5 Sep 2017 10:09
5 September 2017
Dechra® Pharmaceuticals PLC
(Dechra or the Company)
Availability of 2017 Annual Report and Accounts
The 2017 Annual Report and Accounts is now available to view at www.dechra.com.
The following documents are scheduled to be mailed to registered shareholders of the Company on 18 September 2017:
· 2017 Annual Report and Accounts
· Notice of the 2017 Annual General Meeting; and
· Proxy Form for the 2017 Annual General Meeting.
In accordance with Listing Rule 9.6.1 a copy of each of these documents will be submitted to the National Storage Mechanism and will be available for viewing shortly after posting.
The information below, which is extracted from the 2017 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's 4 September 2017 announcement of its 2017 Preliminary Results (available at www.dechra.com). This material is not a substitute for reading the full 2017 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers and notes to the financial statements, in the 2017 Annual Report and Accounts.
Key Performance Indicators
The Group utilises the following KPIs to assess our progress against our strategic, financial and operational objectives. Their relevance to our strategy and their definitions are explained below.
Some KPIs are also used as a measure in the long term incentive arrangements for the remuneration of the Executives.
These are identified with an asterisk.
KPI | Definition and Performance | Commentary | Relevance to Strategy | Strategic Link |
Sales Growth 6.5%
| Year-on-year sales growth including new products and excluding revenue from acquired businesses. 2017£269.6m 2016 £225.9m 2015 £203.5m
| Dechra delivered £269.6 million from its existing business, an increase of 6.5% from market penetration and new product launches.
| A key driver of our strategy is to deliver sustainable sales growth through delivering our pipeline, maximising our existing portfolio and expanding geographically. | Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
|
Underlying Diluted EPS Growth* 35.1%
| Underlying profit after tax divided by the diluted average number of shares, calculated on the same basis as note 11 to the Accounts. 2017 64.33p 2016 42.65p 2015 39.90p | The increase reflects growth from the existing and acquired businesses, increased finance charges from the increased debt to fund acquisitions, and the change in mix to the applicable tax rates. | Underlying EPS is a key indicator of our performance and the return we generate for our shareholders. It is one of the performance conditions of the Long Term Incentive Plan (LTIP's). | Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
|
Return on Capital Employed* 160bps
| Underlying operating profit expressed as a percentage of the average of the opening and closing operating assets (excluding cash/debt and net tax liabilities).
2017 17.7% 2016 16.1% 2015 20.0%
| ROCE grew as the returns from the 2016 acquisitions (in particular Putney, acquired in April 2016) were manifest in the Group's results. | As we look to grow the business, it is important that we use our capital efficiently to generate returns superior to our cost of capital in the medium to long term. It underpins the performance conditions of the LTIPs. | Pipeline Delivery Portfolio Focus Geographical Expansion Acquisition
|
Underlying Cash Conversion 910 bps
| Cash generated from operations before tax and interest payments as a percentage of underlying operating profit.
2017 115.9% 2016 106.8% 2015 105.9%
| The Group enjoyed strong underlying cash conversion during the year. With the EBITDA margin strengthening from 23.4% to 24.5%, and working capital shrinking by £6.9 million. | Our stated aim is to be a cash generative business. | Pipeline Delivery Portfolio Focus Geographical Expansion
|
New Product Sales (620 bps)
| Revenue from new products as a percentage of total Group revenue. A new product is defined as any molecule launched in the last five financial years. 2017 8.2% 2016 14.4% 2015 13.8%
| The decline arose from the increase in new product revenue from acquisitions. We continue to invest in our pipeline to develop new products and plan to increase this investment. | This measure shows the delivery of sales in each year from new products launched in the prior five years, on a rolling basis. It shows the performance of our R&D and sales and marketing organisations when launching newly developed or in-licensed products. | Pipeline Delivery Portfolio Focus Acquisition
|
Lost Time Accident Frequency Rate (LTAFR) (25.7%) | All accidents resulting in the absence or inability of employees to conduct the full range of their normal working activities for a period of more than three working days after the day when the incident occurred, normalised per 100,000 hours worked.
2017 0.26 2016 0.35 2015 0.07 | The LTAFR decreased from 0.35 to 0.26. None of these incidents related in a work-related fatality or disability. | The safety of our employees is core to everything we do. We are committed to a strong culture of safety in all our workplaces. | Manufacturing and Supply Chain People |
Employee Turnover 260 bps | Number of leavers during the period as a percentage of the average total number of employees in the period.
2017 15.7% 2016 13.1%± 2015 12.2%± ± excludes Apex, Brovel, Genera and Putney | The figure for the 2017 financial year includes the employees from Genera, Brovel and Putney, whereas the previous year excludes them. The increase relates to streamlining of operations within the acquired businesses and the restructuring of our manufacturing team. | Attracting and retaining the best employees is critical to the successful execution of our strategy. | People |
How the Business Manages Risk
Effective risk management and control is key to the delivery of our business strategy and objectives. Our risk management and control processes are designed to identify, assess, mitigate and monitor significant risks, and can only provide reasonable and not absolute assurance that the Group will be successful in delivering its objectives.
The Board is responsible for overseeing how the Group's strategic, operational, financial and compliance risks are managed, and for assessing the effectiveness of the risk management and internal control framework.
Our Senior Executive Team (SET) owns the risk management process and is responsible for managing specific Group risks.
The SET is also responsible for embedding sound risk management in strategy, planning, budgeting, performance management, and operational processes within their respective Operating Segments and business units.
The Board and the SET together set the tone and decide the level of risk and control to be taken in achieving the Group's objectives.
Risk Management Process
Our strategy informs the setting of the objectives across the business and is widely communicated. Strategic risks and opportunities are identified as an integral part of the strategy setting process.
The SET is responsible for evaluating and managing risk from both a bottom up and top down level and acts as a link between the Board and the business units to ensure management of operational risks is embedded in the business.
Each SET member owns one or more Group risks and is responsible for identifying how the risks are currently controlled, what additional mitigating actions are required, what monitoring and assurance mechanisms are in place, assessing the effectiveness of key control processes, and addressing any weaknesses identified.
The Board conducts a review of the risk management and internal control framework and SET members present their risks, controls and mitigation plans to the Board for review on a rolling programme throughout the year. The Audit Committee reviews the effectiveness of internal financial controls annually.
Internal Control Framework
Our internal control framework is designed to ensure:
· proper financial records are maintained;
· the Company's assets are safeguarded;
· compliance with laws and regulations; and
· effective and efficient operation of business processes.
The Dechra Values are the foundation of the control framework and it is the Board's aim that these values should drive the behaviours and actions of all employees. The key elements of the control framework are described below:
· Management Structure
Our management structure has clearly defined reporting lines, accountabilities and authority levels.
The Group is organised as business units. Each business unit is led by a SET member and has its own management team.
· Policies and Procedures
Our key financial, legal and compliance policies that apply across the Group are:
· Code of Business Conduct;
· Delegation of Authorities;
· Anti-Bribery and Anti-Corruption;
· Whistleblowing;
· Sanctions; and
· Charitable Donations.
· Strategy and Business Planning
We have a five year strategic plan which is updated and reviewed by the Board annually. Business objectives and performance measures are defined annually together with budgets and forecasts. Monthly business performance reviews are conducted at both Group and business unit levels.
The product pipeline is reviewed regularly to:
· assess whether products in development are progressing according to schedule;
· identify new product ideas and assess fit with our product portfolio; and
· assess the expected commercial return on new products.
· Operational Controls
Our key operational control processes are as follows:
· Quality Assurance: All our manufacturing sites have an established Quality Management System. These systems are designed to ensure that our products are manufactured to a high standard and in compliance with the relevant regulatory requirements.
· Pharmacovigilance: Our regulatory team operates a robust system with a view to ensuring that any adverse reactions related to the use of our products are reported and dealt with promptly.
· Information Technology: Our business units currently use a number of different local financial, manufacturing and warehouse management systems to support their operations. We are in the process of implementing Oracle across the Group.
· Financial Controls: Our financial controls are designed to prevent and detect financial misstatement or fraud and operate at three levels:
o Entity Level Controls performed by senior managers at Group and business unit level;
o Month-end and Year-end procedures performed as part of our regular financial reporting and management processes; and
o Transactional Level Controls operated on a day-to-day basis.
Internal Audit provides independent and objective assurance and advice on the design and operation of the Group's internal control framework. The internal audit plan seeks to provide balanced coverage of the Group's material financial, operational and compliance control processes
· Improvements in 2017
We have continued to strengthen and improve a number of key control processes and the following changes have been implemented:
· a number of portfolio and project management improvements have been implemented in our product development processes;
· the manufacturing Quality Management Systems in all our recent acquisitions have been assessed and improvements implemented to ensure they meet relevant regulatory standards;
· a risk assessment of the key contract manufacturing organisations (CMOs) that our supply chain is dependent upon has been completed and quality audits have also been conducted on the top 35 CMOs; and
· our standard financial control framework has been updated and rolled out across the Group, including all recent acquisitions, in response to a number of improvement opportunities identified from internal audit reviews.
· Plans for 2018
We will continue to refine and strengthen our internal control framework where required in response to changes in our risk profile and improvement opportunities identified by business management, quality assurance and internal audit.
We are planning to review our key corporate compliance processes and training activities including our Group Code of Conduct, key Group Policies and our Third Party Principles Policy in order to improve our ability to comply with existing and emerging legislation.
Understanding Our Key Risks
Dechra is one of only a handful of listed veterinary pharmaceuticals companies in the FTSE. We therefore believe it is important to summarise the key distinctions between the animal and human pharmaceutical industries in order to provide a better understanding of our risk profile.
The business of developing and marketing animal pharmaceuticals shares a number of characteristics with human pharmaceutical businesses. These similarities include the need to conduct clinical trials to prove product safety and efficacy, obtain regulatory approval for new products, complex and highly regulated product manufacturing, and to market products based on approved clinical claims. However, there are also significant differences between animal and human pharmaceutical businesses, including:
· Product development is generally faster, cheaper and more predictable and sustainable: Development of animal medicines typically requires fewer clinical studies with fewer subjects and is conducted directly in the target species. Decisions on product safety, efficacy and likelihood of success can therefore be made more quickly.
· Diversified product portfolios: Animal pharmaceuticals businesses are generally less reliant on a small number of 'blockbuster' products. Animal health products are sold across different regions which may have distinct product requirements. As a result, animal health products often have a smaller market size and the performance of any single product typically has less impact on overall business performance.
· Stronger customer relationships and brand loyalty: Companion Animal Products are often directly prescribed and dispensed by veterinarians which contributes to brand loyalty, which often continues after the loss of patent protection or regulatory exclusivity.
· Lower pricing pressure: Livestock producers and pet owners generally pay for animal healthcare themselves. Pricing decisions are not influenced by government payors that are involved in product and pricing decisions for human medicines.
· Less price erosion by generic competition: Generic competition in animal healthcare, whilst playing an important role, has a lower impact on prices compared to human pharmaceuticals because of the smaller average market size of each product opportunity, stronger customer relationships and brand loyalty.
The SET has identified and agreed key risks with the Board. Of these, a number are deemed to be generic risks facing every business including failure to comply with financial reporting regulation, foreign exchange, IT systems failure and non-compliance with legislation. The table below therefore details the ten principal risks that are specific to our business and provides information on:
· how they link to Group strategy;
· their potential impact on the business; and
· what controls are in place to mitigate them.
Link to Strategic Pillar and Enabler | Risk | Potential Impact | Controls and Mitigating Actions | Trend |
Pipeline Delivery Portfolio Focus Geographical Expansion
| Competitor Risk: Competitor products launched against one of our leading brands (e.g. generics or a superior product profile). We depend on data exclusivity periods or patents to have exclusive marketing rights for some of our products. Although we maintain a broad portfolio of products, our unique products like Vetoryl and Felimazole have built a market which may be attractive to competitors. | Revenues and margins may be adversely affected should competitors launch a novel or generic product that competes with one of our unique products upon the expiry or early loss of patents. Costs may increase due to defensive marketing activity. | We focus on lifecycle management strategies for our key products to ensure they fulfil evolving customer requirements. Product patents are monitored and defensive strategies are developed towards the end of the patent life or the data exclusivity period. We monitor market activity prior to competitor products being launched, and develop a marketing response strategy to mitigate competitor impact. | Increased Risk Competitor product launches against some of our key products |
Portfolio Focus
| Market Risk: The emergence of veterinary buying groups and corporate customers. We sell and promote primarily to veterinary practices and distribute our products through wholesaler and distributor networks in most markets. In a number of mature markets, veterinarians are establishing buying groups to consolidate their purchasing, and corporate customers are also emerging. | The emergence of corporate customers and buying groups represents an opportunity to increase sales volumes and revenue but may result in reduced margins. Our reputation and relationships with veterinary practices could also be adversely affected. | We manage and monitor our national and European pricing policies to ensure equitable pricing for each customer group. Our relationships with larger customers are managed by key account managers. Our marketing strategy is designed to support veterinarians in retaining customers by promoting the benefits of our product portfolio in our major therapeutic areas. | No Change |
Acquisition | Acquisition Risk: Identification of acquisition candidates and their potential integration. Identification of suitable candidates and securing a successful approach involves a high degree of uncertainty. Acquired products or businesses may fail to deliver expected returns due to over-valuation or integration challenges. | Failure to identify or secure suitable targets could slow the pace at which we can expand into new markets or grow our portfolio. Acquisitions could deliver lower profits than expected or result in intangible assets impairment. | We have defined criteria for screening acquisition targets and we conduct commercial, clinical, financial and legal due diligence. The Board reviews acquisition plans and progress regularly and approves all potential transactions. The SET manages post-acquisition integration and monitors the delivery of benefits and returns. | Decreased risk Successful integration of recent acquisition. |
Pipeline Delivery
| Product Development Risk: Failure to deliver major products either due to pipeline delays or newly launched products not meeting revenue expectations. The development of pharmaceutical products is a complex, risky and lengthy process involving significant financial, R&D and other resources. Products that initially appear promising may be delayed or fail to meet expected clinical or commercial expectations or face delays in regulatory approval. It can also be difficult to predict whether newly launched products will meet commercial expectations. | A succession of clinical trial failures could adversely affect our ability to deliver shareholder expectations and could also damage our reputation and relationship with veterinarians. Our market position in key therapeutic areas could be affected, resulting in reduced revenues and profits. Where we are unable to recoup the costs incurred in developing and launching a product this would result in impairment of intangible assets. | Potential new development candidates are assessed from a commercial, financial and scientific perspective by a multi-functional team to allow senior management to make decisions on which ones to progress. The pipeline is discussed regularly by senior management, including the Chief Executive Officer and Chief Financial Officer. Regular updates are also provided to the Board. Each development project is managed by co-project leaders who chair project team meetings. Before costly pivotal studies are initiated, smaller proof of concept pilot studies are conducted to assess the effects of the drug on target species and for the target indication. In respect of all new product launches a detailed marketing plan is established and progress against that plan is regularly monitored. The Group ensures that it has a detailed market knowledge and retains close contact with customers through its management and sales teams which are trained to a high standard. | No Change |
Pipeline Delivery Portfolio Focus Geographical Expansion
| Regulatory Risk: Failure to meet regulatory requirements. We conduct our business in a highly regulated environment, which is designed to ensure the safety, efficacy quality, and ethical promotion of pharmaceutical products. Failure to adhere to regulatory standards or to implement changes in those standards could affect our ability to register, manufacture or promote our products. | Delays in regulatory reviews and approvals could impact the timing of a product launch and have a material effect on sales and margins. Any changes made to the manufacturing, distribution, marketing and safety surveillance processes of our products may require additional regulatory approvals, resulting in additional costs and/or delays. Non-compliance with regulatory requirements may result in delays to production or lost sales. | The Group strives to exceed regulatory requirements and ensures that its employees have detailed experience and knowledge of the regulations. Manufacturing and Regulatory have established quality systems and standard operating procedures in place. Regular contact is maintained with all relevant regulatory bodies in order to build and strengthen relationships and ensure good communication lines. The regulatory and legal teams keep updated in respect of changes with a view to ensuring that the business is equipped to deal with, and adhere to, such changes. Where changes are identified which could affect our ability to market and sell any of our products, a response team is created in order to mitigate the risk. External consultants are used to audit our manufacturing quality systems. | No Change
|
Portfolio Focus Geographical Expansion
| Regulatory Risk: Continuing pressure on reducing antibiotic use. The issue of the potential transfer of increased antibacterial resistance from food producing animals to humans is subject to regulatory discussions. In some countries this has led to government recommendations on reducing the use of antibiotics in food producing animals. | Reduction in sales of our antimicrobial product range. Our reputation could be adversely impacted if we do not respond appropriately to government recommendations. | Regular contact is maintained with relevant veterinary authorities to ensure that we have a comprehensive understanding of regulatory changes. We strive to develop new products and minimise antimicrobial resistance concerns. | Increased Risk Antibiotic decline has increased in the UK and Denmark
|
Pipeline Delivery Portfolio Focus Manufacturing and Supply Chain | Reliance on Third Parties Risk: A supply failure on a key product may affect our ability to develop, make, or sell our products. We rely on third parties for the supply of all raw materials for products that we manufacture in-house. We also purchase many of our finished products from third party manufacturers. | Raw material supply failures may cause: · increased product costs due to difficulties in obtaining scarce materials on commercially acceptable terms; · product shortages due to manufacturing delays; · delays in clinical trials due to shortage of trial products. Shortages in manufactured products and third party supply failures on finished products may result in lost sales. | We monitor the performance of our key suppliers and act promptly to source from alternative suppliers where potential issues are identified. The top ten Group products are regularly reviewed in order to identify the key suppliers of materials or finished products. We maintain buffer stocks and dual sourcing arrangements for key products. All contracts with suppliers are reviewed from both a commercial and legal perspective to try to ensure that assignment of the contract is allowed should there be a change of control of either of the contracting parties. | No Change |
Portfolio Focus Manufacturing and Supply Chain | Reliance on Third Parties Risk: Loss of key third party manufacturing customers from DPM. Other sales, relating to third party manufacturing and other non-core activities, represents approximately 9.2% of Group revenues. | Loss of a key customer can impact manufacturing revenues and lead to an increase in the cost of goods of the remaining portfolio. | The DPM sales team maintains relationships with key customers. Robust supply agreements are in place with each of our key customers and are regularly reviewed. Monthly customer service level monitoring and reporting is in place. | Decrease Risk Strategy to reduce third party manufacturing contracts |
Portfolio Focus Pipeline Delivery People | People Risk: Failure to retain high calibre, talented senior managers and other key roles in the business. Our growth plans and future success are dependent on retaining knowledgeable and experienced senior managers and key staff. | Loss of key skills and experience could erode our competitive advantage and could have an adverse impact on results. Inability to attract and retain key personnel may weaken succession planning. | The Nomination Committee oversees succession planning for the Board and the SET. Succession plans are in place for the SET together with development plans for key senior managers. Key person insurance is in place where appropriate. Remuneration packages are reviewed on an annual basis in order to help ensure that the Group can continue to retain, incentivise and motivate its employees. | Decreased Risk Board and SET succession planning managed successfully |
Geographical Expansion Acquisition People | People Risk: Failure to resource the business to achieve our strategic ambitions, particularly on geographical expansion and acquisition. As Dechra expands into new markets and acquires new businesses or science we recognise that we may need new people with different skills, experience and cultural knowledge to execute our strategy successfully in those markets and business areas. | Failure to recruit or develop good quality people could result in: · capability gaps in new markets; · challenges in integrating new acquisitions; or · overstretched resources This could delay implementation of our strategy and we may not meet shareholders' expectations. | The Group HR Director reviews the organisational structure with the SET twice a year to aim to ensure that the organisation is fit for purpose and to assess the resourcing implications of planned changes or strategic imperatives. A development programme is in place to identify opportunities to recruit new talent and develop existing potential. | Decreased Risk Successful recruitment of DPM management team |
Directors' Responsibility Statement Required under the Disclosure and Transparency Rules
The responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 30 June 2017. Certain parts of that Report are not included with this announcement.
We confirm to the best of our knowledge:
a) the Company Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 'Reduced Disclosure Framework', and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company;
b) the Group Financial Statements, prepared in accordance with the IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of Group; and
c) the Strategic Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face.
Approved by the Board and signed on its behalf by:
Ian Page | Richard Cotton |
Chief Executive Officer | Chief Financial Officer |
4 September 2017 | 4 September 2017 |
For further information, please contact:
Melanie Hall, Company Secretary
Telephone number: 01606 814730
About Dechra
Dechra is an international specialist veterinary pharmaceuticals and related products business. Our expertise is in the development, manufacture, and sales and marketing of high quality products exclusively for veterinarians worldwide. Dechra's business is unique as the majority of its products are used to treat medical conditions for which there is no other effective solution or have a clinical or dosing advantage over competitor products. For more information please visit: www.dechra.com
Trademarks
Trademarks appear throughout this document in italics. Dechra and the Dechra "D" logo are registered trademarks of Dechra Pharmaceuticals PLC.
Forward Looking Statement
This document contains certain forward-looking statements. The forward-looking statements reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involve a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.