CSRT.L Regulatory News (CSRT)

Risk

Controls and Mitigating Actions

Trend

Reliance upon key customers/products: Both Aesica and Bespak have a degree of reliance on a relatively small number of key customers/products and the loss of one such customer/product could lead to a significant reduction in revenues.

The Group has significant Intellectual Property with associated barriers to entry. Regulatory licencing reduces customers' ability to transfer business elsewhere so a loss of business once approved on a customer programme is unusual. The Group maintains a close dialogue with all of its customers and seeks to enter into long term supply agreements where appropriate. The Group's strategy of diversification has opened up a broader range of products and customers, and is progressively diluting customer/product concentration.

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Major operational incident: A major incident (e.g. fire) at a manufacturing site may result in the closure of a site causing disruption to key supply chain and loss of assets, revenues and profit.

Where possible, manufacturing is split into discrete buildings for separate operations providing some level of isolation for certain products. The Group carries out critical plant risk and remediation assessments at each of its manufacturing sites. High-profile near-miss reporting is performed to raise awareness of potential risks. Business continuity plans are also in place at major sites.

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Growth risk: The Group's growth strategy is achieved through four key elements: sustained organic revenue growth, operating leverage, innovation and enhancing acquisitions/investments. Delivery of growth carries the risk of execution due to allocation of resources and new areas of expertise.

The Group has well-honed programme planning and management processes. These provide good visibility of resource requirements, whether capital, space, equipment or people, and enable timely fulfilment on multiple parallel programmes. Programme management techniques are risk based and highlight risks and challenges for increased management focus.

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Acquisition risk: Failure to successfully execute or attain strategic objectives from the Group's acquisitions may adversely affect the Group's financial performance and position. Despite due diligence, changes in circumstances could mean that initial expectations are not met in whole or in part.

The Group uses a clear set of criteria for making acquisition decisions while also engaging a long standing set of advisors who provide advice throughout an acquisition process. Appropriate due diligence is performed on all potential mergers and acquisitions. All acquisition plans are reviewed and sanctioned by the Board. Warranties and indemnities are also sought from the seller, which act to further reduce risk/exposure in certain areas.

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Legal risk: As an international enterprise, the Group must comply with differing laws in different jurisdictions. This can result in a wide range of risks relating to contract, competition, trademark, patent and anti-bribery/corruption laws. Significant penalties, such as fines, the requirement to comply with monitoring or self-reporting obligations could materially adversely affect our reputation, business or financial performance.

The Group limits such risks by means of review by the Legal department and, where appropriate, by consulting external specialists on national laws in the jurisdictions concerned. There is a specific anti-corruption and anti-bribery policy which all employees are required to comply with and confirm their understanding. There is also a whistle blowing policy in place and Bribery Act training is given to employees. The Group is not aware of any risks from legal disputes that could have a significant impact on its financial results or net assets.

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Political/Socio-economic risk: The Group has operations and customers in a number of countries worldwide. As a result it is subject to political and socio-economic risks both globally and in individual countries. Political or economic instability may impact the performance of our business both operationally and financially.

The Group maintains open relationships with its customers and suppliers to ensure that we are up to date on any political/economic conditions which may impact the business. The Group continually reviews any economic policy changes in both the UK and Global markets and assesses if there is any impact on the business.

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Development risk: Bespak is developing a range of medical device products. Aesica is providing pharmaceutical product formulation development, analytics and manufacturing services to pharmaceutical and biotech companies. At any time, any of the products may fail in clinical trials, be withdrawn by the customer or may not become commercially successful once launched.

The Group follows rigorous processes for the development of new products. Where possible, Bespak is developing its device technology as a platform for multiple programmes to reduce the exposure to any individual trial. Aesica's development services are on a fee per project basis, with the large majority of its revenues coming from manufacturing services.

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Product quality failure: The Group operates in highly regulated markets with strict quality requirements. Any quality failure involving the Group's products could lead to loss of reputation, reduction in revenues, recall costs or sanction by the regulators.

The Group has rigorous quality management and assurance systems and processes. Incoming raw materials are analysed, production processes are controlled and products are sampled for testing prior to release. Any issues are tracked and reported to ensure that there is early communication with customers and regulatory bodies regarding any quality audits.

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Corporate Social Responsibility: Our manufactured products or other activities/decisions of the Group may not be judged by the public, governments or other stakeholders as being socially responsible, leading to reputational harm.

The Group continually reviews and explores ways to ensure that its business operates in a responsible manner across the key focus areas of: health and safety, environmental management, our people, ethical business practices and how it interacts with and supports local communities. The Corporate Responsibility Committee meet regularly and is responsible for reviewing the divisions' new programmes, assisting with resourcing and ensuring alignment to the overall Group strategy.

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Regulatory risk: The operations of the Group are subject to various stringent regulatory requirements which carry an element of compliance risk (e.g. environmental, health & safety).

A strong regulatory compliance regime is in place and the Group has invested heavily in ensuring compliance with health, safety and regulatory requirements. Regular reviews and audits take place, not only by regulatory bodies such as the FDA and MHRA but also by customers. Bespak is ISO 13485 accredited and operates SAP in all its main processes. Aesica's API facilities are inspected and approved by the FDA and all manufacturing sites are approved by the MHRA and comply with cGMP manufacturing standards and requirements.

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IT / Cyber Risk: The Group is dependent on information technology: its systems and infrastructure face certain risks, including service disruptions and the loss or theft of sensitive or confidential information. Cyber crime is increasing in sophistication, consequences and incidence, with risks including virus "infection", unauthorised access (hacking), and email-based phishing frauds.

The Group adopts a risk based approach in responding to Cyber risks. The Group has a dedicated IT department who monitor and review access security, ensure that there are regular back-ups of confidential information and data, perform disaster recovery procedures when required and manage investment in the Group's IT infrastructure. Continuous vigilance and training are required to mitigate Cyber security risks, as perpetrators are creative and dynamic on a wide spectrum of strategies.

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Human Resources: The Group relies heavily on recruiting and retaining talented employees with a diverse range of skills and capabilities to meet its strategic objectives. A lack of training, recruitment, securing the long term loyalty of sufficient numbers of qualified personnel, demographic change and any resulting skills shortages could have a considerable impact on our success.

Remuneration packages are reviewed on an annual basis in order to ensure that the Group can continue to attract, retain, incentivise and motivate its employees. The Group is also committed to working on improving drivers of engagement, such as increasing our employees' understanding of our strategy, performance and core values.

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Currency risk: As the Group is headquartered in the UK, its functional currency is pounds sterling. As the Group conducts a large part of its business in Europe (Euro) and also contracts in other currencies including USD and Japanese Yen, exchange rate fluctuations can have an impact on earnings.

Currency exposures are reviewed on a monthly basis. The Group has a currency hedging strategy in place to cover known transactional currency exposures. The Group's European operations are naturally hedged whereas its UK operations hedge contracted non-GBP FX flows. The Group hedges its Balance Sheet FX exposure by structuring its debt currency composition in line with the base currency of its assets. The City and analysts are aware of our currency exposures and the Group's results are reported in constant currency.

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Interest rate risk: The Group is subject to interest rate risk on its revolving credit facility which is currently based on LIBOR/EURIBOR plus a margin.

The terms of the facility are reviewed by the Board on a regular basis. In the current low interest rate environment, the Group has decided not to hedge its floating rate debt into fixed rate for the time being. However, the Group actively monitors interest rates and debt markets and will manage any floating rate interest rate exposure, as appropriate.

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Liquidity and leverage risk: Whilst the Group has comfortable borrowing facilities and strong cash flows, there is a risk of unforeseen short term working capital fluctuations which it may not be able to meet, or which may breach covenants on its borrowing facilities.

The Group has strong cash flows, and good earnings visibility ensures that its margins are sufficient to exceed normal operating costs. The business is cash-generative, and there are well-embedded cash and working capital management processes. Current borrowing levels and financial covenants can be supported comfortably by forecast profit and cash flows. Covenant tests are performed bi-annually to determine whether the covenant tests are being met. Committed facilities are in place until September 2019.

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Pension risk: The Group operates a number of defined benefit pension schemes which are valued based upon a number of actuarial assumptions. Fluctuations as well as errors or misstatements in these assumptions may result in the pension schemes being underfunded or valued incorrectly.

The Group has full open dialogue with the Pension Trustees and works closely with them to ensure that the Defined Benefit Schemes are adequately funded and that the assets are invested appropriately. The Bespak Scheme was closed to future accrual in March 2016 and has been closed to new members since 2002. The total deficit on the Bespak pension scheme was £40.6m at 30 April 2017. Aesica has three defined benefit schemes in Germany and Italy, two of which are closed to new members. The total deficit on the Aesica pension schemes was £4.0m at 30 April 2017 (See Note 21).

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Distributable reserves: Following the Brexit vote and subsequent changes in UK monetary policy, corporate bond yields have fallen sharply, leading to substantial increases in the Bespak pension deficit. The Group continues to monitor the impact of this on its ability to pay dividends in future periods.

The Group monitors distributable reserves prior to key reporting periods and in an amplified update provided within the Board dividend paper. The Group's tax advisors EY have also completed our strategy for repatriation of profits in overseas subsidiaries.

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Impact of Brexit: The vote to leave the EU has resulted in some uncertainty, including currency volatility and a significant weakening of sterling. Whilst the weakening of sterling has had a beneficial translation impact on the Group's sterling results, it continues to monitor the impact of Brexit on its principal risks and any direct or indirect resultant complexities this may bring.

We will continue to monitor any impact on the group by monitoring any decisions made by the UK government, maintaining regular interaction with tax colleagues and providing legal updates to the Board and the Executive Committee.

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