,965
100%
400%
86.6%
$952,965
359.9%
$3,958,894
Receive
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
2018 Performance outcome: Chief Executive Officer (Regular EIP)
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Regular EIP Criteria
Section
Financial
Total
Description
Rationale and Measurement
Performance Condition
Core Revenue
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on the performance related to this target.
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on the performance related to this target.
Quality Execution
Manufacturing quality is essential to achieving the maximum benefit from Hikma’s product portfolio
and to meeting our customers’ needs. The executive must ensure that zero warning letters for any
US FDA inspected plant are received. Measurement is a matter of the public record of the US FDA.
Please see page 8 of the Strategic report for further detail on the performance related to this target.
Business Growth
The continuous launch of new products are required to maintain revenue and profitability in
Hikma’s increasingly competitive markets. The executive must deliver new products through
successful investment in in-house R&D and by partnering, licensing or acquiring new products and
technology. The result is a subjective assessment by the Committee of the quality and strategic
value of R&D and business development output. Please see page 7 of the Strategic report for
further detail on the performance related to this target.
Enhanced employee
Our people are essential to our business. The 2017 employee survey indicated areas for
engagement and
improvement regarding engagement and enablement and the CEO’s actions to inspire and enable
enablement
Hikma’s people as detailed on pages 8 and 19 of the Strategic report. The result is assessed by the
Committee taking into account the employee survey.
Corporate governance | Committees | Remuneration
Core Operating Profit
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
(COP)
environment in which Hikma operates, the Executive Directors must focus continuously on
30%
Target -30%
$344m
Target -10%
$442m
Target
$491m
Target +10%
$540m
COP before R&D
of $578
Maximum
120% of salary
Performance Level
Achievement
Weighting
Forfeiture
Threshold
Target
Maximum
Results
30%
Target -30%
$1,392m
Target -10%
$1,789m
Target
$1,988m
Target +10%
$2,187m
Core Revenue
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
10%
20%
10%
1+
warning
letter
N/A
N/A
nil
warning
letters
nil
warning
letters
Maximum
40% of salary
nil
significant
deals
1
significant
deal
2
significant
deals
3
significant
deals
3+
significant
deals
Maximum
determined by
the Committee
80% of salary
Committee assessment of the direction of employee engagement and
enablement, taking into account the employee survey results and the
CEO’s progress on delivering the strategic pillar to inspire and enable
Significant
enhancements to
engagement and
enablement
Target
determined by
the Committee
25% of salary
Unacceptable
Acceptable
Good
Excellent
360%
The above performance results
in Performance remuneration
under the EIP as follows:
Participant
Executive
EIP Element
Salary
Calculation
Maximum
potential
(% of salary)
Application
% of salary
Receive
Value of bonus/shares
Receive
Notes
A
B
C
Chief
Executive
Officer
Total
150%
136.6%
$1,502,965
$1,100,000
150%
136.6%
$1,502,965
100%
400%
86.6%
$952,965
359.9%
$3,958,894
The information in the above tables has been audited by PwC
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
Hikma Pharmaceuticals PLC | Annual Report 2018
95
Remuneration Committee continued
2018 Performance outcome: Chief Executive Officer (First Year Additional Remuneration)
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Section
Financial
Description
Rationale and Measurement
Performance Condition
Generics Revenue
Generic Core
Operating Profit (COP)
Management were expecting Generics Revenue to decline in 2018 following a broadly flat
performance in 2017. As part of the delivery of returns from the business it was essential to return
to revenue growth. Measured by target Generics Revenue compared to audited Generics Revenue
for the year ended 31 December 2018. Please see pages 30 and 31 of the Strategic report for further
detail on this target
During 2017, the Generics COP declined to 3.6% of revenue, an unacceptably low rate of return
that was expected to continue into 2018. The Committee considered it was essential to thoroughly
review the cost structure of the business, and return value from the Columbus acquisition. Measured
by target Generics COP compared to audited Generics COP for the year ended 31 December 2018.
Please see pages 30 and 31 of the Strategic report for further detail on this target
Historically, the Group’s investment in R&D has not delivered incremental revenue and profitability
in line with expectations. The Committee tasked the CEO with restructuring Hikma’s approach to
R&D in order to improve the output from the investment in R&D. Please see pages 7, 19 and 39 of the
Strategic report for further detail on this target
Strategic
R&D
Total
Unacceptable
Acceptable
Good
Excellent
150%
96
Hikma Pharmaceuticals PLC | Annual Report 2018
Weighting
Forfeiture
Minimum
Target
Maximum
Results
Achievement
Performance Level
Achievement
Application
% of salary
30%
Target -20%
Target -5%
Target $620m
Target +5%
Generics Revenue of
Maximum
45% of salary
$500m
$590m
$650m
$692m
(5% above
expectations)
30%
Target -75%
Target -25%
Target $60m
Target +25%
Generics COP of
Maximum
45% of salary
$15m (the 2017
$45m
rate of return)
$75m
$93m
40%
No change in
Pipeline review
Restructuring
Fully restructured
Group R&D
Maximum
60% of salary
R&D approach
only
only
and refocused
leadership replaced
determined by
R&D
with divisional
the Committee
leadership. Product
pipeline assessed
and rationalised
The above performance results in performance
remuneration under the additional first-year
performance remuneration as follows:
Participant
Receive
Executive
Equivalent to
EIP Element
Salary
Value of bonus/shares
Receive
Notes
Calculation
Maximum
potential
(% of salary)
Application
% of salary
Chief Executive
Officer
C
$1,100,000
150%
150%
$1,607,760
(see notes)
Shares in 3 years
from March 2019
The value of the award
is capped at 72,000
shares equivalent to
146% of salary (see
page 82) and may not
be sold until 5 years
from grant.
The information in the above tables has been audited by PwC
Corporate governance | Committees | Remuneration
2018 Performance outcome: Chief Executive Officer (First Year Additional Remuneration)
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Section
Financial
Description
Rationale and Measurement
Performance Condition
Generics Revenue
Management were expecting Generics Revenue to decline in 2018 following a broadly flat
performance in 2017. As part of the delivery of returns from the business it was essential to return
to revenue growth. Measured by target Generics Revenue compared to audited Generics Revenue
for the year ended 31 December 2018. Please see pages 30 and 31 of the Strategic report for further
detail on this target
Generic Core
During 2017, the Generics COP declined to 3.6% of revenue, an unacceptably low rate of return
Operating Profit (COP)
that was expected to continue into 2018. The Committee considered it was essential to thoroughly
review the cost structure of the business, and return value from the Columbus acquisition. Measured
by target Generics COP compared to audited Generics COP for the year ended 31 December 2018.
Please see pages 30 and 31 of the Strategic report for further detail on this target
Weighting
Forfeiture
Minimum
Target
Maximum
Results
Performance Level
Achievement
Target -20%
$500m
Target -5%
$590m
Target $620m
(5% above
expectations)
Target +5%
$650m
Generics Revenue of
$692m
Achievement
Maximum
Application
% of salary
45% of salary
Target -75%
$15m (the 2017
rate of return)
Target -25%
$45m
Target $60m
Target +25%
$75m
Generics COP of
$93m
Maximum
45% of salary
30%
30%
Strategic
R&D
Historically, the Group’s investment in R&D has not delivered incremental revenue and profitability
in line with expectations. The Committee tasked the CEO with restructuring Hikma’s approach to
R&D in order to improve the output from the investment in R&D. Please see pages 7, 19 and 39 of the
Strategic report for further detail on this target
40%
No change in
R&D approach
Pipeline review
only
Restructuring
only
Fully restructured
and refocused
R&D
Group R&D
leadership replaced
with divisional
leadership. Product
pipeline assessed
and rationalised
Maximum
determined by
the Committee
60% of salary
Total
Unacceptable
Acceptable
Good
Excellent
150%
The above performance results in performance
remuneration under the additional first-year
performance remuneration as follows:
Participant
Executive
Equivalent to
EIP Element
Salary
Calculation
Maximum
potential
(% of salary)
Application
% of salary
Receive
Value of bonus/shares
Receive
Notes
Chief Executive
Officer
C
$1,100,000
150%
150%
(see notes)
$1,607,760
Shares in 3 years
from March 2019
The information in the above tables has been audited by PwC
The value of the award
is capped at 72,000
shares equivalent to
146% of salary (see
page 82) and may not
be sold until 5 years
from grant.
Hikma Pharmaceuticals PLC | Annual Report 2018
97
Remuneration Committee continued
2018 Performance outcome: Executive Vice Chairman
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
Section
Financial
Description
Rationale and Measurement
Performance Condition
Core Revenue
Core Operating Profit
(COP)
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on this target.
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
environment in which Hikma operates, the Executive Directors must focus continuously on
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on this target.
The Executive Director is responsible for this region. The Committee considered financial metrics
to be the best method of ensuring delivery of the Board-approved strategy that could be measured
in an objective manner that is readily understandable by investors. Measured by target MENA
Revenue compared to audited MENA revenue for the year ended 31 December 2018. Please see
pages 36 and 37 of the Strategic report for further detail on this target.
The Executive Director is responsible for this region. The Committee considered financial metrics
to be the best method of ensuring delivery of the Board-approved strategy that could be measured
in an objective manner that is readily understandable by investors. Measured by target MENA COP
compared to audited MENA COP for the year ended 31 December 2018. Please see pages 36 and 37
of the Strategic report for further detail on this target.
Strategic
MENA Revenue
MENA COP
Total
Unacceptable
Acceptable
Good
Excellent
348%
98
Hikma Pharmaceuticals PLC | Annual Report 2018
Performance Level
Weighting
Forfeiture
Minimum
30%
Target -30%
Target -10%
$1,392m
$1,789m
Target
Target
$1,988m
Maximum
Target +10%
$2,187m
Achievement
Results
Core Revenue
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
30%
Target -30%
Target -10%
Target +10%
COP before R&D
Maximum
120% of salary
$344m
$442m
$540m
of $578m
Target
$491m
20%
Target -30%
Target -10%
$455m
$585m
Target
$650m
Target +10%
MENA Revenue
$715m
of $656m
Target to
maximum
53% of salary
20%
Target -30%
Target -10%
$84m
$108m
Target
$120m
Target +10%
$132m
MENA COP
of $161m
Maximum
80% of salary
The above performance results
in performance remuneration
under the EIP as follows:
Participant
Calculation
Receive
Executive
EIP Element
Salary
Value of bonus/shares
Receive
Notes
Maximum
potential
(% of salary)
Application
% of salary
150%
132.6%
$950,634
A
B
C
Executive Vice
Chairman
$717,155
150%
132.6%
$950,634
Total
The information in the above tables has been audited by PwC
100%
400%
82.6%
$592,056
347.7%
$2,493,324
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
Corporate governance | Committees | Remuneration
2018 Performance outcome: Executive Vice Chairman
Readers are directed to the Committees’ commentary on business performance that is included in the Chair’s letter on pages 81 and 82.
The following table sets out the performance conditions and targets for 2018 and their level of satisfaction:
is cognisant that this could lead to declining revenue over the longer term, which could ultimately
result in a declining business overall. By ensuring that a significant proportion of performance
remuneration is based on revenue, the Committee is able to ensure that the Executive Directors
are focused on mitigating pricing declines by maximising the potential of the in-market portfolio,
launching new products, and developing the pipeline. Please see page 18 of the Strategic report
for further detail on this target.
optimising Hikma’s cost base. The Committee wants the Executive Directors to deliver an optimised
cost base without putting at risk the longer-term prospects of the business by underinvesting in
R&D. Therefore, R&D costs have been excluded from this criterion. Please see page 18 of the
Strategic report for further detail on this target.
to be the best method of ensuring delivery of the Board-approved strategy that could be measured
in an objective manner that is readily understandable by investors. Measured by target MENA
Revenue compared to audited MENA revenue for the year ended 31 December 2018. Please see
pages 36 and 37 of the Strategic report for further detail on this target.
MENA COP
The Executive Director is responsible for this region. The Committee considered financial metrics
to be the best method of ensuring delivery of the Board-approved strategy that could be measured
in an objective manner that is readily understandable by investors. Measured by target MENA COP
compared to audited MENA COP for the year ended 31 December 2018. Please see pages 36 and 37
of the Strategic report for further detail on this target.
Strategic
MENA Revenue
The Executive Director is responsible for this region. The Committee considered financial metrics
Section
Financial
Description
Rationale and Measurement
Performance Condition
Core Revenue
In general, the pricing of generic pharmaceutical products decreases with time. The Committee
Performance Level
Weighting
Forfeiture
Minimum
30%
Target -30%
$1,392m
Target -10%
$1,789m
Target
Target
$1,988m
Maximum
Target +10%
$2,187m
Achievement
Results
Core Revenue
of $2,076m
Achievement
Target to
maximum
Application
% of salary
95% of salary
Core Operating Profit
Ultimately, COP is the value of Hikma to shareholders. Given the highly competitive business
(COP)
environment in which Hikma operates, the Executive Directors must focus continuously on
30%
Target -30%
$344m
Target -10%
$442m
Target
$491m
Target +10%
$540m
COP before R&D
of $578m
Maximum
120% of salary
Total
Unacceptable
Acceptable
Good
Excellent
348%
20%
20%
Target -30%
$455m
Target -10%
$585m
Target
$650m
Target +10%
$715m
MENA Revenue
of $656m
Target to
maximum
53% of salary
Target -30%
$84m
Target -10%
$108m
Target
$120m
Target +10%
$132m
MENA COP
of $161m
Maximum
80% of salary
The above performance results
in performance remuneration
under the EIP as follows:
Participant
Calculation
Receive
Executive
EIP Element
Salary
Maximum
potential
(% of salary)
Application
% of salary
Value of bonus/shares
Receive
Notes
A
B
C
Executive Vice
Chairman
Total
150%
132.6%
$950,634
$717,155
150%
132.6%
$950,634
100%
400%
82.6%
$592,056
347.7%
$2,493,324
The information in the above tables has been audited by PwC
Cash now
(March 2019)
Shares in
2 years from
March 2019
Shares in
3 years from
March 2019
All shares vesting are
subject to a holding
period after vesting.
These shares may not
be sold until 5 years
after grant.
Hikma Pharmaceuticals PLC | Annual Report 2018
99
Remuneration Committee continued
Hikma continued to operate the EIP in 2018. The outstanding share awards under the EIP in respect of each of the Executive Directors are:
Participant
Director
Said Darwazah
Total
Mazen Darwazah
Total
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 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
17-Mar-16
17-Mar-19
97% salary
45,100
$987,285
13-Apr-17
13-Apr-19
107% of salary
60,973
$1,334,761
13-Apr-17
13-Apr-20
64% of salary
36,438
142,511
(2017: 237,857)
$797,665
$3,119,710
(2017: $3,639,686)
17-Mar-16
17-Mar-19
97% salary
25,406
$556,163
13-Apr-17
13-Apr-19
103% of salary
33,005
$722,513
13-Apr-17
13-Apr-20
60% of salary
19,318
$422,891
16-May-18
16-May-20
33% salary
16,953
$371,118
16-May-18
16-May-21
23% salary
12,042
106,724
(2017: 136,230)
$263,612
$2,336,296
(2017: $2,084,590)
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 92 to 99.
2. The face value is calculated using the vesting percentages described earlier in this section and the closing share price of 1,716p and foreign exchange rates of $1.2757 to £1 on 31 December
2018. 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:
Date
1 January 2018
31 December 2018
2018 Range (low to high)
12 March 2019
Market price
(Closing price)
1,134p
1,716p
856p to 2,025p
1,660p
100
Hikma Pharmaceuticals PLC | Annual Report 2018
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 Hikma’s share plans since 2009:
Type of plan
Discretionary Share Plans (5% Limit)
Granted in a
rolling ten-year
period
Granted during
the year
3.72%
0.42%
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 Darwazah1
Ali Al-Husry2
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
The information in the table above has been audited by PwC
Darhold
Interest in
Darhold
21.85%
11.01%
8.08%
Personal
Shares
(incl. connected
people)
Effective
Hikma shares
Total
shareholding
13,112,770
1,327,553
14,440,323
6,606,598
4,849,132
1,473,214
1,162,811
8,079,812
6,011,943
The following table sets out details of the Directors’ shareholdings in Hikma and, where there are shareholding requirements, whether these have
been met:
Ownership requirements
Total
Scheme Interests
Total
Director
Said Darwazah
Siggi Olafsson
Mazen Darwazah4
Ali Al-Husry5
Robert Pickering
Pat Butler
Dr Pamela Kirby
John Castellani
Nina Henderson
Dr Jochen Gann6
Percentage
of salary
300%
300%
300%
Number
of shares
139,573
151,747
98,281
Requirement
fulfilled?
Shares
owned3
EIP subject to
performance
(Element B)
EIP subject to
service
(Element C)
Share
interests
Yes
No
Yes
14,440,323
60,973
81,538
14,582,834
20,000
8,079,812
6,011,943
10,000
3,875
3,317
3,500
3,500
0
0
0
20,000
49,958
56,766
8,186,536
6,011,943
10,000
3,875
3,317
3,500
3,500
0
3. Including shares effectively owned through Darhold as per the table above
4. Mazen Darwazah holds his shares in Darhold Limited through a family trust, in which he has a beneficial interest
5. Ali Al-Husry holds his shares in Hikma and Darhold Limited through a family trust, in which he has a beneficial interest
6. Dr Jochen Gann is senior executive in Boehringer Ingelheim who hold 40 million (16.6%) shares in Hikma
There have been no changes in the interests of the Directors in the shares of Hikma between 31 December 2018 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 2018 of £17.16p and foreign exchange rates of $1.2757 to £1 on the same date
The information in the above tables has been audited by PwC
Hikma Pharmaceuticals PLC | Annual Report 2018
101
Remuneration Committee continued
The following table sets out the changes in the share interests of Directors during the year under review and up to the date of this report. Other
than as detailed in the table, the Directors’ share interests in Hikma did not change during the period.
Director
Said Darwazah
Mazen Darwazah
Said Darwazah
Mazen Darwazah
John Castellani
Siggi Olafsson
Date
Event
19-Mar-18
Exercise of 2016 EIP Element B. Retained all shares.
19-Mar-18
Exercise of 2016 EIP Element B. Retained all shares.
15-May-18
Exercise of 2015 EIP Element C. Retained all shares.
15-May-18
Exercise of 2015 EIP Element C. Retained all shares.
22-May-18
Market purchase of shares.
30-May-18
Market purchase of shares.
The information in the table above has been audited by PwC
No. Shares
68,346
38,501
27,000
20,000
1,000
20,000
Scheme interests
The following table sets out details of the ‘scheme interests’ of the Directors. Element B of the EIP has been included because it has a performance
period of one year plus a two-year forfeiture condition.
Director
Said Darwazah
Siggi Olafsson
Mazen Darwazah
All other directors
Total shareholder return
Type of interest
Performance measures
Shares
Share options
142,511
-
106,724
–
–
–
–
–
Yes
60,973
-
No
81,538
-
49,958
56,766
–
–
Vested but
unexercised
–
–
–
–
During 2018, Hikma performed better than its UK peers in Hikma’s index (FTSE 100) and sector (FTSE 350 Pharmaceuticals & Biotechnology
segment, a relatively small group of companies that are mainly focused on developing new drugs).
650
550
450
350
250
150
50
-50
Dec 07
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Hikma Pharmaceuticals PLC
FTSE 100
FTSE 350/Pharmaceuticals & Biotechnology – SEC
102
Hikma Pharmaceuticals PLC | Annual Report 2018
Corporate governance | Committees | Remuneration
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 Executive Chairman and Chief Executive Officer. 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 and, therefore, do not impact the Share Awards percentage for
2018 onwards.
Year
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Said Darwazah – Executive Chairman
Siggi Olafsson – Chief Executive Officer
Total
$4,501,217
$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
% max1
Share awards as
% max2
Total
Bonus as
% max1
Share awards as
% max2
88%
0%
71%
98%
100%
100%
80%
80%
100%
37%
90%
0%
68%
98%
70%
62%
50%
67%
49%
67%
$5,260,957
89%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
91%
N/A%
N/A%
N/A%
N/A%
N/A%
N/A%
N/A%
N/A%
N/A%
1. The ‘Bonus as % max’ column comprises cash under Element A of the EIP paid immediately and shares under Element C of the EIP that are released three years after grant
2. The ‘Share awards as % max’ column includes Element B of the EIP, shares that vest in two years from the date of grant
Non-Executive Directors
The table below details the fees paid to Non-Executive Directors during the year under review and the prior year. Certain Directors 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 Goode
Independent Director
Dr Pamela Kirby
Remuneration Committee Chair
Ali Al-Husry
Non-Executive Director
Dr Jochen Gann
Non-Executive Director
John Castellani4
CRE Committee Chair
Nina Henderson5
Independent Director and
Employee Engagement Lead
Fee (all
elements)
£,000
2018
Taxable
benefits3
£,000
101.0
109.0
–
38.5
101.0
85.0
85.0
104.9
93.0
–
–
–
2.4
–
2.5
1.6
2.4
1.6
Fee (all
elements)
£,000
2017
Taxable
benefits
£,000
Total
£,000
101.0
109.0
–
40.9
101.0
87.5
86.6
107.3
101.0
109.0
43.5
98.7
101.0
85.0
85.0
96.8
94.6
116.3
Total
£,000
101.0
109.0
43.5
107.1
101.0
86.3
85.0
98.1
116.3
–
–
–
8.4
–
1.3
–
1.3
–
3. ‘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
4. John Castellani was underpaid fees of £3,900 in 2017 which were paid in 2018
5. 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
During the year, the Executive Directors reviewed the fees paid to Non-Executive Directors. The conclusion from the review was that the base fee
of £85,000 should remain unchanged and that the Committee membership and Committee Chair fees (having remained unchanged since 2010)
should be increased from £8,000 to £10,000 (£20,000 for the Audit Committee Chair, the proportional increase). Additionally, it was concluded
that the Director responsible for employee engagement should receive a Committee Chair fee. The changes will be implemented with effect from
1 June 2019.
Hikma Pharmaceuticals PLC | Annual Report 2018
103
Remuneration Committee continued
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 Hikma’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 Executive Directors are not appointed for a specified term and, therefore, do not have an outstanding term that requires disclosure.
Letters of appointment
The Non-Executive Directors have letters of appointment with Hikma, not service contracts, and which are available for inspection at Hikma’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
Pat Butler
Dr Pamela Kirby
Dr Jochen Gann
John Castellani
Nina Henderson
Date of appointment
1 September 2011
14 October 2005
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
Hikma complies with the UK Corporate Governance Code requirement that all directors of FTSE 350 companies be subject to annual election
by shareholders.
External appointments
Hikma 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, Siggi Olafsson and Mazen Darwazah received fees of $4,100 (2017: $4,000), $114,745 (2017: N/A) and $29,400 (2017: $32,000),
respectively, relating to external appointments which are detailed in their Director profiles on pages 66 and 67. The process for controlling these
appointments is described in the governance statement on page 78.
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
12 March 2019
104
Hikma Pharmaceuticals PLC | Annual Report 2018
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 2018. 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 Hikma: Strategic report, pages 2 to 61
— Long-term incentive schemes: Directors’ remuneration report,
pages 90 to 100
— Related party transactions: Note 40 to the financial statements,
page 162
— Going concern statement: Risk management report, page 61
— Names and biographical details of the Directors: corporate
governance report, pages 66 and 67
— Independence of Non-Executive Directors: corporate governance
report, page 69
— Directors’ share interests: Directors’ remuneration report, pages
101 and 102
— Greenhouse gas emissions: Sustainability report, pages 52 and 53
— Financial instruments and risk: Note 31 to the financial statements,
pages 150 to 155
For the purposes of listing Rule 9.8.4, shareholders are directed in
accordance with the following table:
Item
Interest capitalised and associated tax relief
Publication of unaudited financial
information
Details of long-term incentive schemes
Waiver of emoluments by Directors
Allotment of securities for cash, including by
major subsidiaries
Parent undertakings of Hikma
Contracts of significance with a material
interest of a director or controlling
shareholders
Services provided to Hikma by controlling
shareholders
Arrangements by which shareholders have
agreed to current or future waive dividends
Controlling shareholder agreements and
associated obligations
Reference
This page
None
See Note 38 on pages 158
to 161
None
None
None
None
See Note 35 on page 157
Hikma does not have any
controlling shareholders
within the meaning of the
Listing Rules
Principal activity
The principal activities of Hikma are the development, manufacture
and marketing of a broad range of generic, branded and in-licensed
pharmaceutical products. Hikma’s pharmaceutical operations are
conducted through three business segments: Injectables, Generics,
and Branded. The majority of Hikma’s operations are in the MENA
region, the US and Europe. Hikma does not have overseas branches
within the meaning of the Companies Act 2006 (the Act).
Hikma’s net sales, gross profit and operating profit are shown by
business segment in Note 5 to the consolidated financial statements
on pages 133 and 134.
Results
Hikma’s reported profit for the year in 2018 was $285 million
(2017: loss of $839 million).
Dividend
The Board is recommending a final dividend of 26 cents per share
(approximately 20 pence per share) (2017: 23 cents per share) bringing
the total dividend for the full year to 38 cents per share (approximately
29 pence per share) (2017: 34 cents per share, approximately 24 pence
per share). The proposed dividend will be paid on 22 May 2019 to
eligible shareholders on the register at the close of business on 5 April
2019, subject to approval at the Annual General Meeting on 17 May 2019.
Creditor payment policy
Hikma’s policy, which is also applied by all subsidiaries and will continue
in respect of the 2019 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 2018 were equivalent to 94
days’ purchases (2017: 82 days), based on the average daily amount
invoiced by suppliers during the year.
Donations
During the year Hikma made charitable donations of approximately
$2.6 million (2017: $3.2 million):
Type of donation
Local charities serving communities in
which Hikma operates
Amount
donated in
2017 ($)
Amount
donated in
2018 ($)
1,441,861
1,209,550
Medical (donations in kind)
1,780,625
1,398,738
Hikma’s policy prohibits the payment of political donations and
expenditure within the meaning of the Act.
Research and development
Hikma’s investment in research and development (R&D) during 2018
represented 5.7% of Group revenue (2017: 6.3%). Further details on
Hikma’s R&D activities can be found on page 39.
Interest
The interest capitalised during the year under review was $0.1 million
(2017: $0.1 million). The tax impact related to the capitalised interest
was $nil (2017: $nil).
Significant contracts
Due to the nature of Hikma’s business, members of Hikma are party
to agreements that could alter or be terminated upon a change
of control of Hikma following a takeover. However, none of these
agreements is individually deemed to be significant in terms of its
potential impact on the business of Hikma taken as a whole.
The Directors are not aware of any agreements between Hikma and
its Directors or employees that provide for compensation for loss of
office or employment that occurs because of a takeover bid.
There are no persons, with whom Hikma has contractual or other
arrangements, who are deemed to be essential to the business
of Hikma.
Hikma Pharmaceuticals PLC | Annual Report 2018
105
None
Political donations and expenditure
nil
nil
Total
3,222,486
2,608,288
Directors’ report continued
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 re-election at the AGM.
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 the year, Hikma 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.
During 2019, Nina Henderson will undertake employee engagement
activities as described on page 70. Hikma does not discriminate against
a potential employee on grounds of disability and will make reasonable
adjustments to employ and develop disabled people.
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 on page 156. 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 2018:
Type
Shares
Nominal value
In issue
Issued during
the year
10 pence
241,455,394
776,500
During 2018, 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 provision
Hikma’s Articles of Association (the Articles) and prevailing legislation.
106
Hikma Pharmaceuticals PLC | Annual Report 2018
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.
Share buy-back
At the Annual General Meeting (AGM) on 18 May 2018, 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 2019 or the 2019 AGM,
which is scheduled for 17 May 2019. The Directors have not used this
authority during the year, but are proposing to renew this authority at
the 2019 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
Columbus acquisition. This authority expires on 22 January 2021.
Share issuance
At the AGM on 18 May 2018, the Directors were authorised to issue
relevant securities up to an aggregate nominal amount of £8,023,630
and to be empowered to allot equity securities for cash on a non
pre-emptive basis up to an aggregate nominal amount of £1,203,394
at any time up to the earlier of the date of the 2019 AGM or 30 June
2019. The Directors propose to renew these authorities at the 2019 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 on pages 160 and 161. Shares are also held
by the Hikma Pharmaceuticals Employee Benefit Trust (EBT) and are
detailed in Note 35 to the financial statements on page 157. 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, 17 May 2019, starting at 10.00 am
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.
Hikma 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.
Corporate governance | Directors’ report
— make judgements and accounting estimates that are reasonable
and prudent
— prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the group and company will
continue in business
The directors are also responsible for safeguarding the assets of the
group and company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the group and company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the group and company and enable them to ensure
that the financial statements and the Directors’ Remuneration Report
comply with the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.
The directors are responsible for the maintenance and integrity of the
company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
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 Hikma 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 Hikma 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 Hikma’s performance, business
model and strategy
On behalf of the Board
Said Darwazah
Executive Chairman
12 March 2019
Sigurdur Olafsson
Chief Executive Officer
12 March 2019
Hikma Pharmaceuticals PLC | Annual Report 2018
107
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 Ingelheim2
Capital Group International
Fidelity International
Vanguard Healthcare Fund
Number of shares
Percentage held
60,000,000
40,000,000
23,275,396
9,791,950
7,284,981
24.9%
16.6%
9.6%
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 101
for details of their holdings in Darhold Limited
2. Dr Jochen Gann is a Director of Hikma and a senior executive of Boehringer Ingelheim
There have been no changes in substantial shareholdings notified to
Hikma 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 shares pursuant to an authority given by shareholders at an AGM to
issue 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
Since the year end, a litigation matter with an external party was
determined in Hikma’s favour resulting in a payment of $32 million
becoming due to Hikma. Additionally, the acquisition of a facility in
Vietnam was completed for total consideration that is not expected
to exceed $17 million.
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 have prepared the
group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and
company financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards, comprising FRS 101 “Reduced Disclosure Framework”, and
applicable law). In preparing the group financial statements, the
directors have also elected to comply with IFRSs, issued by the
International Accounting Standards Board (IASB). Under company law
the directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
group and company and of the profit or loss of the group and company
for that period. In preparing the financial statements, the directors are
required to:
— select suitable accounting policies and then apply them consistently
— state whether applicable IFRSs as adopted by the European Union
and IFRSs issued by IASB have been followed for the group financial
statements and United Kingdom Accounting Standards, comprising
FRS 101, have been followed for the company financial statements,
subject to any material departures disclosed and explained in the
financial statements
Financial statements
We deliver accurate, high-quality and
timely information to all stakeholders
with the utmost integrity and efficiency.
109 Independent auditors’ report
116 Consolidated financial statements
168 Company financial statements
170 Notes to the Company financial statements
108
Hikma Pharmaceuticals PLC | Annual Report 2018
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC
Financial statements
Report on the audit of the financial statements
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 2018 and of the Group’s profit and cash flows for
the year then ended
— the Group financial statements have been properly prepared in
accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union
— the Company financial statements have been properly prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 101
'Reduced Disclosure Framework', and applicable law)
— 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 2018; 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 7 to the financial statements,
we have provided no non-audit services to the Group or the Company
in the period from 1 January 2018 to 31 December 2018.
Hikma Pharmaceuticals PLC | Annual Report 2018
109
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
Materiality
Audit scope
Our audit approach
Overview
— Overall Group materiality: $17 million (2017: $14 million), based on 5% of profit before tax after adding back
the following exceptional and other items: research and development costs relating to generic Advair
Diskus®, restructuring costs as a result of the closure of the Eatontown, New Jersey manufacturing plant
and the re-measurement of acquisition-related liabilities.
— Overall Company materiality: capped at $10 million (2017: $10 million), but calculated based on 1%
of total assets.
— Our audit included full scope audits of seven components, audit procedures on specific financial
statement line items of one component and audit procedures performed centrally over specific material
balances at other locations around the world. Taken together the above procedures account for 84%
of consolidated revenue, 75% of consolidated profit before tax and 83% of consolidated total assets.
— Recoverability of the carrying value of intangible assets and goodwill (Group).
Key audit
matters
— Recognition and measurement of accruals for chargebacks, rebates and returns in the US (Group).
— Recognition and measurement of uncertain tax positions and recoverability of deferred tax assets (Group).
— No key audit matters specific to the Hikma Pharmaceuticals PLC parent Company financial statements
were identified.
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.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and the industry in which
it operates, we identified that the principal risks of non-compliance
with laws and regulations related 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, and we considered
the extent to which non-compliance might have a material effect on the
financial statements. We also considered those laws and regulations
that have a direct impact on the preparation of the financial statements
such as the Companies Act 2006.
— challenging assumptions made by management in their significant
accounting estimates in particular in relation to estimation of rebate
and return accruals, impairment of intangible assets, and the
recognition and measurement of litigation and contingent liabilities
and uncertain tax provisions (see related key audit matters below)
— identifying and testing journal entries, in particular any journal
entries posted with unusual account combinations, journals posted
by senior management, journals posted and reviewed by the same
individual and consolidation journals
There are inherent limitations in the audit procedures described above
and 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. Also, 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 evaluated management’s incentives and opportunities for
fraudulent manipulation of the financial statements (including the risk
of override of controls), and determined that the principal risks were
related to posting inappropriate journal entries to manipulate financial
results and management bias in accounting estimates. The Group
engagement team shared this risk assessment with the component
auditors so that they could include appropriate audit procedures in
response to such risks in their work. Audit procedures performed by
the Group engagement team and/or component auditors included:
— discussions with management and the Group’s legal counsel,
including consideration of known or suspected instances of
non-compliance with laws and regulations and fraud
— assessment of matters reported on the Group’s whistleblowing
helpline and results of management’s investigation of such matters
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.
110
Hikma Pharmaceuticals PLC | Annual Report 2018
Financial statements
Recoverability of the carrying value of intangible assets and goodwill (Group)
Key audit matter
How our audit addressed the key audit matter
At 31 December 2018, the Group had goodwill of $279 million and intangible
assets of $487 million (31 December 2017: $282 million and $503 million,
respectively) comprising customer relationships, product-related intangible
assets, software and other identified intangible assets. This is contained within
three cash generating units (CGUs). For the year ended 31 December 2017, the
Group recorded $1,105 million as an exceptional impairment charge primarily
as a result of uncertainty in the generics market and the delay in approval of
its application for its generic version of Advair Diskus®.
All CGUs containing goodwill and indefinite-lived intangible assets must be
tested for impairment annually. The Group is also required to complete an
impairment review of its portfolio of finite-lived intangible assets where there
are indicators of impairment. Additionally, the Group must consider whether
there are indicators of impairment reversal at each reporting date.
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 costs 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. There is a risk that
the carrying value of intangible assets may be higher than the recoverable
amount. Additionally, there is judgement in relation to triggering the reversals
of impairments recognised in previous periods as IAS 36 states that impairment
losses are reversed if there has been an event or trigger that indicates a
significant, discrete and sustained change.
We focused on the intangible assets in the Generics CGU, to assess if there
were any significant changes in estimates relating to the external market
conditions. We further focused specifically on the business plan cash flows and
assumptions in the current financial year. No impairment charges or reversals
of previously recognised impairment charges were recorded in the year.
Refer to notes 3 and 16 in the Group financial statements and the Audit
Committee review of areas of significant judgement on page 74.
We assessed the determination of the CGUs identified for the impairment
calculation by considering the CGUs previously used as well as from our
understanding of the business and how it is monitored.
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.
We performed the following procedures on the Group’s impairment analyses,
with significant involvement from senior engagement team members:
— corroborated the information to Board reviewed budgets and forecasts
— understood management’s process for forecasting cash flows, which
is underpinned by models that include a product-by-product analysis.
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
— for the Group’s In Process Research & Development (IPRD) in 2018 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
— 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
— performed look back testing to understand how accurate management had
been in its previous forecasting
— we recalculated the weighted average cost of capital and considered if the
amount was within a reasonable range
We consider management’s key assumptions to be within a reasonable range.
For those intangible assets including goodwill where management determined
that no impairment was required, we found that these judgements were
supportable.
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 performed our own sensitivity analyses.
We considered management’s policy around impairment reversal given the size
of the impairment loss recognised in 2017. We considered both the conditions
in the US generics market and factors relating to generic Advair Diskus®. Based
on our procedures, we concluded that reversing any of the prior year impairment
charge was currently not appropriate. This will continue to be monitored closely
during 2019.
We also validated the appropriateness of the related disclosures in note 16
of the financial statements.
Hikma Pharmaceuticals PLC | Annual Report 2018
111
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
Recognition and measurement of accruals for chargebacks, rebates and returns in the US (Group)
Key audit matter
How our audit addressed the key audit matter
Management is required to make certain judgements and estimates in
respect of revenue recognition and specifically 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 estimates relates to revenue recognition, chargebacks,
rebates and returns in the US for which the Group recorded revenue
deductions for the year ended 31 December 2018 of $2,057 million
(2017: $1,933 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 $409 million to be necessary
at 31 December 2018 (2017: $388 million).
Refer to the Audit Committee review of areas of significant judgement
page 74, significant accounting policies note 2, trade and other
receivables note 21 and other current liabilities note 28.
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 2018 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.
Recognition and measurement of uncertain tax positions and recoverability of deferred tax assets (Group)
Key audit matter
How our audit addressed the 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.
Judgement is required in assessing the level of provisions required in respect
of uncertain tax positions. At 31 December 2018, the Group has recorded
provisions of $53 million in respect of uncertain tax positions (2017: $61 million).
In 2018 management has recorded an exceptional deferred tax credit of $43
million relating to the 2017 impairment charge on US intangible assets. This
credit was not recognised in 2017 due to insufficient forecast taxable profits in
the US to meet the recognition criteria in IAS 12. At 31 December 2018, the total
deferred tax asset was $125 million (2017: $135 million).
Refer to notes 12 and 13 in the Group financial statements.
In conjunction with our UK, US, international tax and transfer pricing specialists,
we evaluated and challenged management's judgements in respect of estimates
involved in the determination of uncertain tax provisions and judgements taken
in the measurement of deferred tax assets.
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, developments
in the tax environment and external tax advice received by the Group, where
relevant, to satisfy ourselves that the tax provisions had been appropriately
recorded or adjusted to reflect the latest developments.
In respect of deferred tax we considered whether deferred tax assets were
recoverable with reference to Board reviewed forecasts. We ensured that these
forecasts were consistent with those used for impairment testing (see above).
We also challenged management on whether it is appropriate to now recognise
deferred tax assets in respect of the 2017 impairment charge. We concur with
management that, as a result of changes to the US business model due to an
internal reorganisation, which increased US taxable profits principally in relation
to the Injectables business, it is now sufficiently probable that future taxable
profit will be available against which the tax relief arising on the 2017 impairment
loss can be utilised. Consequently we believe it is now appropriate to recognise
a deferred tax asset.
We also considered the appropriateness of the related disclosures in
notes 12 and 13 to the financial statements.
Based on the procedures performed, we noted no material matters from our work.
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Hikma Pharmaceuticals PLC | Annual Report 2018
Financial statements
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 2018, Hikma Pharmaceuticals PLC had in total
51 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 (Hikma Pharmaceuticals USA Inc. and West-Ward
Columbus Inc.), Jordan (Hikma Jordan), Saudi Arabia (Hikma Al Jazeera
Pharmaceuticals Industries), Algeria (Hikma Pharma Algeria) and
Portugal (Hikma Portugal) 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 Hikma Pharmaceuticals International Limited
(HPIL) 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 and Jordan.
Taken together our audit work accounted for 84% of consolidated
revenue, 75% of consolidated profit before tax, 83% of total assets
and 73% of the adjusted profit measure we use as a basis for
determining materiality.
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
$17 million (2017: $14 million).
Group financial statements
Company financial statements
$10 million (2017: $10 million).
How we determined it
5% of profit before tax after adding back the
following exceptional and other items: research and
development costs relating to generic Advair Diskus®,
restructuring costs as a result of the closure of the
Eatontown, New Jersey manufacturing plant and
the remeasurement of acquisition-related liabilities.
1% of total assets. This was capped at $10 million
(2017: $10 million), but calculated based on
1% of total assets.
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.
The Company holds the Group’s investments and
performs treasury functions on behalf of the Group.
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 $1,500,000 and $10,000,000. Certain components were audited to a local statutory
audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above $850,000 (Group audit)
(2017: $500,000) and $850,000 (Company audit) (2017: $500,000) as well as misstatements below those amounts that, in our view, warranted
reporting for qualitative reasons.
Hikma Pharmaceuticals PLC | Annual Report 2018
113
Independent auditors’ report to the members
of Hikma Pharmaceuticals PLC continued
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 2018 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 pages 62 to 107) about internal controls and risk management
systems in relation to financial reporting processes and about share
capital structures in compliance with rules 7.2.5 and 7.2.6 of the
Disclosure Guidance and Transparency Rules sourcebook of the
FCA (DTR) is consistent with the financial statements and has been
prepared in accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the Group and Company
and their environment obtained in the course of the audit, we did not
identify any material misstatements in this information. (CA06)
In our opinion, based on the work undertaken in the course of the
audit, the information given in the Corporate Governance Statement
(on pages 62 to 107) with respect to the Company’s corporate
governance code and practices and about its administrative,
management and supervisory bodies and their committees
complies with rules 7.2.2, 7.2.3 and 7.2.7 of the DTR. (CA06)
We have nothing to report arising from our responsibility to report
if a corporate governance statement has not been prepared by the
Company. (CA06)
The Directors’ assessment of the prospects of the Group and
of the principal risks that would threaten the solvency or liquidity
of the Group
We have nothing material to add or draw attention to regarding:
— the Directors’ confirmation on page 58 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 61 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
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. For example,
the terms on which the United
Kingdom may withdraw from
the European Union, which is
currently due to occur on
29 March 2019, are not clear, and
it is difficult to evaluate all of the
potential implications on the
Group’s and Company’s trade,
customers, suppliers and the
wider economy.
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).
114
Hikma Pharmaceuticals PLC | Annual Report 2018
Financial statements
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)
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.
Other Code Provisions
We have nothing to report in respect of our responsibility to
report when:
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.
— the statement given by the Directors, on page 107, 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
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 section of the Annual Report on page 74 describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee
Other required reporting
— 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)
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 107, 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.
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 members 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 three
years, covering the years ended 31 December 2016 to 31 December 2018.
Mark Gill
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
12 March 2019
Hikma Pharmaceuticals PLC | Annual Report 2018
115
Consolidated income statement
For the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Sales and marketing expenses
General and administrative expenses
Net impairment reversals on financial assets
Research and development expenses
Other operating expenses (net)
Total operating expenses
Operating profit/(loss)
Finance income
Finance expense
Loss from investment at fair value
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
2018
Exceptional
items and other
adjustments
(note 6)
$m
(6)
(16)
(22)
(33)
–
–
(29)
(5)
(67)
(89)
–
(26)
–
(115)
65
(50)
–
(50)
(50)
2018
Core
results
$m
2,076
(1,004)
1,072
(191)
(246)
11
(118)
(68)
(612)
460
3
(54)
(1)
408
(73)
335
3
332
335
137.8
137.2
2018
Reported
results
$m
2,070
(1,020)
1,050
(224)
(246)
11
(147)
(73)
(679)
371
3
(80)
(1)
293
(8)
285
3
282
285
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
(6)
(6)
(48)
(1)
–
(6)
(1,072)
(1,127)
(1,133)
93
(26)
–
(1,066)
(29)
(1,095)
–
(1,095)
(1,095)
2017
Core
results
$m
1,936
(963)
973
(188)
(238)
–
(115)
(46)
(587)
386
2
(60)
–
328
(72)
256
4
252
256
117.0
116.5
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)
Note
4
9
5
10
11
12
34
15
15
116
116
Hikma Pharmaceuticals PLC | Annual Report 2018
Consolidated statement of comprehensive income
For the year ended 31 December 2018
2018
Exceptional
items and other
adjustments
(note 6)
$m
(50)
2018
Core
results
$m
335
2018
Reported
results
$m
285
2017
Exceptional
items and other
adjustments
(note 6)
$m
(1,095)
2017
Core
results
$m
256
2017
Reported
results
$m
(839)
Note
Profit/(loss) for the year
Other comprehensive income/(loss)
Items that may be reclassified subsequently to the
consolidated income statement, net of tax:
Currency translation (loss)/gain
(29)
–
(29)
20
–
20
Items that will not be reclassified subsequently to
the consolidated income statement, net of tax:
Change in fair value of available-for-sale
financial assets¹
Change in the fair value of equity investments²
Total comprehensive income/(loss) for the year
24
19
Attributable to:
Non-controlling interests
Equity holders of the parent
–
7
313
1
312
313
–
–
(50)
–
(50)
(50)
–
7
263
1
262
263
2
–
–
–
2
–
278
(1,095)
(817)
3
275
278
–
(1,095)
(1,095)
3
(820)
(817)
1. This investment was previously designated as available-for-sale financial assets, upon transition to IFRS 9 it has been re-categorised as Investments measured at fair value through profit or loss (FVTPL)
2. This investment was previously classified as available-for-sale and stated at cost (under IAS 39 cost exemption); upon transition to IFRS 9 it has been re-categorised as Investments measured at fair value
through other comprehensive income (FVTOCI)
Hikma Pharmaceuticals PLC | Annual Report 2018
117
117
Financial statements
Consolidated balance sheet
At 31 December 2018
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
Other reserves
Retained earnings
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Note
16
16
17
18
13
19
20
21
22
23
24
25
26
27
28
29
30
13
32
33
34
2018
$m
279
487
870
11
125
57
1,829
528
74
731
–
276
59
1,668
3,497
74
465
68
23
263
893
775
539
23
16
329
907
1,800
1,697
40
282
(217)
1,580
1,685
12
1,697
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
(190)
1,382
1,514
14
1,528
The consolidated financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, on pages 116 to 167 were approved by the Board of
Directors on 12 March 2019 and signed on its behalf by:
Said Darwazah
Director
12 March 2019
Sigurdur Olafsson
Director
118
118
Hikma Pharmaceuticals PLC | Annual Report 2018
Consolidated statement of changes in equity
For the year ended 31 December 2018
Balance at 1 January 2017
Loss for the year1
Change in fair value of available-for-
sale financial assets (note 24)2
Currency translation gain/(loss)
Total comprehensive (loss)/income
for the year
Cost of equity-settled employee share
scheme (note 38)
Dividends on ordinary shares (note 14)
Adjustment arising from change in
non-controlling interests (note 34)
Total transactions with owners,
recognised directly in equity
Balance at 31 December 2017 and
1 January 2018 as previously reported
Impact of IFRS 93
Impact of IFRS 153
Balance at 1 January 2018 as adjusted
Profit for the year
Change in the fair value of equity
investments at fair value through other
comprehensive income (note 19)4
Currency translation loss
Total comprehensive income/(loss)
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 14)
Balance at 31 December 2018
Merger and
revaluation
reserves
$m
1,077
(1,039)
–
–
(1,039)
–
–
–
38
–
–
38
–
–
–
–
–
–
38
Translation
reserve
$m
(248)
Own shares
$m
(1)
–
–
21
21
–
–
–
(227)
–
–
(227)
–
–
(27)
(27)
–
–
(254)
–
–
–
–
–
–
–
(1)
–
–
(1)
–
–
–
–
–
–
(1)
Total other
reserves
$m
828
Retained
earnings
$m
1,246
(1,039)
196
–
21
1
–
(1,018)
197
–
–
–
22
(79)
(4)
(190)
1,382
–
–
(190)
–
–
(27)
(3)
(25)
1,354
282
7
–
(27)
289
–
–
21
(84)
(217)
1,580
Equity
attributable
to equity
shareholders
of the parent
$m
2,396
Non-
controlling
interests
$m
15
Share
capital
$m
40
Share
premium
$m
282
Total
equity
$m
2,411
(839)
1
20
(818)
22
(81)
(6)
1,528
(3)
(25)
1,500
285
7
(29)
(843)
1
21
(821)
22
(79)
4
–
(1)
3
–
(2)
(4)
(2)
1,514
(3)
(25)
1,486
282
7
(27)
14
–
–
14
3
–
(2)
262
1
263
21
(84)
1,685
–
(3)
12
21
(87)
1,697
–
–
–
–
–
–
–
40
–
–
40
–
–
–
–
–
–
40
–
–
–
–
–
–
–
282
–
–
282
–
–
–
–
–
–
282
1. In 2017 a loss of $1,039 million had been allocated from retained earnings to the merger and revaluation reserves in relation to the Columbus business impairment (note 6, 16 and 17)
2. This investment was previously designated as available-for-sale financial assets, upon transition to IFRS 9 it has been re-categorised as Investments FVTPL
3. The Group adopted IFRS 9 and IFRS 15 from 1 January 2018 (note 1, 4, 28 and 44)
4. This investment was previously classified as available-for-sale and stated at cost (under IAS 39 cost exemption); upon transition to IFRS 9 it has been re-categorised as Investments at FVTOCI
Hikma Pharmaceuticals PLC | Annual Report 2018
119
119
Financial statements
Consolidated cash flow statement
For the year ended 31 December 2018
Note
36
Cash flows from operating activities
Cash generated from operations
Income taxes paid
Net cash inflow from operating activities
Cash flow from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchase of intangible assets
Cash (paid)/received from investment in joint ventures
Investment in financial and other non-current assets, net
Investments at fair value through other comprehensive income (2017: available-for-sale investment)
Acquisition of business undertakings net of cash acquired
Contingent consideration adjustment
Finance income
Net cash outflow from investing activities
Cash flow from financing activities
Decrease in collateralised and restricted cash
Proceeds from issue of long-term financial debts¹
Repayment of long-term financial debts¹
Proceeds from short-term borrowings²
Repayment of short-term borrowings²
Dividends paid
Dividends paid to non-controlling shareholders of subsidiaries
Interest paid
Purchase of non-controlling interest in subsidiary
Payment from co-development and earnout payment agreement, net
Net cash outflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Foreign exchange translation movements
Cash and cash equivalents at end of year
2018
$m
493
(63)
430
(107)
13
(32)
(4)
4
(4)
1
30
3
(96)
3
93
(224)
138
(148)
(84)
(3)
(51)
–
(2)
(278)
56
227
(7)
276
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
1. These cash flows relate to long-term financial debts (note 29) and the movements above reconcile to the movement per the note. In the prior year, the movement reconciled to the note after including
a non-cash movement of $1 million in respect of unfavourable translation differences
2. These cash flows relate to bank overdraft and loans (note 25) and the movements above reconcile to the movement per the note after including a non-cash movement of $2 million (2017: $5 million)
in respect of favourable translation differences
120
120
Hikma Pharmaceuticals PLC | Annual Report 2018
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. Several other amendments and
interpretations apply for the first time in 2018, but do not have an impact
on the consolidated financial statements of the Group, but may impact
the accounting for future transactions and arrangements.
IFRS 9
IFRS 15
Financial Instruments
Revenue from Contracts with Customers
IFRS 15 (Amendments)
Revenue from Contracts with Customers
The following standards and interpretations have not been applied in these
consolidated financial statements because while in issue, these are not
yet effective:
IFRS 16
IFRIC 23
Leases
Uncertainty over Income Tax Treatments
IFRS 15
IFRS 15 ‘Revenue from Contracts with Customers’ is effective for
accounting periods beginning on or after 1 January 2018 and replaces
IAS 18 ‘Revenue’. It provides enhanced detail on the principle of recognising
revenue to reflect the transfer of goods and services to customers at a
value which the Company expects to be entitled to receive. The standard
also updates revenue disclosure requirements.
The key revenue recognition policy impacted under IFRS 15 is the
accounting of free goods. Previously, free goods were recorded only at
cost, within cost of sales and no transaction price was allocated to the
free goods revenue. Under IFRS 15 an option to acquire additional goods
or services gives rise to a separate performance obligation, if the option
provides a material right to the customer that the customer would not
receive without entering into that contract. The standard requires
management to estimate the transaction price to be allocated to the
separate performance obligations, to defer revenue and to recognise
a contract liability for the performance obligations that will be satisfied
in the future. The Group recognises revenue for the option when those
future goods or services are transferred to the customer.
The Group has adopted IFRS 15, applying modified retrospective approach
on 1 January 2018 with a cumulative adjustment as an increase to other
current liabilities of $27 million (contract liability), reflecting the free
goods obligations outstanding as at 1 January 2018, an increase of trade
receivables by $1 million, decrease in the income tax provision by $1 million
and the corresponding net adjustment to decrease retained earnings by
$25 million. There is no restatement to prior periods as permitted in the
transition rules for IFRS 15. The impact of IFRS 15 on the consolidated
financial statements for 31 December 2018 is disclosed in note 44.
IFRS 9
IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments:
Recognition and Measurement’ and is effective for annual periods
beginning on or after 1 January 2018, bringing aspects of the accounting
for financial instruments: classification, measurement; and impairment.
(a) Classification and measurement
The principal impact is that the portfolio investments (quoted securities
portfolio) previously designated as available-for-sale financial assets have
been re-categorised on initial application as Investments FVTPL. For
further details, see note 24 of the consolidated financial statements and
note 51 to the Company financial statements. The Group recorded the fair
value movements for such investments through the consolidated income
statement for the year ended 31 December 2018.
Equity instruments are normally measured at fair value through profit
or loss. However, on initial recognition, the Group may make irrevocable
election (on instrument-by-instrument basis) to present in other
comprehensive income subsequent changes in the fair value of
equity instrument not held for trading.
The fair value movements on investments in unlisted equity instrument
(i.e. the Group’s venture capital investments) are recorded in other
comprehensive income. This category only includes equity instruments,
which the Group intends to hold for the foreseeable future. The Group has
irrevocably elected (on instrument-by-instrument basis) to classify these
equity investments as measured at FVTOCI upon transition to IFRS 9.
Previously, the investments in unlisted shares that were not held for trading
were stated at cost, less a provision for any impairment loss (under IAS 39
cost exemption). At transition date, the investments in unlisted shares
($16 million – see note 31) are re-classed as financial assets measured
at FVTOCI.
(b) Impairment
The adoption of IFRS 9 has changed the Group’s accounting for
impairment losses for financial assets by replacing IAS 39’s incurred loss
approach with a forward-looking expected credit loss (ECL) approach.
IFRS 9 requires the Group to record an allowance for ECLs for all loans
and other debt financial assets not held at FVTPL.
The Group has adopted IFRS 9 retrospectively, but with certain permitted
exceptions. As a result, prior year results are also not restated, but
a cumulative adjustment as a decrease in trade receivables and a
corresponding adjustment to decrease equity at 1 January 2018 by
$3 million has been made (note 44).
The adoption of the ECL requirements of IFRS 9 resulted in an increase
in impairment allowance of the Group’s debt financial assets.
The other changes introduced in IFRS 9 have not had a significant impact
on the Group.
IFRS 16
IFRS 16 was issued in January 2016 and it replaces IAS 17 ‘Leases’, IFRIC 4
‘Determining whether an Arrangement Contains a Lease’, SIC-15 ‘Operating
Leases-Incentives’ and SIC-27 ‘Evaluating the Substance of Transactions
Involving the Legal form of a Lease’.
IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to account for
all leases under a single on-balance sheet model similar to the accounting
for finance leases under IAS 17. The standard includes two recognition
exemptions for lessees – leases of ‘low-value’ assets (e.g. personal
computers) and short-term leases (i.e. leases with a lease term of
12 months or less). At the commencement date of a lease, a lessee
will recognise a liability to make lease payments (i.e. the lease liability)
and an asset representing the right to use the underlying asset during
the lease term (i.e. the right-of-use asset). Lessees will be required to
separately recognise the interest expense on the lease liability and the
depreciation expense on the right-of-use asset.
Lessees will be also required to remeasure the lease liability upon the
occurrence of certain events (e.g. a change in the lease term, a change
in future lease payments resulting from a change in an index or rate used
to determine those payments).
Hikma Pharmaceuticals PLC | Annual Report 2018
121
121
Financial statements
Notes to the consolidated financial statements continued
1. Adoption of new and revised standards
continued
The consolidated financial statements have been prepared under the
historical cost convention, except for the revaluation to fair value of
certain financial assets and liabilities.
The lessee will generally recognise the amount of the remeasurement
of the lease liability as an adjustment to the right-of-use asset.
The accounting policies included in this note have been applied
consistently other than where new policies have been adopted.
IFRS 16 also requires lessees and lessors to make more extensive
disclosures than under IAS 17.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019.
Early application is permitted. A lessee can choose to apply the standard
using either a full retrospective or a modified retrospective approach.
The standard’s transition provisions permit certain reliefs; it is currently
anticipated that the standard will be adopted on a modified
retrospective approach.
In 2018, the Group has assessed the potential effect of IFRS 16 on its
consolidated financial statements. The Group expects to recognise lease
liabilities of approximately $49 million on 1 January 2019, right-of-use
assets of $46 million (after an adjustment for accrued rent of $3 million
recognised as at 31 December 2018).
IFRIC 23
IFRIC 23 ‘Uncertainty over Income Tax Treatments’ was issued in June
2017 and will be implemented by the Group from 1 January 2019. The
interpretation clarifies that if it is considered probable that a tax authority
will accept an uncertain tax treatment, the tax charge should be calculated
on that basis. If it is not considered probable, the effect of the uncertainty
should be estimated and reflected in the tax charge. In assessing the
uncertainty, it is assumed that the tax authority will have full knowledge
of all information related to the matter.
The Group has assessed the potential impact of the new interpretation
and believes the application of IFRIC 23 on 1 January 2019 will not result
in a material change to the provisions held for uncertain tax positions.
2. Significant accounting policies
General information
Hikma Pharmaceuticals PLC is a public limited liability company
incorporated and domiciled in England and Wales under the Companies
Act 2006. The address of the registered office is given on page 176.
The Group’s principal activities are the development, manufacture,
and marketing of a broad range of branded and non-branded generic
pharmaceuticals products across the US, the Middle East and North Africa
(MENA) and Europe. Hikma is also a leading licensing partner in MENA.
Basis of preparation
The Group 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 Group’s previously published consolidated 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 presentation and functional currency of the Group is the US dollar
as the majority of the Group’s business is conducted in US dollars.
Going concern
The Directors have, at the time of approving the consolidated 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 consolidated financial statements (see page 61).
Basis of consolidation
The consolidated financial statements incorporate the results of Hikma
Pharmaceuticals PLC (the Company) and entities controlled by the
Company (together the Group). Control is achieved when the Group is
exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power
over the investee.
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 consolidated financial statements of entities 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.
122
122
Hikma Pharmaceuticals PLC | Annual Report 2018
2. Significant accounting policies continued
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.
Contingent consideration classified as an asset or liability is a financial
instrument and within the scope of IFRS 9 ‘Financial Instruments’,
is measured at fair value with changes in fair value recognised in
consolidated income statement in line with IFRS 9, ‘Other Contingent
Consideration’ that is not within the scope of IFRS 9 is measured at fair
value at each reporting date with changes in fair value recognised in the
consolidated income statement.
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.
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 that the Group obtains complete information about facts
and circumstances that existed as of the acquisition date, and is subject
to a maximum of one year.
Investment in associates 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 consolidated 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. The aggregate of the Group’s share of profit or loss of
an associate and a joint venture is shown on the face of the consolidated
income statement outside operating profit and represents profit after tax.
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 rate prevailing on the balance sheet date. Sudan was
considered as a hyperinflationary economy in the year ended 31 December
2018 in which the rate prevailing was 47.6 Sudanese pounds per US dollar
as of 31 December 2018. The effect of inflation accounting in Sudan for the
year ended 31 December 2018 was not material.
Revenue recognition
Under IFRS 15 revenue is recognised in the consolidated income statement
when control of the goods or services are transferred to the customer at an
amount that reflects the consideration to which the Group expects to be
entitled in exchange for those goods and services.
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Financial statements
Notes to the consolidated financial statements continued
2. Significant accounting policies continued
The transition to IFRS 15 had no significant impact on the Group’s revenue
recognition policies as the majority of the Group’s revenue is derived from
the supply of goods (i.e. single performance obligation). The only significant
revenue recognition policy that is impacted by IFRS 15 transition is free
goods. Refer to free goods policy for more details.
The Group has generally concluded that it acts as principal in its revenue
arrangements because it typically controls the goods or services before
the transfer to customer.
Revenue represents the amounts receivable after the deduction of
discounts, value added tax, other sales taxes, allowances given, penalties,
provisions for chargebacks and accruals for estimated future rebates,
returns and price adjustments. 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. Revenue
is only recognised when it is highly probable that a significant reversal will
not occur.
The Group does not expect to have any contract where the period
between the transfer of the promised goods or services to the customer
and payment by the customer exceeds one year. As a consequence, the
Group does not adjust any of the transaction prices for the time value
of money.
Variable consideration
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 US are covered by various programmes (such as Medicaid) under
which products are sold at a discount.
The Group estimates its provision for rebates based on current contractual
terms and conditions as well as historical experience, changes to business
practices and credit terms. While such experience has 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.
Customer option that provides a material right
Free goods
Free goods are issued to customers as sale incentives. Under IFRS 15
an option to acquire additional goods or services gives rise to a separate
performance obligation, if the option provides a material right that the
customer would not receive without entering into that contract. IFRS 15
requires management to estimate the transaction price to be allocated to
the separate performance obligations and to recognise a contract liability
for the performance obligations that will be satisfied in the future. The
Group recognises revenue for the option when those future goods or
services are transferred to the customer.
Previously, free goods were recorded only at cost, within cost of sales
and no transaction price was allocated to the free goods revenue.
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2. Significant accounting policies continued
Contract manufacturing
The Group manufactures certain medicines on behalf of customers. The
revenue from providing contract manufacturing services is recognised
when these medicines are approved by the quality control department.
There is no alternative use of these medicines and the Group also has the
enforceable right to payments once these medicines are quality approved.
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 under the LTIP was made 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 the 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 payment 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 consolidated 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.
A new standard for leasing, IFRS 16 ‘Leases’ will come into effect on
1 January 2019, the potential effect on the consolidated financial statement
is disclosed in note 1.
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.
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Financial statements
Notes to the consolidated financial statements continued
Core numbers are not substitutable for IFRS numbers and should not
be considered superior to results presented in accordance with IFRS.
Our core results exclude the exceptional items and other adjustments
set out in note 6 to the consolidated 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 businesses 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 consolidated
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.
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
– 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 and are amortised on a straight-line basis on the
following amortisation rates:
Customer relationships
Product related intangibles
Trade names
Marketing rights
Software
7%
7% to 14%
10%
10% to 50%
10% to 30%
Judgement is used to assess the degree of certainty attached to the flow
of future economic benefits that are attributable to the use of the asset on
the basis of the evidence available at the time of initial recognition, giving
greater weight to external evidence.
Expenditures on research and development activities are charged to
the consolidated income statement, except only when the criteria for
recognising an internally generated intangible asset is met, which is
usually when approval from the relevant regulatory authority is
considered probable.
2. Significant accounting policies continued
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 consolidated
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 consolidated financial statements and the corresponding tax bases
used in the computation of taxable profit, and is accounted for using the
consolidated 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
consolidated 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 2018, this had a 1.3%
favourable impact on the effective tax rate (2017: 0.9% unfavourable).
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.
Non-IFRS measures are used to report and monitor the underlying
performance of our business. Management uses these numbers internally
to measure our progress and for setting performance targets. To provide
a more complete picture of the Group’s performance we present core
results, alongside our reported results, to external audiences to help them
understand the underlying performance of our business. Our core results
may be calculated differently to other companies.
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2. Significant accounting policies continued
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.
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
Vehicles, fixtures and equipment
2% to 4%
5% to 33%
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.
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.
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.
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.
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.
Impairment of property, plant and equipment and
intangible assets
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 to 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.
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Financial statements
Notes to the consolidated financial statements continued
2. Significant accounting policies continued
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 (CGU)) is
estimated to be less than its carrying amount, the carrying amount of the
asset (or CGU) is reduced to its recoverable amount. 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 CGUs. These CGUs 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 CGU 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. The
assumptions used in the impairment tests are set out in note 16.
(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.
For assets excluding goodwill, an assessment is made at each reporting
date to determine whether there is an indication that previously recognised
impairment losses no longer exist or have decreased. If such indication
exists, the Group estimates the asset’s or CGU’s recoverable amount. A
previously recognised impairment loss is reversed only if there has been
a sustained change in the assumptions used to determine the asset’s
recoverable amount since the last impairment loss was recognised. The
reversal is limited so that the carrying amount of the asset does not exceed
its recoverable amount, nor exceed the carrying amount that would have
been determined, net of depreciation, had no impairment loss been
recognised for the asset in prior years. Such reversal is recognised in the
consolidated income statement. In line with IAS 36, previously recognised
impairment losses on goodwill are not reversed.
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 consolidated 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
consolidated balance sheet when the Group becomes a party to the
contractual provisions of the instrument.
Financial assets
From 1 January 2018, the Group classifies its financial assets in the following
measurements categories:
(i) Financial assets at fair value through profit and loss (P&L)
Listed shares and investment portfolios held by the Group that are traded
in an active market are classified as being financial assets at FVTPL and are
stated at fair value. Gains and losses arising from changes in fair value are
recognised in the consolidated income statement, see note 24.
(ii) Financial assets designated at fair value through other comprehensive
income (OCI)
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, see note 19.
(iii) Financial assets at amortised cost
Trade receivables, loans, and other receivables that have fixed or
determinable payments of principle and interest amounts and are not
quoted in an active market are classified as ‘Financial assets at amortised
cost’. These receivables include the reimbursements of certain contingent
payments in respect to milestone, loan, 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.
Income is recognised on an effective interest basis for debt instruments
other than those financial assets classified as being at FVTPL.
For trade receivables and contract assets, the Group applies a simplified
approach in calculating expected credit loss. Therefore, the Group does
not track changes in credit risk, but instead recognises a loss allowance
based on lifetime expected credit losses at each reporting date. The Group
has established a provision matrix that is based on its historical credit loss
experience, adjusted for forward-looking factors specific to the debtors
and the economic environment.
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2. Significant accounting policies continued
Financial liabilities
Financial liabilities are classified in two categories: financial liabilities
‘at FVTPL’ or ‘Loans and Borrowings’. 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 research and development; and commercialisation milestones.
Those payments are recognised as financial liabilities once received
– contingent consideration arising from the Columbus business
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
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.
(ii) Loans and borrowings
Other financial liabilities, including borrowings, are initially measured at fair
value, net of transaction costs.
Other financial liabilities are subsequently measured at amortised cost
using the effective interest method, with interest expense recognised
on an effective interest method.
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.
A financial liability is derecognised when the obligation under the liability
is discharged or cancelled or expires. When an existing financial liability
is replaced by another from the same lender on substantially different
terms, or the terms of an existing liability are substantially modified,
such an exchange or modification is treated as the derecognition of
the original liability and the recognition of a new liability. The difference
in the respective carrying amounts is recognised in the consolidated
income statement.
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.
Restructuring provisions
Restructuring provisions are recognised only when the Group has
a constructive obligation, which is when:
(i) There is a detailed formal plan that identifies the business or part of the
business concerned, the location and number of employees affected,
the detailed estimate of the associated costs, and the timeline; and
(ii) The employees affected have been notified of the plan’s main features.
Decommissioning provisions
The Group records a provision for decommissioning costs of a
manufacturing facility. Decommissioning costs are provided for at the
present value of expected costs to settle the obligation using estimated
cash flows and are recognised as part of the cost of the relevant asset.
The cash flows are discounted at a current pre-tax rate that reflects
the risks specific to the decommissioning liability. The unwinding of the
discount is expensed as incurred and recognised in the consolidated
income statement as a finance expense. The estimated future costs of
decommissioning are reviewed annually and adjusted as appropriate.
Changes in the estimated future costs, or in the discount rate applied,
are added to or deducted from the cost of the asset.
Onerous contracts
The present obligation under the onerous contract is recognised and
measured as a provision. However, before a separate provision for an
onerous contract is established, the Group recognises any impairment
loss that has occurred on assets dedicated to that contract. An onerous
contract is a contract under which the unavoidable costs of meeting the
obligations under the contract exceed the economic benefits expected
to be received under it. The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is the lower of the cost of
fulfilling it and any compensation or penalties arising from failure to fulfil it.
Own shares
The Group provide finance to the trustee of the Employee Benefit
Trust (EBT) which is Link Trustees (Jersey) Limited. Own shares are
deducted from equity. These shares are held to be used to satisfy
long-term commitments arising from the employee share plan
operated by the Company.
Cash dividend
The Company recognises a liability to pay a dividend when the distribution
is authorised and the distribution is no longer at the discretion of
the Company. In accordance with the laws of the United Kingdom,
a final dividend is binding on the Company when it is approved by the
shareholders and an interim dividend obtains this status when it is
approved by the Board of Directors.
Equity instruments
Equity instruments issued by the Group are recorded at the proceeds
received, net of direct issue costs.
Hikma Pharmaceuticals PLC | Annual Report 2018
129
129
Financial statements
Notes to the consolidated financial statements continued
3. Critical accounting judgements and
key sources of estimation uncertainty
In the application of the Group’s accounting policies, which are described
in note 2, the Directors are required to make judgements and estimates
about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates are based on historical
experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates 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 (notes 4 and 5)
The Group’s revenue recognition policies require Directors to make
estimates of the net selling price, which is made complicated due to
chargebacks, product returns, rebates and price adjustments. These
significant estimates vary by product arrangements and buying groups.
We have not included sensitivity disclosures with respect to these given
the commercially sensitive nature of this information. Refer to note 2
for more detail on each of the underlying estimates.
Goodwill (note 16)
The critical areas of estimates in relation to the valuation of goodwill 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 and estimates:
– evaluation of current and future market conditions, market size, market
share, and competition
– estimating 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
– estimating 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
– estimating appropriate terminal growth rate beyond the forecast period
Acquired intangible assets (note 16)
When testing for impairment, the following judgements and estimates
are made:
– judgement around determining whether a ‘triggering event’ has occurred
for intangible assets. In such cases we first assess the qualitative factors
to determine whether it is more likely than not that the fair value of the
intangible asset is less than its carrying amount as a basis for
determining whether it is necessary to perform a quantitative
impairment test
– for pipeline products, establishing the launch date and probability
of a successful product approval are critical judgements
– estimating revenue forecasts (including market size, estimated
expected market share, number of competitors and net selling prices)
– estimating the future product profitability
– estimating a discount rate and specific risk premiums
– estimating appropriate terminal growth rate beyond the forecast period
For previously impaired assets, an assessment is made at each reporting
date to determine whether there is an indication that previously recognised
impairment losses no longer exist or have decreased, see note 2.
Taxation (notes 12 and 13)
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 consolidated 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 $219 million (2017: $278 million), of which
$125 million (2017: $135 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.
130
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Hikma Pharmaceuticals PLC | Annual Report 2018
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.
Valuation risk
As part of a reorganisation following the Columbus business acquisition
in 2016, 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 consolidated balance sheet date, the Group held an aggregate
provision in the sum of $57 million in respect of liabilities likely to arise
from the above estimation uncertainties. Hikma released $20 million in
2018 mainly due to the statute of limitations but this was offset by new
provisions of $13 million booked in 2018. In 2019, up to $9 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 US 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, see note 37.
3. Critical accounting judgements and
key sources of estimation uncertainty continued
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 has beneficially
impacted 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. This risk is reviewed periodically through the
year. 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 Organisation for Economic Co-operation and Development
(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.
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.
Tax audit risk
In common with most international organisations, the Group is 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.
Hikma Pharmaceuticals PLC | Annual Report 2018
131
131
Financial statements
Notes to the consolidated financial statements continued
4. Revenue from contracts with customers
Business and geographical markets:
The following table provides an analysis of the Group’s sales by segment and geographical market, irrespective of the origin of the goods/services:
Year ended 31 December 2018
United States
Middle East and North Africa
Europe and rest of the world
United Kingdom
Year ended 31 December 2017
United States
Middle East and North Africa
Europe and rest of the world
United Kingdom
The top selling markets in 2018 are as below:
United States
Saudi Arabia
Egypt
Branded
$m
–
Injectables
$m
601
Generics
$m
692
531
11
–
542
Branded
$m
–
523
13
–
536
120
100
5
826
Injectables
$m
586
102
86
2
776
–
–
–
692
Generics
$m
615
–
–
–
615
Others
$m
–
5
5
–
10
Others
$m
–
5
4
–
9
2018
$m
1,293
170
97
1,560
Total
$m
1,293
656
116
5
2,070
Total
$m
1,201
630
103
2
1,936
2017
$m
1,201
157
75
1,433
Included in revenue arising in the Generics and Injectables segments is revenue of approximately $309 million (2017: $301 million) which arose from the
Group’s largest customer which is located in the US.
Contract balances:
Trade receivables (note 21)
Contract liabilities (note 28)
2018
$m
654
151
2017
$m
650
127
Trade receivables are non-interest bearing. Typical credit terms in the US range from 30 to 90 days, in Europe from 30 to 120 days, and in MENA from
180 to 360 days.
Contract liabilities mainly relate to returns provisions and free goods balances. The movement in the year is mainly due to the increase in contract liability
offset by the settlement of free goods liability of $28 million against a customer account receivable balance.
There was nominal amount of revenue recognised in the year in relation to the contract liability balance recognised at the beginning of the year.
132
132
Hikma Pharmaceuticals PLC | Annual Report 2018
5. Business 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.
Core 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
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
Generics
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
Branded
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
Others
Revenue
Cost of sales
Gross profit
Total operating expenses
Segment result
2018
Exceptional
items and other
adjustments
(note 6)
$m
(6)
–
(6)
(24)
(30)
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
(16)
(16)
(37)
(53)
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
–
–
(6)
(6)
2018
Core
results
$m
832
(329)
503
(168)
335
2018
Core
results
$m
692
(397)
295
(202)
93
2018
Core
results
$m
542
(271)
271
(154)
117
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
2018
Core
results
$m
10
(7)
3
(8)
(5)
–
–
–
–
2018
Reported
results
$m
826
(329)
497
(192)
305
2018
Reported
results
$m
692
(413)
279
(239)
40
2018
Reported
results
$m
542
(271)
271
(160)
111
2018
Reported
results
$m
10
(7)
3
(8)
(5)
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
–
–
(22)
(22)
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
(6)
(6)
(1,098)
(1,104)
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
–
–
(7)
(7)
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
–
–
–
–
2017
Core
results
$m
776
(296)
480
(165)
315
2017
Core
results
$m
615
(390)
225
(203)
22
2017
Core
results
$m
536
(271)
265
(151)
114
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)
‘Others’ mainly comprises 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).
Hikma Pharmaceuticals PLC | Annual Report 2018
133
133
Financial statements
Notes to the consolidated financial statements continued
5. Business segments continued
Group
Segment result
Unallocated expenses
Operating profit/(loss)
Finance income
Finance expense
Loss from investment at fair value
Profit/(loss) before tax
Tax
Profit/(loss) for the year
Attributable to:
Non-controlling interests
Equity holders of the parent
2018
Exceptional
items and other
adjustments
(note 6)
$m
(89)
2018
Core
results
$m
540
2018
Reported
results
$m
451
2017
Exceptional items
and other
adjustments
(note 6)
$m
(1,133)
2017
Core
results
$m
447
(80)
460
3
(54)
(1)
408
(73)
335
3
332
335
–
(89)
–
(26)
–
(115)
65
(50)
–
(50)
(50)
(80)
371
3
(80)
(1)
293
(8)
285
3
282
285
(61)
386
2
(60)
–
328
(72)
256
4
252
256
–
(1,133)
93
(26)
–
(1,066)
(29)
(1,095)
–
(1,095)
(1,095)
2017
Reported
results
$m
(686)
(61)
(747)
95
(86)
–
(738)
(101)
(839)
4
(843)
(839)
Unallocated corporate expenses mainly comprise employee costs, third-party professional fees, IT costs, travel expenses, rent expenses and donations.
6. Exceptional items and other adjustments
Exceptional items and other adjustments are disclosed separately in the consolidated income statement to assist in understanding the Group’s
core performance.
Exceptional items
Research and development cost
Contingent consideration gain
Acquisition, integration and other costs
Impairment of the Columbus business goodwill
Impairment of product-related intangible assets, software, property, plant and equipment and others
2018
$m
(29)
–
(30)
–
–
2017
$m
–
29
(26)
(407)
(681)
Exceptional items included in operating profit/(loss)
(59)
(1,085)
Tax benefit associated with prior year impairment loss for which a tax benefit is recognised
Prior year favourable US tax ruling
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
43
13
–
(3)
(30)
(26)
(59)
9
(50)
–
–
(49)
(1,134)
(48)
67
(1,115)
20
(1,095)
134
134
Hikma Pharmaceuticals PLC | Annual Report 2018
6. Exceptional items and other adjustments continued
In reference to the exceptional items and other adjustments policy in note 2, the details are presented below:
Exceptional items
– During 2018, Hikma incurred $29 million of research and development costs related to a repeat clinical endpoint study for generic Advair Diskus®.
In 2017, Hikma recognised a $29 million contingent consideration gain from Boehringer Ingelheim as compensation for failure to receive FDA approval
of generic Advair Diskus® before 24 December 2017. To obtain approval, the FDA requires the completion of an additional clinical endpoint study.
Both the compensation and the repeat clinical study cost have been treated as exceptional items.
– Integration and other costs were incurred in relation to the restructuring of the Columbus manufacturing facility and the closure of the Eatontown
manufacturing facility, in addition to the consolidation of the distribution centre in the US, of which $6 million is included in revenue, $16 million is
included in cost of sales, $2 million in sales and marketing, $1 million in general and administrative and $5 million in other operating expenses.
– Tax benefit associated with prior year impairment loss recognised in 2018 (note 12).
– The prior year favourable US tax ruling relates to the benefit associated with a change in the tax reporting for chargebacks in the US.
In previous periods, exceptional items and other adjustments were related to the following:
– acquisition, integration and other costs were incurred in relation to the acquisition of the Columbus business and disposal the Eatontown plant and
were included in the cost of sales, general and administrative expenses, sales and marketing expenses, research and development expenses and
other operating expenses (notes 9 and 17)
– impairment of the Columbus business goodwill related to the unfavourable industry developments in the US generics industry in the second half
of 2017 and was included in other operating expenses (note 16)
– impairment of product related intangible assets, property, plant and equipment and others, related to the impairment of assets of the Columbus
business, including product rights, in process R&D, software and property, plant and equipment, and was included in other operating expenses
(notes 16 and 17). In addition, impairment of other product-related intangible assets of $4 million which was included in research and development
expenses (note 16)
– contingent consideration gain represents compensation received from Boehringer Ingelheim for failure to receive FDA approval of generic Advair
Diskus® before 24 December 2017 (notes 9 and 24)
– 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 effective from 1st January 2018 (note 12)
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 receivables in respect of the Columbus business acquisition and the financial liability in relation
to the co-development earnout payment agreement in respect of certain generic injectable products that were acquired from Boeringher Ingelheim
(notes 19, 24, 28 and 32). The remeasurement is included in finance expense/income.
7. Audit remuneration
The Group auditor’s remuneration on a worldwide basis is as below:
Audit of the Company’s annual accounts
Audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
Assurance services¹
Total audit and assurance fees
1. Assurance services relate to review procedures in respect to the interim financial information
2. Amounts have been restated for audit fees related to statutory accounts
2018
$m
0.6
1.8
2.4
0.2
2.6
2017²
$m
0.9
1.7
2.6
0.2
2.8
Nominal non-audit fees were charged in both years for subscriptions to a technical accounting portal, for general training and for services required to
be performed by the incumbent in Ireland.
A description of the work of the Audit Committee is set out in the Audit Committee report on pages 73 to 76 and includes an explanation of how auditor
objectivity and independence is safeguarded when non-audit services are provided by the auditor.
Hikma Pharmaceuticals PLC | Annual Report 2018
135
135
Financial statements
Notes to the consolidated financial statements continued
8. Staff costs
The average monthly number of employees (including Executive Directors) is:
2018
Number
4,634
2,246
1,158
375
8,413
2018
$m
346
32
13
18
21
20
38
18
2017
Number
5,017
2,123
1,047
334
8,521
2017
$m
321
30
16
10
22
19
39
28
506
485
2018
Exceptional
Items and other
adjustments
(note 6)
$m
–
2
3
–
5
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
–
–
–
2018
Core
results
$m
62
8
–
5
75
2018
Core
results
$m
–
–
7
7
2018
Reported
results
$m
62
10
3
5
80
2018
Reported
results
$m
–
–
7
7
2017
Exceptional
Items and other
adjustments
(note 6)
$m
–
1,101
–
–
2017
Reported
results
$m
58
1,101
3
–
1,101
1,162
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
–
29
29
2017
Reported
results
$m
1
4
39
44
2017
Core
results
$m
58
–
3
–
61
2017
Core
results
$m
1
4
10
15
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
9. Other operating expense/income
Other operating expense
Inventory related provisions
Impairment loss
Loss from disposal of property, plant and equipment
Forex losses (net)
Other operating income
Gain from disposal of property, plant and equipment
Forex gain (net)
Others
136
136
Hikma Pharmaceuticals PLC | Annual Report 2018
10. Finance income
Interest income
Remeasurement of contingent consideration, financial
liability and asset
11. Finance expense
Interest on bank overdrafts and loans
Interest on Eurobond
Remeasurement of contingent consideration,
financial liability
Other bank charges
Net foreign exchange loss
12. Tax
Current tax:
Domestic tax
Foreign tax
Deferred tax (note 13)
Current year
Adjustment to prior year
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
2018
Reported
results
$m
3
–
–
–
3
2018
Exceptional
items and other
adjustments
(note 6)
$m
–
–
26
–
–
26
2018
Reported
results
$m
19
22
26
13
–
80
2018
Core
results
$m
3
–
3
2018
Core
results
$m
19
22
–
13
–
54
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
93
93
2017
Exceptional
items and other
adjustments
(note 6)
$m
–
–
26
–
–
26
2017
Core
results
$m
2
–
2
2017
Core
results
$m
29
22
–
8
1
60
2018
Exceptional
items and other
adjustments
(note 6)
$m
2018
Core
results
$m
2018
Reported
results
$m
2017
Exceptional
items and other
adjustments
(note 6)
$m
2017
Core
results
$m
1
36
39
(3)
73
–
(9)
(43)
(13)
(65)
1
27
(4)
(16)
8
2
48
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
2
28
71
–
101
UK corporation tax is calculated at 19.00% (2017: 19.25%) of the estimated assessable profit made in the UK for the year.
The Group incurred a tax expense of $8 million (2017: $101 million). The effective tax charge rate is 2.7%, (2017: credit 13.7%). The reported effective
tax rate is lower than the statutory rate mainly due to the tax benefit associated with the impairment loss incurred in the prior year, for which a current
year deferred tax benefit is being recognised.
Taxation for all jurisdictions is calculated at the rates prevailing in the respective jurisdiction.
Hikma Pharmaceuticals PLC | Annual Report 2018
137
137
Financial statements
Notes to the consolidated financial statements continued
12. Tax continued
The charge for the year can be reconciled to profit/(loss) before tax per the consolidated income statement as follows:
Profit/(loss) before tax
Tax at the UK corporation tax rate of 19.00% (2017: 19.25%)
Profits taxed at different rates
Permanent differences
– Non-taxable income
– Non-deductible expenditure
– 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
– Prior year favourable US tax ruling
– Tax benefit associated with losses incurred in a prior year for which a current benefit is recognised
– Tax rate changes (US tax reform)
– Other deductible temporary differences for which no benefit is recognised
Change in provision for uncertain tax positions
Unremitted earnings
Prior year adjustments
Tax expense for the year
2018
$m
293
56
14
(14)
2
1
–
–
4
8
(13)
(43)
–
(3)
(2)
4
(6)
8
2017
$m
(738)
(142)
13
(13)
6
(7)
(7)
78
(4)
119
–
–
49
–
7
2
–
101
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 for which 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. 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 2018 and primarily relates to a transfer pricing adjustment. 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.
The prior year favourable US tax ruling relates to the benefit associated with a change in tax reporting for chargebacks in the US.
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 consolidated financial statements.
US tax reform
In 2017, the impact of the US Tax Cuts and Jobs Act of 2017 was 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 (note 6).
US deferred tax assets recognition
In 2017, management did not recognise a tax benefit associated with the impairment of certain assets of the Columbus business on the basis that there
were insufficient forecasted taxable profits in the foreseeable future. In 2018, as a result of positive changes to the US business model due to internal
reorganisation which increased the US taxable profit principally in relation to our Injectables business, management determined that it is now more likely
than not that such tax benefit is realisable from forecasted taxable profits in the foreseeable future.
138
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Hikma Pharmaceuticals PLC | Annual Report 2018
12. Tax continued
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
In line with the UK requirement for large UK businesses to publish their tax strategy. Hikma’s tax strategy has been made available on the Group’s website.
13. Deferred tax
Certain deferred tax assets and liabilities have been appropriately offset. The following is the analysis of the deferred tax balances (after offset) for
financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
As at 31 December
2018
$m
(16)
125
109
2017
$m
(49)
135
86
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 2017
Credit/(charge) to income
At 1 January 2018 as previously reported
Impact of IFRS 9 and 15
At 1 January 2018 as adjusted
Credit/(charge) to income
At 31 December 2018
Deferred R&D
costs
$m
1
Other short-term
temporary
differences¹
$m
202
Tax losses
$m
6
Amortisable
assets
$m
(23)
Fixed assets
$m
(29)
Share-based
payments
$m
–
(3)
3
–
3
–
3
–
1
–
1
–
1
(71)
131
2
133
(16)
117
7
(16)
–
(16)
5
(11)
(4)
(33)
–
(33)
31
(2)
–
–
–
–
1
1
Total
$m
157
(71)
86
2
88
21
109
1. The other deferred taxes on short-term temporary differences primarily relate to charge backs and product returns in the US of $49 million (2017: $76 million), tax benefit in respect of US impairment of
$39 million (2017: $nil) and unrealised intercompany profits of $15 million (2017: $17 million)
No deferred tax asset has been recognised on temporary differences totalling $536 million (2017: $770 million) due to the unpredictability of the related
future profit streams. $527 million (2017: $578 million) of these temporary differences relate to losses on which no deferred tax is recognised. None of
these losses are expected to expire.
A deferred tax liability has been recognised on temporary differences relating to the unremitted earnings of overseas subsidiaries of $8 million
(2017: $4 million). No deferred tax liability has been recognised on the remaining unremitted earnings of $187 million (2017: $278 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.
Hikma Pharmaceuticals PLC | Annual Report 2018
139
139
Financial statements
Notes to the consolidated financial statements continued
14. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2017 of 23.0 cents (2016: 22.0 cents) per share
Interim dividend for the year ended 31 December 2018 of 12.0 cents (2017: 11.0 cents) per share
2018
$m
55
29
84
2017
$m
53
26
79
The proposed final dividend for the year ended 31 December 2018 is 26.0 cents (2017: 23.0 cents).
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 17 May 2019 and has not been included as a liability
in these consolidated financial statements. Based on the number of shares in issue at 31 December 2018 (241,455,394), the unrecognised liability is
$63 million.
15. Earnings/(loss) per share
Basic 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. Diluted EPS is calculated by dividing the profit attributable to ordinary equity holders by the weighted average number of the Ordinary Shares
outstanding during the year plus the weighted average number of Ordinary Shares that would be issued on conversion of all dilutive potential Ordinary
Shares into 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
2018
Exceptional
items and other
adjustments
(note 6)
$m
2018
Core
results
$m
2018
Reported
results
$m
2017
Exceptional items
and other
adjustments
(note 6)
$m
2017
Core
results
$m
2017
Reported
results
$m
332
(50)
282
252
(1,095)
(843)
Number of shares
Weighted average number of Ordinary Shares for the purposes of basic earnings per share
Effect of dilutive potential Ordinary Shares:
Share-based awards
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share
Basic
Diluted
2018
Number
m
241
1
242
2017
Number
m
240
1
241
2018
Core
earnings per
share
Cents
137.8
2018
Reported
earnings per
share
Cents
117.0
2017
Core
earnings per
share
Cents
105.0
2017
Reported
earnings per
share
Cents
(351.3)
137.2
116.5
104.6
(349.8)
140
140
Hikma Pharmaceuticals PLC | Annual Report 2018
16. Goodwill and other intangible assets
The changes in the carrying value of goodwill and other intangible assets for the years ended 31 December 2018 and 31 December 2017 are as follows:
Cost
Balance at 1 January 2017
Additions
Translation adjustments
Balance at 1 January 2018
Additions
Acquisition of subsidiaries (note 43)
Translation adjustments
Balance at 31 December 2018
Amortisation
Balance at 1 January 2017
Charge for the year
Impairment (note 6)
Translation adjustments
Balance at 1 January 2018
Charge for the year
Impairment
Translation adjustments
Balance at 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Goodwill
$m
Product-related
intangibles
$m
Software
$m
Other identified
intangibles
$m
Total
$m
683
1,006
–
7
7
2
690
1,015
–
–
(3)
–
1
(1)
687
1,015
(1)
–
(407)
–
(408)
–
–
–
(87)
(41)
(505)
–
(633)
(22)
(4)
1
(408)
(658)
279
282
357
382
87
31
–
118
12
–
–
130
(28)
(11)
(12)
–
(51)
(10)
(5)
–
(66)
64
67
106
1,882
1
4
111
21
–
(2)
39
13
1,934
33
1
(6)
130
1,962
(47)
(7)
–
(3)
(57)
(8)
–
1
(64)
66
54
(163)
(59)
(924)
(3)
(1,149)
(40)
(9)
2
(1,196)
766
785
Amortisation of all intangible assets with finite useful lives is charged on a straight-line basis in which $1 million is included in the cost of sales, $30 million
in sales and marketing expenses and $9 million in general and administrative expenses.
In 2018, the Group recorded a total intangible impairment charge of $9 million, of which $5 million related to software and $4 million to product related
intangibles. $7 million of the impairment charge is included within other operating expenses (note 9).
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 the Columbus business.
As a result of this impairment the Generics business goodwill was written off to $nil.
Goodwill
Goodwill acquired in a business combination is allocated at acquisition to the CGUs that are expected to benefit from that business combination.
The carrying amount of goodwill has been allocated as follows:
Branded
Injectables
Total
As at 31 December
2017
$m
169
2018
$m
166
113
279
113
282
Hikma Pharmaceuticals PLC | Annual Report 2018
141
141
Financial statements
Notes to the consolidated financial statements continued
16. 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 to sell 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
Terminal
growth rate (perpetuity)
2%
Pre-tax
discount rate
16.3%
Post-tax
discount rate
14.1%
2%
13.1%
11.1%
CGUs: The Group also performed its annual goodwill impairment test on a quantitative basis for the Branded and Injectables CGUs. The Group
conducted a sensitivity analysis on the impairment of each CGU’s carrying value. Although the Directors have concluded sufficient headroom¹ exists
for all of the CGUs, there is a possibility that changes to the key assumptions could result in impairment. The Group has performed sensitivity analysis
on the key assumptions affecting the valuation of the Branded and Injectables CGUs and has determined that sufficient headroom exists. Specifically,
an evaluation of the valuation of the CGUs 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 region, the Group does not consider that the
likelihood of impairment losses in the long term has increased.
1. Headroom is defined as the excess of the higher of fair value less costs to sell and value in use, compared to the carrying value of a CGU
Other intangible assets
Other intangible assets with a net book value of $487 million at 31 December 2018 (2017: $503 million) consists of in-process research and development
(IPR&D) of $236 million (2017: $223 million), product rights of $125 million (2017: $159 million) and other intangible assets of $126 million (2017: $121 million).
IPR&D: As of 31 December 2018, the Group performed its annual review of IPR&D. The result of this testing is an impairment charge of $4 million.
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 recoverable amount of identifiable intangible assets include all assumptions associated with forecasting product profitability. As at
31 December 2018, management did not identify any impairment indicators.
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.
In 2018, the Group recorded an impairment charge of $5 million related to software.
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.
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: 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 vary from two to ten years.
As at 31 December 2018, the Group had entered into definitive contractual commitments for the acquisition of intangible assets of $4 million
(2017: $5 million).
142
142
Hikma Pharmaceuticals PLC | Annual Report 2018
17. Property, plant and equipment
Cost
Balance at 1 January 2017
Additions
Adjustments to opening balance
Disposals
Transfers
Translation adjustment
Balance at 1 January 2018
Additions
Acquisition of subsidiaries (note 43)
Disposals
Transfers
Translation adjustment
Balance at 31 December 2018
Accumulated depreciation
Balance at 1 January 2017
Charge for the year
Adjustments to opening balance
Disposals
Impairment (note 6)
Translation adjustment
Balance at 1 January 2018
Charge for the year
Disposals
Impairment (note 6)
Translation adjustment
Balance at 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Land is not subject to depreciation.
Land and
buildings
$m
Machinery and
equipment
$m
Vehicles,
fixtures and
equipment
$m
Projects under
construction
$m
530
2
2
(1)
52
7
592
8
7
(33)
6
(6)
574
(84)
(21)
(2)
–
(86)
(3)
(196)
(19)
19
–
2
539
7
1
(4)
64
12
619
15
5
(22)
18
(8)
627
(242)
(45)
(1)
1
(84)
(8)
(379)
(38)
23
(3)
5
98
8
1
(2)
7
2
114
6
–
(4)
2
(1)
117
(57)
(11)
(1)
2
(5)
(1)
(73)
(12)
4
–
1
192
95
–
(2)
(123)
2
164
100
–
(3)
(26)
(4)
231
(7)
–
–
–
(6)
–
(13)
–
–
–
–
(194)
(392)
(80)
(13)
380
396
235
240
37
41
218
151
Total
$m
1,359
112
4
(9)
–
23
1,489
129
12
(62)
–
(19)
1,549
(390)
(77)
(4)
3
(181)
(12)
(661)
(69)
46
(3)
8
(679)
870
828
A depreciation amount of $55 million is included within the cost of sales, $2 million in sales and marketing expenses, $7 million in general and
administrative expenses and $5 million in research and development expenses.
In 2018, the Group reported an impairment charge of $3 million, of which $2 million related to the closure of Eatontown (note 6).
The net book value of the Group’s property, plant and equipment includes an amount of $2 million (2017: $6 million) in respect of assets held under
finance lease.
As at 31 December 2018, the Group had pledged property, plant and equipment with a carrying value of $8 million (2017: $11 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 and Tunisia (2017: Germany, Tunisia and Egypt).
As at 31 December 2018, the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to
$27 million (2017: $12 million).
Hikma Pharmaceuticals PLC | Annual Report 2018
143
143
Financial statements
Notes to the consolidated financial statements continued
18. Investments in associates and joint ventures
The Group’s share in Hubei Haosun Pharmaceutical Co Ltd (China) is 49.0% at 31 December 2018 (31 December 2017: 30.1%) with an investment balance
of $8 million at 31 December 2018 (31 December 2017: $3 million),
The Group’s share of the results of Hubei Haosun Pharmaceutical Co Ltd (China) is $nil (2017: loss of $1 million).
Balance at 1 January
Additions
Share of loss
Reclassification
Balance at 31 December
For the year ended 31 December 2018
For the year ended 31 December 2017
Joint
ventures
$m
3
Associates
$m
3
–
–
8
11
5
–
(8)
–
Total
$m
6
5
–
–
11
Joint
ventures
$m
3
–
–
–
3
Associates
$m
4
–
(1)
–
3
Total
$m
7
–
(1)
–
6
On 13 February 2018, Hikma acquired an additional stake in Hubei Haosun Pharmaceuticals Co Ltd (China) bringing the total ownership to 49.0%
(2017:30.1%).
Summarised financial information in respect of the Group’s interests in joint ventures and associated companies is set out below:
Total assets
Total liabilities
Net assets
Group’s share of net assets of joint ventures/associate¹
Total revenue
Net profit/(loss)
Group’s share of loss of joint ventures/associate¹
1. This represents the Groups share of net assets/share of results of Hubei Haosun Pharmaceuticals Co Ltd
As at
31 December
2018
$m
17
As at
31 December
2017
$m
16
(2)
15
7
(7)
9
3
For the
year ended
31 December
2018
$m
6
For the
year ended
31 December
2017
$m
3
1
–
(1)
(1)
In 2017, Hikma and MIDROC have agreed not to proceed with the Hikmacure joint venture and to liquidate it. As part of the liquidation process the joint
venture granted two loans of $2 million each to the Group and MIDROC, the balance is currently outstanding and the liquidation is still in progress.
144
144
Hikma Pharmaceuticals PLC | Annual Report 2018
19. Financial and other non-current assets
Investments at FVTOCI (2017: available-for-sale investments)
Other non-current asset
As at 31 December
2017
$m
16
2018
$m
27
30
57
44
60
Investments at FVTOCI include investments in seven venture capital companies through the Group’s venture capital arm Hikma International Ventures
Developments LLC and Hikma Ventures Limited.
Other non-current assets mainly represent inventory expected not to be sold within one year.
20. Inventories
Finished goods
Work-in-progress
Raw and packing materials
Goods in transit
Spare parts
Inventories are stated net of provisions as follows:
Provisions against inventory
As at 31 December
2018
$m
135
83
253
32
25
528
2017
$m
135
63
234
33
23
488
As at
31 December
2017
$m
81
Additions
$m
62
Utilisation
$m
(71)
As at
31 December
2018
$m
72
Hikma Pharmaceuticals PLC | Annual Report 2018
145
145
Financial statements
Notes to the consolidated financial statements continued
21. Trade and other receivables
Trade receivables
Prepayments
VAT and sales tax recoverable
Employee advances
As at 31 December
2017
$m
650
2018
$m
654
57
17
3
731
41
13
3
707
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
As at
31 December
2017
$m
238
67
305
As at
31 December
2017 and
1 January 2018
(adjusted)
$m
238
Additions
/(releases), net
$m
1,861
IFRS 9 impact
$m
–
3
3
70
308
(11)
1,850
Translation
adjustments
$m
–
(1)
(1)
As at
31 December
2018
$m
236
56
292
Utilisation
$m
(1,863)
(2)
(1,865)
More details on the Group’s policy for credit and concentration risk are provided in note 31.
22. Collateralised and restricted cash
Collateralised and restricted cash amounted to $nil (2017: $4 million) and mainly represents restricted cash retained against short-term bank transactions
granted to the Group’s Sudanese, Algerian and Egyptian operations.
23. Cash and cash equivalents
Cash at banks and on hand
Time deposits
Money market deposits
As at 31 December
2017
$m
98
2018
$m
112
128
36
276
80
49
227
Cash and cash equivalents include highly liquid investments with maturities of three months or less which are convertible to known amounts of cash and
are subject to insignificant risk of changes in value.
146
146
Hikma Pharmaceuticals PLC | Annual Report 2018
24. Other current assets
Price adjustment receivable
Investment at FVTPL (2017: available-for-sale investments)
Others
As at 31 December
2017
$m
61
2018
$m
20
21
18
59
22
12
95
Price adjustment receivable represents the current portion of the contingent receivable in relation to the Columbus business acquisition, 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. During the year, the Group received $45 million reimbursement (2017: $3 million) in cash. The non-current portion of price adjustment receivable
is included within other non-current assets (note 19).
Investment at FVTPL 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 consolidated income statement. This asset is classified as level 1 as it uses quoted prices in active markets.
25. Bank overdrafts and loans
Bank overdrafts
Import and export financing
Short-term loans
Current portion of long-term loans (note 29)
The weighted average interest rates paid are 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.
26. Trade and other payables
Trade payables
Accrued expenses
Other payables
As at 31 December
2017
$m
10
2018
$m
–
58
7
9
74
2018
%
5.31
4.48
4.25
5.45
48
1
27
86
2017
%
4.55
3.65
4.25
4.58
As at 31 December
2017
$m
218
2018
$m
263
185
17
465
134
13
365
The fair value of payables are estimated to be equal to the carrying amount.
Other payables mainly comprise employees’ provident fund liability of $7 million (31 December 2017: $4 million), which mainly represents the outstanding
contributions to the Hikma Pharmaceuticals Ltd (Jordan) retirement benefit plan, on which the fund receives 3.5% interest.
Hikma Pharmaceuticals PLC | Annual Report 2018
147
147
Financial statements
Notes to the consolidated financial statements continued
27. 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 the end of service indemnity:
1 January
Additions
Utilisation
At 31 December
28. Other current liabilities
Contract liability¹
Co-development and earnout payment
Supply manufacturing agreement
Obligations under finance leases (note 30)
Indirect rebate and other allowances
Others
2018
$m
26
5
(8)
23
2017
$m
27
3
(4)
26
As at 31 December
2017
$m
127
2018
$m
151
2
18
1
65
26
3
9
1
67
31
263
238
1. The 2018 balance includes the IFRS 15 transition impact of $27 million (note 1)
Contract liability: The Group allows customers to return products within a specified period prior to and subsequent to the expiration date. In addition,
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.
Co-development and earn out payment agreement: The liability mainly relates to the present value of future payments on a co-development and earn
out 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 2018, the liability associated with these earn out payments was adjusted to reflect the present value of the expected future
cash outflows and the difference is presented as a finance expense. This balance represents the current portion of the liability and the non-current
portion is disclosed in note 32.
Supply manufacturing agreement: As part of the acquisition of the Columbus business, 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.
Indirect rebate and other allowances: represents rebates granted to healthcare authorities and other parties under contractual arrangements with
certain customers, see note 2.
148
148
Hikma Pharmaceuticals PLC | Annual Report 2018
29. Long-term financial debts
Long-term loans
Long-term borrowings (Eurobond)
Less: current portion of long term loans (note 25)
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
2017
$m
201
2018
$m
51
497
(9)
539
9
509
8
8
9
5
496
(27)
670
27
139
520
4
2
5
548
697
514
17
16
–
–
1
673
12
–
1
9
2
548
697
The loans are held at amortised cost.
Long-term loans amounting to $1 million (31 December 2017: $2 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 $497 million, and fair value of $496 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 Columbus business 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 $nil at 31
December 2018, (with a fair value of $nil) (2017: $112 million with a fair value of $112 million) and a $1,175 million unused available limit (2017: $1,063),
$1,000 million of the facility matures on 24 December 2021 and the remainder matures on 24 December 2019. The facility can be used for general
corporate purposes.
(c) 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 2018. 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 operation for general corporate purposes. The facility matures on 15 December 2027.
Hikma Pharmaceuticals PLC | Annual Report 2018
149
149
Financial statements
Notes to the consolidated financial statements continued
30. Obligations under finance leases
Amounts payable under finance leases:
Within one year¹
In the second to fifth years inclusive
Less: Interest lease charges
Present value of minimum lease payments payable
Minimum lease payments
2017
$m
2018
$m
2
24
26
(2)
24
2
21
23
(2)
21
Present value of minimum
lease payments
2017
$m
2018
$m
1
23
24
1
20
21
1. The current portion of the obligations under finance leases is included within other current liabilities (note 28)
It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is five years (2017: five years).
For the year ended 31 December 2018, the average effective borrowing rate was between 1.89% and 14.00% (2017: between 1.87% and 14.00%).
31. 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 consolidated balance sheet are net of allowances
for doubtful debts, chargebacks, and other allowances. A provision for impairment is made based on expected credit losses which are estimated based
on previous experience, current events and forecasts of future conditions.
The credit risk on liquid investments 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 2018, the Group’s largest two customers in the MENA region represented 5.3% of Group revenue, 3.5% from one
customer in Saudi Arabia, and 1.8% from a customer in Algeria. At 31 December 2018, the amount of receivables due from all customers based in Saudi
Arabia was $83 million (2017: $131 million), and in Algeria was $55 million (2017: $67 million).
During the year ended 31 December 2018, three key US wholesalers represented 40.0% of Group revenue (2017: 44.3%). The amount of receivables due
from all US customers at 31 December 2018 was $298 million (2017: $293 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 to 90 days, in Europe from 30 to 120 days, and in MENA from 180 to 360 days.
Where appropriate, the Group endeavours to minimise risk through the use of trade finance instruments such as letters of credit and insurance.
150
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Hikma Pharmaceuticals PLC | Annual Report 2018
31. Financial policies for risk management and their objectives continued
The following table provides a summary of the age of trade receivables (note 21):
At 31 December 2018
Total trade receivables as at 31 December 2018
Related allowance for doubtful debts
Chargebacks and other allowances
Net receivables
At 31 December 2017
Total trade receivables as at 31 December 2017
Related allowance for doubtful debts
Chargebacks and other allowances
Net receivables
Not past due on
the reporting
date
$m
739
less than 90
days
$m
102
Between 91 and
180 days
$m
21
Between 181 and
360 days
$m
21
(1)
738
–
102
(1)
20
(1)
20
Not past due on
the reporting
date
$m
750
less than 90
days
$m
82
Between 91 and
180 days
$m
22
Between 181 and
360 days
$m
24
(1)
749
–
82
(1)
21
(1)
23
Past due
Over
one year
$m
63
(53)
10
Past due
Over
one year
$m
77
(64)
13
Total
$m
946
(56)
890
(236)
654
Total
$m
955
(67)
888
(238)
650
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.
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 includes bank overdrafts and loans (note 25), obligations under finance leases (note 30),
long-term financial debts (note 29), net of cash and cash equivalents (note 23), and collateralised and restricted cash (note 22).
Hikma Pharmaceuticals PLC | Annual Report 2018
151
151
Financial statements
Notes to the consolidated financial statements continued
31. Financial policies for risk management and their objectives continued
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 costs, asset and liability management, and consolidated 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 2018, the Group’s gearing ratio (total debt/equity) was 38% (2017: 51%). The decrease in the Group’s gearing ratio is due to the repayment
of long-term debt during 2018.
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, Saudi riyal and Lebanese pound 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:
US dollar/Euro
US dollar/Sudanese pound
US dollar/Algerian dinar
US dollar/Saudi riyal
US dollar/Pound sterling
US dollar/Jordanian dinar
US dollar/Egyptian pound
US dollar/Japanese yen
US dollar/Moroccan dirham
US dollar/Tunisian dinar
US dollar/Lebanese pound
Period-end rates
2017
0.8319
2018
0.8719
47.6190
20.0000
118.3304
114.9402
3.7495
0.7839
0.7090
17.8571
3.7495
0.7379
0.7090
17.7936
2018
0.8442
32.6797
116.6424
3.7495
0.7464
0.7090
17.7936
109.5600
112.7800
110.2800
9.5655
2.9940
9.3574
2.4839
9.3836
2.6469
Average rates
2017
0.8848
16.9779
110.9802
3.7495
0.7755
0.7090
17.8891
112.1826
9.6800
2.4194
1,507.5000
1,507.5000
1,507.5000
1,507.5000
152
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Hikma Pharmaceuticals PLC | Annual Report 2018
31. Financial policies for risk management and their objectives continued
2018
Functional currency of entity:
– Jordanian dinar
– Euro
– Algerian dinar
– Saudi riyal
– Sudanese pound
– Egyptian pound
– Tunisian dinar
– Moroccan dirham
– Lebanese pound
– US dollar
1. Others include Saudi riyal, Jordanian dinar and Pound sterling
2017
Functional currency of entity:
– Jordanian dinar
– Euro
– Algerian dinar
– Saudi riyal
– Sudanese pound
– Egyptian pound
– Tunisian dinar
– Moroccan dirham
– Lebanese pound
– US dollar
1. Others include Saudi riyal and Jordanian dinar
US dollar
$m
Euro
$m
Net foreign currency financial assets/(liabilities)
Others¹
Japanese yen
$m
$m
Algerian dinar
$m
89
6
(6)
27
(27)
(42)
(1)
(3)
(2)
–
41
43
–
(1)
(1)
–
(1)
2
(6)
–
1
37
(21)
(3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(21)
(3)
9
–
–
–
–
–
–
–
(1)
2
10
US dollar
$m
Euro
$m
19
–
(6)
39
(10)
(35)
(2)
(1)
(3)
–
1
28
–
–
(3)
–
(1)
2
(5)
–
–
21
Net foreign currency financial assets/(liabilities)
Others¹
$m
Japanese yen
$m
Algerian dinar
$m
(11)
–
–
–
–
–
–
–
–
–
(11)
(1)
–
–
(4)
–
–
–
–
–
–
(5)
37
–
–
–
–
–
–
–
2
1
40
A sensitivity analysis based on a 10% movement in foreign exchange rates has no material impact on the Group results or the Group consolidated
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.
Hikma Pharmaceuticals PLC | Annual Report 2018
153
153
Financial statements
Notes to the consolidated financial statements continued
31. Financial policies for risk management and their objectives continued
Financial liabilities
Interest-bearing loans and borrowings
Financial assets
Cash and cash equivalents
Fixed rate
$m
As at 31 December 2018
Total
$m
Floating rate
$m
Fixed rate
$m
As at 31 December 2017
Total
$m
Floating rate
$m
521
–
116
164
637
515
262
164
–
129
777
129
An interest rate sensitivity analysis assumes an instantaneous 100 basis point change in interest rates in all currencies from their levels at 31 December
2018, with all other variables held constant. Based on the composition of the Group’s debt portfolio as at 31 December 2018, a 1% increase/decrease
in interest rates would not result in a material decrease/increase in finance cost being incurred per year (2017: $1 million increase/decrease).
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 their fair value 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 consolidated balance sheet date (note 29)
– 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
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 at FVTPL amounted to $21 million (note 24).
Financial assets and liabilities that fall under Level 3 are:
– Co-development and earnout payment liabilities (note 28)
– Contingent consideration asset and liability resulting from the acquisition of the Columbus business (notes 24,28 and 32)
– Investment at FVTOCI (note 19)
154
154
Hikma Pharmaceuticals PLC | Annual Report 2018
31. Financial policies for risk management and their objectives continued
The following table presents the changes in Level 3 items for the year ended 31 December 2018 and the year ended 31 December 2017:
Financial
assets
$m
39
Financial
liabilities
$m
258
29
(3)
2
67
16
83
(45)
–
4
7
49
–
(3)
(65)
190
–
190
(2)
26
–
–
214
Total
$m
276
654
(586)
(68)
(26)
(448)
(198)
Total
$m
227
650
(758)
(10)
(51)
(23)
(352)
(317)
Balance at 1 January 2017
Additions
Release
Remeasurement through income statement (note 6)
Balance at 31 December 2017 and 1 January 2018
Restatement on adoption of IFRS 9¹
Balance at 1 January 2018 (adjusted)
Received/settlement
Remeasurement through income statement (note 6)
Additions
Fair value adjustments recognised in equity
Balance at 31 December 2018
1. As per IFRS 9 available-for-sale investments stated at cost (under IAS 39 cost exemption) have been re-classified to investments at FVTOCI
Liquidity risk of assets/(liabilities)
Liquidity risk
2018
Cash and cash equivalents
Trade receivables
Interest-bearing loans and borrowings¹
Interest-bearing import and export loans¹
Interest bearing finance lease
Trade payables and accruals
2017
Cash and cash equivalents
Trade receivables
Interest-bearing loans and borrowings¹
Interest-bearing overdrafts¹
Interest-bearing import and export loans¹
Interest-bearing finance lease
Trade payables and accruals
Less than one
year
$m
276
One to five
years
$m
–
More than five
years
$m
–
654
(32)
(68)
(2)
(448)
380
–
(548)
–
(24)
–
(572)
–
(6)
–
–
–
(6)
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)
1. As these are interest bearing liabilities, expected interest expense have been included in the balance
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 2018, the Group had undrawn facilities of $1,724 million (2017: $1,534 million). Of these facilities, $1,391 million (2017: $1,256 million)
were committed and the remainder were uncommitted.
Hikma Pharmaceuticals PLC | Annual Report 2018
155
155
Financial statements
Notes to the consolidated financial statements continued
32. Other non-current liabilities
Contingent consideration
Contingent liability
Supply manufacturing agreement (note 28)
Co-development and earnout payment (note 28)
Others
As at 31 December
2017
$m
178
2018
$m
204
109
4
7
5
329
109
25
8
4
324
Contingent consideration and contingent liability represent a contractual liability to make payments to thirds parties in the form of milestone payments
that depend on the achievement of certain US FDA approval milestones; and royalty payments based on future sales of certain products that are
currently under development.
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
34. Non-controlling interests
At 1 January
Share of profit
Dividends paid
Currency translation loss
Acquisition of subsidiaries
At 31 December
Number
240,678,894
776,500
241,455,394
2018
$m
40
–
Number
239,954,532
724,362
40
240,678,894
2018
$m
14
3
(3)
(2)
–
12
2017
$m
40
–
40
2017
$m
15
4
(2)
(1)
(2)
14
156
156
Hikma Pharmaceuticals PLC | Annual Report 2018
35. Own shares
The Employee Benefit Trust (EBT) of Hikma holds 40,831 (2017: 40,831) Ordinary Shares in the Company. The trustee of the EBT is Link Trustees (Jersey)
Limited an independent trustee. The market value of the Ordinary Shares held in the EBT at 31 December 2018 was $0.9 million (2017: $0.6 million).
The book value of the retained own shares at 31 December 2018 are $0.6 million (2017: $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
Profit/(loss) before tax
Adjustments for:
Depreciation, amortisation, impairment, and write-down of:
Property, plant and equipment
Intangible assets
Loss from investment at fair value through profit or loss
Loss on disposal of property, plant and equipment
Movement on provisions
Cost of equity-settled employee share scheme
Finance income
Interest and bank charges
Foreign exchange loss/(gain)
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 from operations
37. Contingent liabilities
2018
$m
293
72
49
1
3
(3)
21
(3)
80
5
518
(41)
(5)
(51)
88
7
(23)
493
2017
$m
(738)
258
983
–
3
(1)
22
(95)
86
(4)
514
52
(28)
(31)
15
31
(7)
546
A contingent liability existed at the consolidated balance sheet date in respect of external guarantees and letters of credit totalling $53 million
(31 December 2017: $47 million), arising in the normal course of business. No provision for these liabilities has been made in these consolidated
financial statements.
In 2018, the Group received a civil investigative demand from the US Department of Justice requesting information related to products, pricing and
related communications. In 2017, the Group had received a subpoena from a US state attorney general and a subpoena from the US Department of
Justice. Hikma is still cooperating with all such demands, and management still does not believe that sufficient evidence exists at this point to make
any provision.
Hikma Pharmaceuticals PLC | Annual Report 2018
157
157
Financial statements
Notes to the consolidated financial statements continued
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 Group 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 100% of the shares received from elements B and C for a period
of five years from the date of grant. For EIP element B and C grants made in 2017 and before, Members of the Executive Committee must retain 50%
of these shares for a period of five years from the date of grant.
Year 2018
Beginning balance
2018 grants
7 June
–
2018 grants
16 May
–
2017 grants
11 May
608,376
2016 grants
11 May
149,579
2016 grants
17 March
448,875
2015 grants
15 May
47,000
2015 grants
10 April
114,430
Total
Number
1,368,260
Granted during the year
28,818
553,741
–
–
–
–
–
582,559
Exercised during the year
–
–
(60,330)
(119,464)
(236,472)
(47,000)
(90,406)
(553,672)
Outstanding at 31 December
28,818
553,741
548,046
Exercisable at 31 December
–
–
–
30,115
30,115
212,403
35,620
Weighted average
contractual useful life (years)
9.40
3.66
2.63
0.36
2.36
–
–
-
24,024
24,024
1,397,147
89,759
6.28
2.84
Year 2017
Beginning balance
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
Weighted average
contractual useful life (years)
2017 grants
11 May
–
613,269
–
(4,893)
2016 grants
11 May
165,553
–
(3,578)
(12,396)
2016 grants
17 March
448,875
–
–
–
2015 grants
15 May
118,000
–
2015 grants
10 April
338,808
Total
Number
1,071,236
–
613,269
(71,000)
(224,378)
(298,956)
–
–
(17,289)
608,376
149,579
448,875
47,000
114,430
1,368,260
–
–
–
–
17,386
17,386
4.10
2.49
2.49
1.07
1.32
3.06
The cost of the EIP of $13 million (2017: $16 million) has been recorded in the consolidated income statement as part of general and administrative,
and sales and marketing expenses.
The fair value per share is the face value of shares on the date of grant.
The weighted average share price for 2018 is $19.59 (2017: $20.03).
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
19.09082
19.09082
18.83410
33.11449
26.97918
26.97918
32.15333
23.97771
23.97771
19.09082
19.09082
18.83410
Number
granted
338,808
118,000
242,608
206,267
165,553
428,528
184,741
440,231
113,456
28,818
Date of
grants
10/04/2015
15/05/2015
17/03/2016
17/03/2016
11/05/2016
13/04/2017
13/04/2017
16/05/2018
16/05/2018
07/06/2018
EIP 1
EIP 2
EIP 3 B
EIP 3 C
EIP 4
EIP 5 B
EIP 5 C
EIP 6 B
EIP 6 C
EIP 7
The exercise price of the share award is $nil.
158
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Hikma Pharmaceuticals PLC | Annual Report 2018
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 Group satisfying awards under the MIP from newly issued shares. Under the MIP, the Group 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 2018
Outstanding at 1 January
Granted during the year
Exercised during the year
Expired during the year
2018 grants
16 May
Number
–
443,288
2017 grants
19 May
Number
259,099
2016 grants
11 May
Number
173,725
2015 grants
14 May
Number
10,563
2014 grants
11 June
Number
8,149
2013 grants
17 May
Number
4,787
–
–
(3,960)
(2,966)
(17,270)
(165,471)
(3,363)
–
–
–
–
–
–
–
–
–
–
Total
Number
456,323
443,288
(186,701)
(6,329)
Outstanding at 31 December
436,362
238,466
8,254
10,563
Weighted average remaining contractual life (years)
1.76
0.37
7.34
6.37
8,149
5.45
4,787
706,581
4.38
1.28
Year 2017
Outstanding at 1 January
Granted during the year
Exercised during the year
Expired during the year
Outstanding at 31 December
Weighted average remaining contractual life (years)
2017 grants
19 May
Number
–
273,724
–
2016 grants
11 May
Number
192,725
2015 grants
14 May
Number
132,442
2014 grants
11 June
Number
12,632
2013 grants
17 May
Number
9,973
Total
Number
347,772
–
–
–
–
–
273,724
(121,879)
(4,483)
(5,186)
(131,548)
(14,625)
(19,000)
–
259,099
173,725
10,563
1.38
0.36
7.37
–
8,149
6.45
–
(33,625)
4,787
456,323
5.30
1.27
The cost of the MIP of $8 million (2017: $6 million) has been recorded in the consolidated income statement as part of general and administrative, sales
and marketing, cost of sales, and research and development 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 2018 is $19.59 (2017: $20.03).
MIP 1
MIP 2
MIP 3
MIP 4
MIP 5
MIP 6
MIP 7
MIP 8
MIP 9
MIP 10
The exercise price of the share award is $nil.
Date of
grants
19/03/2009
Number
granted
340,000
28/03/2010
147,561
11/05/2011
356,894
18/05/2012
412,056
17/05/2013
252,482
11/06/2014
225,904
11/05/2015
11/05/2016
19/05/2017
145,918
196,373
273,724
16/05/2018
443,288
The estimated
fair value of
each share
option granted
$
4.89
The share price
at grant date
$
5.11
Expected
dividends
yield
%
1.47
9.15
12.96
9.47
14.61
27.73
32.17
31.73
22.09
18.45
9.36
13.23
9.72
14.93
28.33
32.63
32.20
22.54
19.09
1.15
1.00
1.29
1.10
0.71
0.71
0.73
1.01
1.71
Hikma Pharmaceuticals PLC | Annual Report 2018
159
159
Financial statements
Notes to the consolidated financial statements continued
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 a 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.
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%
Risk-free
interest rate
1.28%
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%
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.
Further details on the number of shares outstanding are as follows:
Year 2018
Outstanding at 1 January
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
Weighted average remaining contractual life (years)
2014
grants
11 June
Number
24,720
(4,347)
(903)
19,470
19,470
5.45
2013
grants
17 May
Number
26,630
–
–
26,630
26,630
4.38
2012
grant
16 March
Number
22,220
–
–
22,220
22,220
3.21
Total
Number
73,570
(4,347)
(903)
68,320
68,320
4.30
160
160
Hikma Pharmaceuticals PLC | Annual Report 2018
38. Share-based payments continued
Year 2017
Outstanding at 1 January
Exercised during the year
Expired during the year
Outstanding at 31 December
Exercisable at 31 December
Weighted average remaining contractual life (years)
2014
grants
3 December
Number
5,899
2014
2014
grants
grants
14 June
29 May
Number
Number
151,429 109,000
2013
2014
grants
grants
3 April 6 November
Number
5,180
Number
84,954
2013
grants
17 May
Number
31,985
(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
6.45
–
–
–
–
–
–
–
–
–
26,630
22,220
26,630
22,220
5.38
4.21
2007
grants
23 April
Number
13,000
Total
Number
423,667
(13,000)
(292,515)
–
–
–
–
(57,582)
73,570
73,570
5.39
No costs for LTIPs were recognised in the consolidated income statement (2017: $1 million credited to profit and loss).
The weighted average share price for 2018 is $19.95 (2017: $20.03).
39. Operating lease arrangements
Minimum lease payments under operating leases recognised in profit or loss for the year
2018
$m
13
2017
$m
9
At the consolidated 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
2018
$m
7
21
10
38
2017
$m
9
22
13
44
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.
Hikma Pharmaceuticals PLC | Annual Report 2018
161
161
Financial statements
Notes to the consolidated financial statements continued
40. Related parties
Transactions between 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 2018, the Group entered into the following transactions with related parties:
Boehringer Ingelheim (BI): is a related party of Hikma because BI owns 16.6% (2017: 16.6%) of the share capital of Hikma, controls 11.8% (2017: 11.8%) 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. The Group total sales to
BI amounted to $66.6 million (2017: $79.1 million) and the Group total purchases from BI amounted to $5.1 million (2017: $10.6 million). As at the year end,
the amount owed from BI to the Group was $18.1 million (2017: $43.8 million). Additionally, balances arising from the acquisition of the Columbus business
from BI relating to contingent consideration are disclosed in notes 24, 28 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 $7.5 million (2017: $11.8 million) and utilisation of facilities granted by Capital Bank to the Group
amounted to $nil (2017: $nil). The interest income is within the market range.
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 24.85% (2017: 24.93%) 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 (2017: $2.5 million). During 2017, Hikma
and MIDROC agreed not to proceed with and to liquidate the venture.
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 49.0% interest in the joint venture (JV) with
Haosun (2017: 30.1%). During 2018, total purchases from Haosun were $2.3 million (2017: $1.4 million). At 31 December 2018, the amount owed from
Haosun to the Group amounted to $0.2 million (2017: $1.6 million). During the year Hikma acquired an additional stake in Haosun bringing the total
ownership to 49.0% (note 18).
Labatec Pharma (Labatec): is a related party of the Group because Labatec is owned by the family of two directors of Hikma. During 2018, total
Group sales to Labatec amounted to $2.9 million (2017: $1.8 million). As at the year end, the amount owed by Labatec to the Group was $0.3 million
(2017: $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 81 to 104.
Short-term employee benefits
Share-based payments
Post-employment benefits
Other benefits
2018
$m
17.4
8.0
0.1
0.8
26.3
2017
$m
11.0
10.2
10.3
0.6
32.1
162
162
Hikma Pharmaceuticals PLC | Annual Report 2018
41. Subsidiaries, associate and joint venture
The subsidiaries, associate and joint venture of Hikma Pharmaceuticals PLC are as follows:
Hikma Specialised Pharmaceuticals (S.A.E)
Egypt
10 D, 11 D, Industrial Zone, Badr City, Cairo, Egypt
Hikmacure Pharmaceuticals Share Company
Ethiopia
Addis Ababa, Bole Sub City, Kebele 16, Woreda,
Ethiopia
Germany
Germany
Germany
Lochhamer Strasse 13, 82152, Martinsried,
Germany
Schiffgraben 23, DE-38690, Goslar, OT
Vienenburg, Deutchland
Schiffgraben 23, DE-38690, Goslar, OT
Vienenburg, Deutchland
Company’s name
Al Jazeera Pharmaceutical Industry S.A.R.L
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
Hubei Haosun Pharmaceutical Co Ltd
Hikma for Importation Co. LLC
Hikma Pharma S.A.E¹
Algeria
Algeria
China
Egypt
Egypt
Hikma Pharmaceuticals Industries S.A.E
Egypt
Hikma Pharma GmbH
Thymoorgan GmbH¹
Thymoorgan Pharmazie GmbH
Hikma Finance (Ireland) Limited
Hikma Italia S.p.A
Hikma Pharma Limited¹
Arab Medical Containers LLC¹
Arab Pharmaceutical Manufacturing PSC¹
Future Pharmaceutical Industries LLC
Hikma International Pharmaceuticals LLC
(Exempt)
Hikma International Ventures and Development
LLC (Exempt)
Hikma Investment LLC¹
Ireland
Italy
Jersey
Jordan
Jordan
Jordan
Jordan
Jordan
Jordan
Hikma Pharmaceuticals LLC¹
Jordan
Hikma United Renewable Energy
Jordan
Incorporated
in
Algeria
Address of the registered office
Zone d’Activité, Propriété N° 379 Section N° 04
Staoueli, Algeria
Ownership%
Ordinary
Owned by the Group Owned by PLC ‘the Company’
Ownership%
Ordinary
Shares
At 31
December
2017
–
Ownership%
Ordinary
Shares
At 31
December
2018
–
Ownership%
Ordinary
Shares
At 31
December
2018
99%
Shares
At 31
December
2017
99%
Algeria
Zone d’Activité 16/15 Staoueli, Algeria
97%
97%
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
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
Al Buhaira – Salt, P.O. Box 42, 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
100%
100%
49%
99%
100%
100%
30%
99%
100%
100%
100%
100%
98%
50%
98%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Hikma Pharmaceuticals PLC | Annual Report 2018
163
163
Financial statements
Notes to the consolidated financial statements continued
41. Subsidiaries, associate and joint venture continued
Company’s name
International Pharmaceutical Research Centre LLC
Sofia Travel and Tourism
Incorporated
in
Jordan
Jordan
Specialised for Pharmaceutical Industries LLC
Jordan
Hikma CIS JSC
Kazakhstan
Hikma Pharmaceuticals Co. Ltd., Almaty (Kazakhtan)
Representative Office
Kazakhstan
Address of the registered office
P.O. Box 963166, Amman, 11196, Jordan
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
Apt. 1, House 7, Building-28, ‘Keremet’
Microdistrict, Bostandykskiy District,
Almaty,A15C8X2, 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.) ¹
Morocco
Zone Industrielle du Sahel, Rue N. 7, Had
Soualem, Province de Settat, Morocco
Hikma International N.V
Hikma Pharma Benelux B.V
Eurohealth N.V
Netherlands
Luna Arena, Herikerberweg 238, 1101 CM,
Amersterdam Zuidoost, Netherlands
Netherlands
Nieuwe Steen 36, 1625 HV, Hoorn,
Netherlands
Netherlands
Antilles
Pareraweg 45, P.O. Box 4914, Curacao,
(Netherlands Antilles)
Hikma Farmaceutica, (Portugal) S.A
Lifotec Farmaceutica S.G.P.S S.A¹
Portugal
Portugal
Al Jazeerah Pharmaceutical Industries Ltd¹
Saudi Arabia
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
Riyadh Gallery, Olaya Street, P.O. Box 106229,
Riyadh-11666, Kingdom of Saudi Arabia
Hikma Slovakia s.r.o
Pharma Ixir Co. Ltd
Savannah Pharmaceutical Industries Co. Ltd
Sudan
Slovakia
Seberíniho 1, 821 03 Bratislava, Slovakia
Sudan
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
Ownership%
Ordinary
Owned by the Group Owned by PLC ‘the Company’
Ownership%
Ordinary
Shares
At 31
December
2017
–
Ownership%
Ordinary
Shares
At 31
December
Shares
At 31
December
Ownership%
Ordinary
Shares
At 31
December
2018
51%
2018
–
2017
51%
100%
100%
100%
100%
100%
100%
100%
100%
67%
67%
100%
94%
100%
94%
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
–
100%
100%
52.5%
52.5%
100%
51%
100%
51%
100%
100%
–
–
–
–
–
–
Eurohealth International S.A.R.L.
Switzerland
Rue des Battoirs 7, 1205 Genève, Switzerland
100%
100%
100%
100%
APM Tunisie S.A.R.L.
Tunisia
STE D’Industriee Pharmaceutique Ibn Al Baytar¹
Tunisia
STE Hikma Pharma Tunisie
STE Medicef
Tunisia
Tunisia
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
99%
99%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
–
164
164
Hikma Pharmaceuticals PLC | Annual Report 2018
41. Subsidiaries, associate and joint venture continued
Company’s name
Hikma Emerging Markets and Asia Pacific FZ-LLC
Hikma International Trading Limited
Hikma MENA Holdings Limited¹
Hikma (Maple) Limited
Hikma Acquisitions (UK) Limited¹
Hikma Holdings (UK) Limited¹
Hikma UK Limited¹
Hikma Ventures Limited¹
Hikmacure Limited¹
West-Ward Holdings Limited¹
Hikma Pharmaceuticals International Limited¹
Bedford Property Holdings, Inc.
United States
Eurohealth (U.S.A.) Inc¹
United States
Hikma Speciality USA, Inc.
United States
Hikma Labs Inc.
United States
West-Ward Columbus Inc.
United States
Hikma Injectables, Inc.
United States
Hikma Pharmaceuticals USA Inc.
United States
Incorporated
in
United Arab
Emirates
United Arab
Emirates
United Arab
Emirates
Address of the registered office
Premises 202-204, Floor 2, Building 26,
Dubai, United Arab Emirates
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
Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle, DE
19802, United States
Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle, DE
19802, United States
C T Corporation System, 800 S Gay
Street, Suite Knoxville TN 2021 37929-
9710, United States
Corporation Trust Company of Nevada
701 S Carson Street Suite 200, Carson
City, NV 89701, United States
Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle DE
19802, United States
Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle DE
19802, United States
Corporation Trust Center 1209 Orange
Street, Wilmington, New Castle DE
19802, United States
Owned by the Group
Ownership%
Ordinary
Shares
At 31
December
2018
100%
Ownership%
Ordinary
Shares
At 31
December
2017
100%
Owned by PLC ‘the
Company’
Ownership%
Ordinary
Shares
At 31
December
2017
100%
Ownership%
Ordinary
Shares
At 31
December
2018
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
–
100%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
100%
100%
100%
100%
50%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Hikma (HK) Limited
Hong Kong
4603-4609, 46/F Jardine HSE, One
Connaught Place, Central Hong Kong
Hikma Shefaa for Pharmaceuticals and Medical Supplies PSC Palestine
West Bank Al Birah, Ramallah
100%
100%
–
–
The investments in subsidiaries are all stated at cost in Hikma Pharmaceuticals PLC, 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 18).
The Group’s subsidiaries principally operate in trading pharmaceuticals products and associated goods and services. Companies marked (¹) were
incorporated as holding companies.
Hikma Pharmaceuticals PLC | Annual Report 2018
165
165
Financial statements
Notes to the consolidated financial statements continued
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, Hikma Pharmaceuticals USA Inc. 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 2018
were $0.4 million (2017: $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 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 2018 were $3 million (2017: $3 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 2018 were $0.9 million (2017: $1 million).
Hikma Pharmaceuticals USA Inc.: (401 (k) salary saving plan)
Hikma Pharmaceuticals USA Inc. 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 $18,500 (2017: $18,000), not including catch-up contributions available to eligible
employees as outlined by the Internal Revenue Service. The Company matches the employees’ eligible contribution dollar-for-dollar on the first 6% of
eligible pay contributed to the plan. Employer contributions vest 50% after two years of service and 100% after three years of service. Employees are
considered to have completed one year of service for the purposes of vesting upon the completion of 1,000 hours of service at any time during a plan
year. Employer contributions to the plan for the year ended 31 December 2018 were $3.5 million (2017: $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 Inc.: (401 (k) salary saving plan)
West-Ward Columbus Inc. 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 $18,500 (2017: $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 2018 were $7 million (2017: $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. Business combinations
Acquisition of Geber Health
On 12 March 2018, Hikma signed an asset purchase agreement with EURL Geber Health. The overall cash consideration for the tangible and intangible
assets amounted to $13 million.
This acquisition has been accounted for as per IFRS 3 ‘business combination’ where a set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return exists.
The assets acquired included an oral general formulation facility located in Algeria. Hikma has converted this facility into an oral cephalosporin facility in
order to locally manufacture its cephalosporin portfolio for the Algerian market.
The fair value of the assets acquired included property, plant and equipment of $12 million and intangible assets of $1 million.
There was insignificant goodwill as a result of this acquisition.
From the date of acquisition, Geber Health contributed $4 million of revenue and $0.4 million to profit before tax of the Group.
If the acquisition of Geber health had been completed on the first day of the financial year, the Group’s revenues for the year would have been
approximately USD $2,073 million and the Group’s profit before tax would have been approximately USD $294 million.
166
166
Hikma Pharmaceuticals PLC | Annual Report 2018
44. Changes in accounting policies and disclosures
New and amended standards and interpretations
The Group applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes as a result of adoption of these new accounting standards
are described below.
IFRS 15 transition impact on opening balance sheet as at 1 January 2018
The Group has adopted IFRS 15 applying modified retrospective approach on 1 January 2018 with a cumulative adjustment as an increase to other
current liabilities of $27 million (contract liability), reflecting the free goods obligations outstanding as at 1 January 2018, an increase of trade receivables
by $1 million, a decrease in the income tax provision by $1 million and the corresponding net adjustment to decrease retained earnings by $25 million.
There is no restatement to prior periods as permitted in the transition roles for IFRS 15.
IFRS 15 impact on the consolidated income statement for the year ended 31 December 2018
The Group revenue was reduced by $36 million under IFRS 15 reporting. This was mainly due to the change in the accounting treatment for payments
made to customers ($32 million) and free goods ($4 million) under IFRS 15. Previously, certain customer payments were accounted for as sales and
marketing expenses whereas under IFRS 15, any payments made to customers (unless payments made in exchange for distinct good or service that
the customer transfers to the entity) are treated as a reduction of transaction price and recognised as a reduction of revenue. See note 2 for change
in accounting policy for free goods.
IFRS 15 impact on the consolidated balance sheet as at 31 December 2018
The Group current liabilities balance was increased by $31 million and the retained earnings balance decreased by $29 million under IFRS 15 reporting.
This was mainly due to the change in free goods accounting treatment. See note 2 for change in accounting policy for free goods.
IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’ for annual periods beginning on or after 1 January
2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.
The Group applied IFRS 9 retrospectively, with an initial application date of 1 January 2018. The Group has not restated the comparative information,
which continues to be reported under IAS 39. Differences arising from the adoption of IFRS 9 have been recognised directly in retained earnings.
The effect of adopting IFRS 9 as at 1 January 2018 is explained in note 1.
45. Subsequent events
Acquisition of Medlac
On 2 January 2019, the Group acquired 100% of the share capital of Medlac Pharma Italy Co Ltd. (Medlac), an injectable manufacturing company
in Vietnam. The total consideration amount includes an initial upfront cash payment of $8 million and is not expected to exceed $17 million. The
consideration includes deferred and contingent consideration payable on successful achievement of certain conditions and milestones. The acquisition
includes an injectable facility, adjacent vacant land, Medlac’s product portfolio of 23 injectables products, its pipeline and all employees.
The fair value and purchase price allocation of the acquired assets and liabilities will be disclosed in the financial statements for the interim period ending
30 June 2019.
Legal settlement
On 13 January 2019, a litigation matter with an external party was concluded in Hikma’s favour and Hikma was entitled to receive compensation of
$32 million. The settlement amount was received on 13 February 2019 and this will be recognised in the financial statements.
Hikma Pharmaceuticals PLC | Annual Report 2018
167
167
Financial statements
Company balance sheet
At 31 December 2018
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
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
Other reserves
Retained earnings
Equity attributable to equity holders of the parent
Note
48
49
50
50
52
51
53
54
55
54
57
58
59
2018
$m
3
23
3,328
177
1
3,532
5
41
50
41
137
3,669
3
39
13
55
82
500
77
577
632
3,037
40
282
1,745
970
3,037
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
1,745
1,049
3,116
The financial statements of Hikma Pharmaceuticals PLC, registered number 5557934, on pages 168 to 174 were approved by the Board of Directors on
12 March 2019 and signed on its behalf by:
Said Darwazah
Director
12 March 2019
Sigurdur Olafsson
Director
168
Hikma Pharmaceuticals PLC | Annual Report 2018
168
Company statements of changes in equity
For the year ended 31 December 2018
Balance at 1 January 2017
Profit for the year
Change in fair value of available-for-sale financial assets¹
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 and 1 January 2018
Loss for the year
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 2018
Share
capital
$m
40
Share
premium
$m
282
Own
shares
$m
(1)
Merger
reserve
$m
1,746
Retained
earnings
$m
1,093
–
–
–
–
–
40
–
–
–
–
40
–
–
–
–
–
282
–
–
–
–
282
–
–
–
–
–
(1)
–
–
–
–
(1)
–
–
–
–
–
12
1
13
22
(79)
1,746
1,049
–
–
–
–
1,746
(16)
(16)
21
(84)
970
Total
$m
3,160
12
1
13
22
(79)
3,116
(16)
(16)
21
(84)
3,037
1. This investment was previously designated as available-for-sale financial assets. Upon transition to IFRS 9 it has been re-categorised as Investments FVTPL
169
Hikma Pharmaceuticals PLC | Annual Report 2018
169
Financial statements
Notes to the Company financial statements
For the year ended 31 December 2018
46. 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.
47. Significant accounting policies
Basis of accounting
These financial statements, for the year ended 31 December 2018 have been prepared in accordance with FRS 101.
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 a minimum of two primary statements, including cash flow statements)
– 45B and 46 to 52 share-based payment
– IFRS 7 financial instruments disclosure
– IAS 24 (paragraph 17)
– IAS 8 (paragraph 30 and 31)
– 111 (cash flow statement information); and
– IAS 7 ‘Statement of Cash Flows’.
We have considered the impact of IFRS 9. The Company does not expect any credit losses from intra-Group receivables.
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 principle 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.
There are no significant judgements and estimates affecting the financial statements of the Company.
The carrying value of investments are reviewed for impairment when there is an indication that the investments might be impaired. Any provision
resulting from an impairment review is charged to the income statement.
Equity-settled employee share scheme are accounted for in accordance with IFRS 2 ‘Share-based payment’. The current charge expenses relating to
the subsidiaries’ employees are recharged to subsidiary companies.
170
Hikma Pharmaceuticals PLC | Annual Report 2018
170
48. Intangible assets
Cost
Balance at 1 January 2017
Additions
Balance at 1 January 2018
Additions
Transfer
Balance at 31 December 2018
Amortisation
Balance at 1 January 2017
Charge for the year
Balance at 1 January 2018
Charge for the year
Impairment
Balance at 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
Details of useful lives and amortisation rates are included in note 16.
49. 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
Ending balance
Software
$m
Total
$m
13
8
21
8
(2)
27
–
(1)
(1)
(1)
(2)
(4)
23
20
13
8
21
8
(2)
27
–
(1)
(1)
(1)
(2)
(4)
23
20
2018
$m
3,323
5
3,328
2017
$m
3,179
144
3,323
Hikma Pharmaceuticals PLC | Annual Report 2018
171
171
Financial statements
Notes to the Company financial statements continued
50. Due from subsidiaries
Non-current assets
Hikma Pharmaceuticals USA Inc.
Hikma Italia S. P. A
Hikma Hong Kong
Hikma Pharmaceuticals International Limited
Hikma UK Limited
Current assets
Hikma Pharmaceuticals LLC
Hikma UK Limited
Hikma MENA Holdings Limited
Hikma Pharmaceuticals USA Inc.
Hikma Pharma SAE
Hikma Farmaceutica, (Portugal) S.A.
Hikma Emerging Markets and Asia Pacific FZ-LLC
Others
51. Other current assets
Price adjustment receivable
Investments at FVTPL (2017: available-for-sale investments)
Others
2018
$m
8
1
10
54
104
177
2018
$m
2
–
19
9
4
1
5
1
41
2018
$m
20
21
–
41
2017
$m
8
4
–
167
183
362
2017
$m
–
55
5
4
3
1
3
–
71
2017
$m
61
22
3
86
Price adjustment receivable in respect to note 24 this represents the current portion of the contingent receivable in relation to the Columbus business
acquisition, 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. During the year, the Group received $45 million reimbursement (2017: $3 million) in cash. The non-current portion of price
adjustment receivable is included within other non-current assets (note 19).
Investment at FVTPL 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 the income statement. This asset is classified as level 1 as it uses quoted prices in active markets.
172
172
Hikma Pharmaceuticals PLC | Annual Report 2018
52. Cash and cash equivalents
Cash at banks and on hand
Time deposits
As at 31 December
2017
$m
5
2018
$m
7
43
50
20
25
Cash and cash equivalents include highly liquid investments with maturities of three months or less which are convertible to known amounts of cash and
are subject to insignificant risk of changes in value.
53. Other payables
Management consider that the carrying amount of other payables approximates to their fair value.
54. Due to subsidiaries
Non-current liabilities
Hikma (Maple) Limited
Hikma Investment LLC
Hikma Pharmaceuticals LLC
Hikma MENA Holdings Limited
Hikma Pharma Limited
Current liabilities
Hikma Investment LLC
Hikma Pharmaceuticals International Limited
Hikma Pharma Limited
Hikma UK limited
55. Long-term financial debts
2018
$m
–
1
–
59
17
77
2018
$m
17
18
2
2
39
2017
$m
44
1
10
60
–
115
2017
$m
22
15
2
–
39
The balance comprises mainly of a $500 million (carrying value of $497 million, and fair value of $496 million) 4.25% Eurobond due in April 2020 with
the rating of (BB+/Ba1) and a withdrawal of $nil on the syndicated revolving credit facility (note 29).
Hikma Pharmaceuticals PLC | Annual Report 2018
173
173
Financial statements
Notes to the Company financial statements continued
56. Staff costs
Hikma Pharmaceuticals PLC currently has an average of 36 employees (2017: 30 employees) (excluding Executive Directors); total compensation paid
to them amounted to $10 million (2017: $8 million) of which salaries and bonuses compromise an amount of $8 million (2017: $6 million) the remaining
balance of $2 million (2017: $2 million) represents national insurance contributions.
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 2018
59. Loss/profit for the year
Number
240,678,894
776,500
241,455,394
2018
$m
40
–
Number
239,954,532
724,362
40
240,678,894
2017
$m
40
–
40
Share premium
$m
282
The net loss in the Company for the year is $16 million (2017: profit $12 million). Included in the net loss for the year is an amount of $47 million (2017: $16
million) representing dividends received and $4 million (2017: $5 million) representing the current year charge of share-based payments. The remaining
income statement components represents general and administrative expenses and net financing expenses. Audit fees for the Company are disclosed
in note 7.
60. Contingent liabilities
A contingent liability exists at the balance sheet date in respect to a standby letter of credit totalling $9 million (2017: $9 million) for potential stamp duty
obligation that may arise if a repayment of the syndicated revolving credit facility (see note 29) is made by the intercompany guarantors on behalf of the
Company. It is not probable that the repayment will be made by the intercompany guarantors.
174
174
Hikma Pharmaceuticals PLC | Annual Report 2018
Shareholder information
Shareholder information
2019 financial calendar
4 April
5 April
17 May
22 May
9 August*
8 August*
9 August*
2018 final dividend ex-dividend date
2018 final dividend record date
Annual General Meeting
2018 final dividend paid to shareholders
2019 interim results and interim dividend
announced
2019 interim dividend ex-dividend date
2019 interim dividend record date
12 September*
2019 interim dividend paid to shareholders
* Provisional dates
Shareholding enquiries
Enquiries or information concerning existing shareholdings should
be directed to Hikma’s registrars, Link Registrars either:
— in writing to Shareholder Services, Link Asset Services,
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
Hikma 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.
Share listings
London Stock Exchange
Hikma’s Ordinary Shares of 10 pence each (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's shares can be found on the London Stock Exchange
website www.londonstockexchange.com.
Global Depository Receipts
Hikma 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’s GDRs can be found on the website
www.nasdaqdubai.com.
American Depository Receipts (ADR)
Hikma has an ADR programme for which BNY Mellon acts as
Depository. One ADR equates to two shares. ADR 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. Shareholders may 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:
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.
— 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
Website
Press releases, the share price and other information on the Group
are available on Hikma’s website www.hikma.com.
Details of the share dealing facilities sponsored by Hikma are included
in Hikma’s mailings and are on Hikma’s website.
Hikma’s website is www.hikma.com and the registered
office is 1 New Burlington Place, London W1S 2HR.
Telephone number + 44 207 399 2760.
Hikma Pharmaceuticals PLC | Annual Report 2018
175
Principal Group Companies and Advisers
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
Hikma Pharmaceuticals USA Inc.
401 Industrial Way West
Eatontown
New Jersey 07724
US
Telephone: +1 732 542 1191
Hikma Pharmaceuticals LLC
P.O. Box 182400
11118 Amman
Jordan
Telephone: +962 6 5802900
Hikma Farmacêutica (Portugal) S.A.
Estrada Rio Da Mo no. 8
8A, 8B – Fervença
2705 – 906 Terrugem SNT
Portugal
Telephone: +351 21 9608410
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 Asset Services
34 Beckenham Road
Beckenham
BR34 4TU
UK
176
Hikma Pharmaceuticals PLC | Annual Report 2018
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1 New Burlington Place
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