Eco Animal Regulatory News (EAH)

10 July 2023

ECO Animal Health Group pc ("ECO", the "Company" or the "Group")(AIM: EAH)

Results for the year ended 31 March 2023

HIGHLIGHTS

Financial

· Revenue and adjusted EBITDA ahead of market expectations

· Group sales increased by 4% to £85.3m, driven primarily by growth in revenues from South & Southeast Asia (excl. China and Japan) and Latin America

o  China and Japan sales representing 31% of group sales (2022: 35%), declined by 7%

o  Rest of world sales increased by 9%

· Gross margin increased to 45% (2022: 43%)

· Adjusted EBITDA increased to £7.2m (2022: £5.4m)

· Adjusted EBITDA margin improved to 8.5% (2022: 6.6%)

· New product development expenditure £8.3m (2022: £9.0m) as planned

· Earnings per share 1.49p (2022: loss per share 1.01p)

· Net cash at the end of the period £21.7m (2022: £14.3m), reinforcing the Group's strong balance sheet

· RCF facility (£10m) available and undrawn

Operational

· Aivlosin® demand remained strong in key markets, with increasing market share

· Unwinding of stock, as new China factory becomes operational

· Continuing positive progress towards regulatory filing for poultry mycoplasma vaccines

· New partnership with Imperial College London for self-amplifying RNA technology to deliver swine vaccines and biologics

· New partnership with Moredun Research Institute to deliver a poultry red mite vaccine

David Hallas, Chief Executive Officer of ECO Animal Health Group plc, commented: "I am pleased to present these results, which also represent the first full financial year since I became CEO. I am delighted that the Group has performed robustly, with encouraging growth in revenues; and profitability whilst also significantly improving our cash position. The strong performance in the second half of the year has continued and we are delighted that this momentum is evident in buoyant trade currently and, notwithstanding challenges in certain markets, we look forward to the rest of the current financial year with cautious optimism.

We have previously spoken of the strength and depth of our R&D portfolio and I remain convinced that this is a primary driver of future ECO success. I look forward to presenting our results and meeting investors in person during our results meetings or at our AGM in September".

The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR") as it forms part of United Kingdom domestic law by virtue of the European Union (Withdrawal) Act 2018. Upon the publication of this announcement via a Regulatory Information Service ("RIS"), this inside information is now considered to be in the public domain.

Forward-Looking Statements

This announcement contains certain forward-looking statements. The forward-looking statements reflect the knowledge and information available to the Company and Group during preparation and up to the publication of this announcement. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future and thereby involving a degree of uncertainty. Therefore, nothing in this announcement should be construed as a profit forecast by the Company or Group.

Contacts

CHAIRMAN AND CHIEF EXECUTIVE'S COMBINED STATEMENT

FOR THE YEAR ENDED 31 MARCH 2023

Having successfully navigated amidst difficult market conditions, we are pleased to report a robust performance of the Group. Despite facing numerous obstacles and uncertainties, ECO has emerged stronger and more determined than ever. Our people have been the true driving force behind our resilience. Their unwavering dedication, adaptability, and persistence have been instrumental in overcoming the challenges.

Operational Review

Revenues for the period increased to £85.3m along with increasing profitability driven by both customer and market mix: gross margin was up at 45% (2022: 43%) and EBITDA increased to £7.2m (2022: £5.4m). This healthy performance was delivered primarily in the second half of the year and we are delighted to report that this momentum has continued into the new financial year.

ECO saw strong performance in all regions: the Group generated particularly strong growth (+42%) in South & Southeast Asia driven by an impressive performance in Thailand and greater poultry sales in India. ECO is also pleased to report further development in Latin America, which delivered double digit growth. The presence of ECO in all major swine and poultry producing countries globally helps to mitigate the impact from individual market downturns.

Sales of Aivlosin®, our patented antimicrobial which is used under veterinary prescription for the treatment of economically important respiratory and gastrointestinal diseases in pigs and poultry, reached £75.9m in FY2023 (2022: £72.9m). Demand was stronger than expected in China and Asia.

Sales of the smaller Ecomectin® anti-parasitic range were £3.6m (2022: £5.5m) with sales of all other products reaching £5.8m (2022: £3.7m).

In China, the Group has completed on schedule a plant for packaging and finishing final product which has provided greater automation and adherence to the high regulatory compliance requirements. During the construction process inventories were built up to £30m of product. Since completion, we are pleased to report that inventory levels have been reduced considerably to approximately £22m and continue to reduce to more normalised levels.

Product Approvals

Additional product approvals were obtained in the year for Aivlosin including new label extensions for additional diseases and one new country in Latin America. Furthermore, since the year end, the Group has been informed by the FDA that a previous safety warning can now be removed from the Aivlosin label in the USA following trials which show that it is safe to use in pregnant and lactating sows.

Innovation through Research and Development

The Group is pleased to see further progress within our portfolio of projects and continues to invest into vaccine R&D and in building our capability and expertise. The Board has dedicated significant efforts on its R&D programme and the amount of innovation in the pipeline is at its highest level.

We continue to invest in promising projects with substantial value associated with major diseases in swine and poultry.

Two late-stage development projects are expected to be submitted and approved by the end of next financial year (the year ending 31 March 2024).

We have engaged an experienced Contract Manufacturing Organisation ("CMO") and secured production for USA, EU, LATAM and Asia for our new biological products.

In June 2022, the Group announced a collaboration with Imperial College London to assess the veterinary application of self-amplifying RNA technology, representing the next generation of RNA delivered medicines. In July 2022, the Group signed a partnership agreement with the Moredun Research Institute to research and develop an effective first in class vaccine solution for the sustainable control of poultry red mite ("PRM"). Both of these initiatives are progressing well and we look forward to updating the market on these in due course.

The Board believes that investment in the exciting initiatives outlined above should, over time, deliver significant shareholder value and therefore these are being prioritised ahead of the payment of dividends, balancing also the need for prudent management of cash resources. Accordingly no dividend will be recommended in respect of the year ended 31 March 2023 but the Board does intend to keep this under review in the future as it recognises the value of dividends to shareholders.

People

We extend our sincere gratitude to our people, customers, partners, and shareholders who have stood by us during this journey. Their unwavering support and trust have been instrumental in our resilience. The Group remains committed to delivering exceptional value, driving innovation, and forging a bright future. ECO has now concluded its first Group-wide engagement survey, providing guidance to improving activities and overall satisfaction of all our people. We are pleased that this first survey reported good engagement and actions are underway to build on these good foundations.

The Group has continued to strengthen the Research & Development and Commercial teams through strategic new hires. I would like to extend a warm welcome to our new appointments in our leadership team, which include new heads of our Quality and Regulatory Team and HR Director.

Outlook

Trading momentum from the second half of FY2023 has continued into the first half of the current financial year. In China, the Group has seen improved trading and the Asian and Latin American markets continue the trend of delivering strong growth. Production and operational efficiencies are being driven by the leadership team and this is expected to support margins going forward. The R&D programme continues to provide considerable excitement and game-changing future product flow is confidently expected. Despite the challenges from continuing, sporadic African swine fever outbreaks and commodity price pressures, the Board is cautiously optimistic for the remainder of this financial year and views the future with confidence.

Dr Andrew Jones David Hallas

Non-executive Chairman Chief Executive Officer

FINANCE DIRECTOR'S REPORT

FOR THE YEAR ENDED 31 MARCH 2023

Introduction

I am delighted to report a year of strong financial progress. Building on the foundations established in the past three years and working with new leadership we have delivered a year of robust growth in revenue and profit terms whilst improving working capital ratios and balance sheet strength. We have seen growth in all major performance metrics.

Supporting the commercial performance of our existing portfolio of businesses whilst ensuring a robust controls environment is in place to safeguard and maximise the return on assets is central to the role of the finance team, as well as supporting the strategic growth ambitions of the Group.

Trading

Previous years have seen a pattern of stronger trading in the second half of the year. This is associated with disease prevalence in pigs during the Northern Hemisphere winter. This pattern of trading has continued in the year ended 31 March 2023 with the second half accounting for 59% of the annual revenue. The primary contributing segment to this weighting was China and Japan, where the second half represented 68% of the annual revenue. In our interim report for the six months ended 30 September 2022 we stated that China revenue had declined as a result of poor producer margins and Covid impacts; in our second half of year the zero-Covid policy in China was relaxed and pork consumption improved, coinciding with the customary winter disease outbreaks providing a strong end to our trading year in China. 

A geographical analysis of revenue is as follows:

Revenue from China and Japan in the last four successive six-month trading periods was £15.7m, £12.7m, £8.5m and £17.9m, respectively. This underscores the pork industry cycle in China since the restocking of the herd in the year ended 31 March 2021. The recovery in the six months to 31 March 2023 represented a significant improvement in trading conditions and producer margins. Japan represents less than 5% of the segment's combined revenues.

North America which comprises Canada and the USA showed a small decline overall compared with the year ended 31 March 2022. Canada is a mature market and Aivlosin® enjoys a high market share in this market. The USA had a slower second half compared with prior years where typically disease outbreaks have driven strong demand for the Group's products in the final quarter of the year. This disease driven demand was less pronounced in this financial year.

South and Southeast Asia reported another strong period of annual growth in revenue. Specific strong demand arose from the poultry industry in India and Thailand, with other neighbouring countries also performing well.

Latin America also experienced strong growth in this financial year; principally from Brazil but also showing good revenue performance in Mexico in both swine and poultry.

After some supply interruption in Spain which arose from a regulatory change requiring macrolides to be delivered in water soluble form and not as in-feed formulation, Europe recorded a small 5% reduction in revenues.

Gross margins were 45% in the year ended 31 March 2023 (2022: 43%). This improvement in gross margins arose in the main from the weakness of Sterling compared with the US Dollar and the Chinese Yuan. At net margin, both of these effects were somewhat offset by the currency effect on foreign denominated administrative costs.

Administrative expenses, at £27.9m, were 16% higher than the prior year (£24.1m). Sterling weakness, as mentioned above, together with increased salary costs, travel costs and depreciation drove the increase.

All R&D programmes progressed well during the year and previously capitalised R&D remained in good standing at the year end with no indications of impairment.

Total expenditure on R&D in the year was £8.3m (2022: £9.0m). The total expenditure on R&D can be analysed as follows:

Overall R&D expenditure in the year was 8% lower than the prior year due largely to timing and phasing of trial work. The portion of this expenditure capitalised in the year nearly doubled as a consequence of the greater proportion of the expenditure in the year ended 31 March 2023 being applied to the late-stage poultry vaccine programmes for mycoplasma prevention in chickens. These projects are in the final development stage and have met the capitalisation requirements set out in IAS38 for the entire financial year.

EBITDA has historically represented a key performance measure for the Group; the removal of amortisation (which is a significant annual non-cash charge to profits), depreciation and other non-cash charges to profit provides a good indication of the underlying cash trading performance of the business. The charge for amortisation of intangible assets in the year was £1.1m (2022: £1.1m). The adjusted EBITDA at £7.2m in the year ended 31 March 2023 was a significant increase on the year ended 31 March 2022 (£5.4m). Furthermore, the adjusted EBITDA margin (excluding foreign exchange movements and expressed as a percentage of revenue in the period) was 8.5% in the year ended 31 March 2023 compared with 6.6% in the year ended 31 March 2022. This increase in the adjusted EBITDA margin arose principally from improved gross margins and the effect of operational gearing in the business.

Profit before income tax was significantly stronger in the year ended 31 March 2023 at £4.4m (2022: £1.4m).

The Group's effective tax rate has reduced to 30% in the year ended 31 March 2023 (2022: 151%) due to lower net non-deductible expenses, lower profitability in high tax rate subsidiaries, increased utilisation of past tax losses, offset by lower R&D expenditure allowances. The UK corporation tax rate moves to 25% with effect from 1 April 2023; this should not impact tax payable in the near term due to the continuing availability of tax losses in the UK.

Earnings per share ("EPS") has improved from a loss per share of 1.01 pence in the year ended 31 March 2022 to 1.49 pence profit per share in the year ended 31 March 2023 and diluted EPS has improved from a loss per share of 1.01 pence in the year ended 31 March 2022 to 1.47 pence profit per share in the year ended 31 March 2023.

The consolidated cash position in the Group has increased to £21.7m at 31 March 2023 from £14.3m at 31 March 2022. The consolidated cash position held outside of China decreased to £4.1m at 31 March 2023 from £6.2m at 31 March 2022. A portion of the China cash is repatriated once per annum by dividend declaration; the Group's share of the cash distribution from ECO Biok in China received in the UK is 51%. During the year the dividend received from ECO Biok was £1.8m - related to the China profitability in the year ended 31 December 2021 (2022: £2.2m - related to year ended 31 December 2020). In addition, the Group received a first dividend of £4.0m during the year from its wholly owned entity in China.

The cash generated from operations was significantly greater in the year ended 31 March 2023 at £18.4m (2022: £2.5m) reflecting the increased profitability of the Group and, most significantly, a release of working capital from reduction in inventories. Group inventory levels fell from £30m at 31 March 2022 to £22.4m at 31 March 2023. The new factory in China was successfully commissioned during the year and the required inventory build ahead of the shutdown period unwound by the end of March 2023. Inventory days, expressed as inventory level as a ratio of annual cost of sales was 174 days at 31 March 2023 (2022: 234 days).

Trade receivables increased by 3% proportional to the increase in revenues in the year; the debtor days ratio remaining consistent at around 114 days. The Group's £5m overdraft facility (undrawn at the year end) remains in place and the Group's committed £10m Revolving Credit Facility ("RCF") has not been utilised to date.

Prior Year Adjustment

The prior year adjustment disclosed in note 3 is a technical item relating to the accounting for share options issued to employees of subsidiary companies. The adjustment affects ECO Animal Health Group plc's balance sheet only (not the consolidated position) and moves the cost of the share-based payment out of the intercompany account and into the investment in subsidiary account.

Audit

We are pleased to have completed the first audit with Haysmacintyre LLP. The audit has been a smooth process with good and appropriate challenge and astute enquiry. I would like to personally thank Haysmacintyre for their work and, subject to their reappointment at this year's AGM, we look forward to working with them again next year.

Christopher Wilks

Finance Director

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 MARCH 2023

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2023

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2023

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2023

Company

STATEMENTS OF FINANCIAL POSITION (CO. NUMBER: 01818170)

AS AT 31 MARCH 2023

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2023

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2023

1. General information

ECO Animal Health Group plc ("the Company") and its subsidiaries (together "the Group") manufacture and supply animal health products globally.

The Company is traded on the AIM market of the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is The Grange, 100 High Street, Southgate, London, N14 6BN.

2. Summary of the Group and Company's significant accounting policies

2.1 Basis of preparation

These financial statements have been prepared in accordance with UK-adopted International Financial Reporting Standards. There were no changes to accounting policies on adoption of UK IFRSs.

The preparation of financial statements, in accordance with UK-adopted international accounting standards, requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Further details of estimates and judgements are provided in note 2.30.

The principal accounting policies are set out below and have been applied consistently in dealing with items which are considered material in relation to the financial statements. They are prepared under the historical cost convention with the exception of certain items which are measured at fair value as described in the accounting policies below.

Going Concern

After making appropriate enquiries, the Directors have, at the time of approving the financial statements, formed a judgement that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.

This conclusion is based on a review of the resources available to the Group, taking account of the Group's financial projections together with available cash and committed borrowing facilities. The Directors have performed a reverse stress test on the business, by considering what quantum of revenue and gross margin reduction would be required to exhaust all available funds within 12 months of the date of approving the financial statements, having due regard to the identified strategic risks. The Directors concluded that the likelihood of such a reduction was remote, and therefore that no material uncertainty exists with respect of going concern.

2.2 Adoption of new and revised standards

No new standards or amendments that became effective in the financial year had a material impact in preparing these financial statements.

There are a number of standards and amendments to standards which have been issued by the IASB that are effective in future accounting periods that have not been adopted early.

The following standard is effective for annual reporting periods beginning on or after 1 January 2023:

· IFRS 17 - Insurance Contracts

The following amendments are effective for annual reporting periods beginning on or after 1 January 2023:

· Amendments to IFRS 17

· Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2);

· Definition of Accounting Estimates (Amendments to IAS 8);

· Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12); and

· International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12).

The following amendments are effective for annual reporting periods beginning on or after 1 January 2024:

· Classification of liabilities as current or non-current (Amendments to IAS 1);

· Lease Liability in a Sale and Leaseback (Amendments to IFRS 16);

· Non-current liabilities with covenants (Amendments to IAS 1); and

· Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7).

Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.

2.3 Basis of consolidation

The consolidated financial statements comprise the accounts of the Company and its subsidiaries drawn up to 31 March 2023.

An entity is classed as a subsidiary of the Company when as a result of contractual arrangements, the Company has the power to govern its financial and operating policies so as to obtain benefits from its activities.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured, as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value, the difference is recognised directly in the income statement.

Accounting policies of subsidiaries have been changed where material to ensure consistency with the policies adopted by the Group. Although the subsidiaries in Brazil and China and the joint operations in the USA and Canada all have December year ends, the Group uses management accounts to the end of March to prepare the Group accounts.

Subsidiaries are wholly consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases.

Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation.

The Group initially recognised any non-controlling interest in the acquiree at the non-controlling interest's proportionate share of the acquiree's net assets. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. The Group has not elected to take the option to use fair value in acquisitions completed to date.

Profit or loss and each component of Other Comprehensive Income are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.

2.4 Segment reporting

Operating segments are reported in a manner consistent with the internal reporting to the chief operating decision-maker. The chief operating decision-maker who is responsible for allocating resources and assessing performance of the operating segments has been identified as the Board.

Assets and liabilities of the Group are not reviewed on a segment basis by the chief operating decision-maker, accordingly assets and liabilities on a segment basis are not presented in these consolidated financial statements.

2.5 Foreign currency translation

(a) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("functional currency"). The consolidated and company financial statements are presented in Pounds Sterling, which is the Group and the Company's functional currency.

(b) Transactions and balances

Monetary assets and liabilities denominated in foreign currencies are translated into Pounds Sterling at the rates of exchange ruling at the date of the financial statements.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement within administrative expenses.

Foreign exchange gains and losses that relate to borrowing and cash and cash equivalents are presented in the income statement within administrative expenses.

(c) Group companies

The results and financial position of all Group entities that have a functional currency different from the Group's functional and presentation currency are translated into the Group's functional and presentation currency as follows:

· assets and liabilities for each Statement of financial position presented are translated at the closing exchange rate at the date of the Statement of financial position;

· income and expenses for each income statement are translated at average exchange rates unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case the income and expenses are translated at the rate on the dates of the transaction; and

· all resulting exchange differences are recognised through other comprehensive income as a separate component of equity.

When a foreign operation is partially disposed or sold, exchange differences that were recognised in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing exchange rate.

2.6 Financial instruments

Financial assets

Financial assets comprise mainly trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. These financial assets arise principally from the provision of goods to customers and are measured at amortised cost.

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process, the probability of the non-payment of the trade receivables is assessed with reference to historical data adjusted by forward-looking information. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within Administrative expenses in the consolidated income statement. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

Impairment provisions for receivables from related parties and loans to related parties are recognised based on a forward looking expected credit loss model. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.

Financial liabilities

Financial liabilities comprise mainly trade and other payables and bank overdrafts in the consolidated statement of financial position. These financial liabilities are initially recognised at fair value and subsequently measured at amortised cost in accordance with IFRS 9.

2.7 Goodwill

Goodwill arising on the acquisition of an entity represents the excess of the costs of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity recognised at the date of acquisition.

Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. Goodwill is not subject to amortisation but is tested for impairment annually.

Negative goodwill arising on an acquisition is recognised directly in the income statement. On disposal of a subsidiary or a jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss recognised in the income statement on disposal. Goodwill arising before the date of transition to IFRS, on 1 April 2004, has been retained at the previous UK GAAP amounts, subject to being tested for impairment at that date. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated and is not included in determining any subsequent profit or loss on disposal.

2.8 Other intangible assets

IAS 38 - Intangible Assets includes guidance on the accounting for Research and Development expenditure. Such an intangible asset is a resource that is controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future economic benefits (inflows of cash or other assets) are expected. The three critical attributes of an intangible asset are:

· Identifiability;

· control (power to obtain benefits from the asset); and

· future economic benefits (such as revenues or reduced future costs).

Identifiability

An intangible asset is identifiable when it:

· is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract); or

· arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

Development expenditure - whether purchased or self-created (internally generated) is an example of an intangible asset, governed under IAS 38.

Recognition criteria

IAS 38 requires an entity to recognise an intangible asset (at cost) if, and only if:

· it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and

· the cost of the asset can be measured reliably.

IAS 38 includes additional recognition criteria for internally generated intangible assets.

Expenditure on the research phase of an internal project is expensed as incurred. Expenditure in the development phase of an internal project is capitalised if the entity can demonstrate:

a) the technical feasibility of completing the intangible asset so that it will be available for use or sale.

b) its intention to complete the intangible asset and use or sell it.

c) its ability to use or sell the intangible asset.

d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.

e) the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset.

f) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

The probability of future economic benefits must be based on reasonable and supportable assumptions about conditions that will exist over the life of the asset.

If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the entity treats the expenditure for that project as if it were incurred in the research phase only.

The Group context of IAS 38

Since the early start-up stages of the business, the Group has and continues to invest significant expenditure in research and development into new animal treatments and therapies. This has resulted in a significant family of pharmaceutical treatments for pigs and poultry. Branded as Aivlosin, this product has developed over 20 years into treatments for multiple respiratory and intestinal infections - each of which have separate regulatory and marketing approvals in each target market. The work to bring Aivlosin from the laboratory to the commercial farm has moved through the classical phases of pharmaceutical development and the ECO Animal Health R&D model can be described by the following broad phases:

• The discovery phase - in vitro, in laboratory.

• The proof of concept phase - key efficacy trials in small groups of animals.

• The exploratory development phase - optimisation of dose, economic validation.

• The full development phase - building the data set for dossier submission.

• Submission of an application for regulatory approval.

• Marketing and regulatory approval granted - commercial revenue begins.

The application of the principles of IAS 38 to the above model is to treat expenditure on Research and Development as an expense until the likely commercial benefits that will flow from the project can be judged to be highly probable. This means that the technical feasibility (judged by reference to efficacy) must be certain, the economic feasibility (judged by reference to manufacturing methodology, market intelligence, overall programme cost) has to be highly probable and the likelihood of gaining regulatory approval must be judged to be highly probable. The Directors consider that capitalisation will generally commence once a project enters the full development phase.

In practice, work that is undertaken to build towards regulatory approval for a new treatment claim using Aivlosin, vaccines or other technologies, or an approval for marketing new technologies of applications in a new geographical market can be viewed as starting at the full development phase and are likely to meet the capitalisation criteria whereas costs in relation to some of the Group's recently announced projects, on vaccine development, for example, are likely to meet the capitalisation requirements once they are approved internally to commence the full development phase, subject to careful consideration of residual technical feasibility/risk.

Amortisation of capitalised expenditure is determined with reference to the point at which regulatory approval is given to the product to which the expenditure relates. For historic periods, the approach adopted has been to amalgamate the expenditure incurred on all projects relating to the same product, since the last regulatory approval and then identify the next nearest regulatory approval given for that product in either the same or a subsequent half-year. Amortisation begins in the half-year following the receipt of regulatory approval. A full six months of amortisation is charged in the first half-year for which costs are amortised.

Where it is possible to allocate an individual capitalised cost to a single identifiable project the start date for amortisation is the half-year following the half-year period in which the project receives regulatory approval. Where regulatory approval has not been received for a project, the amortisation has not started.

Amortisation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows:

Aivlosin 5% on cost

Ecomectin 10% on cost

Vaccines 5% on cost

Trade marks and patents 10% on cost

2.9 Property, plant and equipment and depreciation

Plant and equipment are stated at cost less depreciation. Depreciation is provided at rates calculated to write off the cost less estimated residual value of each asset over its expected useful life, as follows:

Plant and machinery 10%-20% on cost

Fixtures, fittings and equipment 10%-20% on cost

Motor vehicles 25% on cost

Leasehold Improvement 18%-25% on cost

Freehold land and buildings valuations are measured as a level 3 recurring fair value measurement. The property is professionally valued by a qualified surveyor at least once every three years. Surpluses (which are not reversals of previous deficits) arising from the periodic valuations are taken to other comprehensive income, and deficits (which are not reversals of previous surpluses) are taken to the income statement within administrative expenses. Depreciation is provided at a rate calculated to expense the valuation less estimated residual value over the remaining useful life of the building at a rate of 2% per annum on a straight line basis. Land is not depreciated.

2.10 Impairment of non-financial assets

The carrying amounts of assets are reviewed at each year end, to determine whether there is any indication of impairment. If any such indication exists, the asset's recoverable amount is estimated in order to determine the impairment loss if any. The recoverable amount is the higher of its fair value and its value in use. For intangible assets with an indefinite useful life or not available for use, an impairment test is performed at each year end.

In assessing value in use, the expected future cashflows from the asset 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.

An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.

A previously recognised impairment loss for costs other than goodwill is reversed if the recoverable amount increases as a result of a change in the estimates used to determine the recoverable amount, but not to an amount higher than the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years and no reversal of impairment losses recognised on goodwill.

2.11 Investment property

Investment property is held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in the production or supply of goods or services or for administrative purposes. Investment property is measured at fair value as a level 3 recurring fair value measurement.

The property is professionally valued by a qualified surveyor at least once every three years. Surpluses and deficits arising from the periodic valuations are taken to the income statement within administrative expenses.

2.12 Investments in subsidiaries

An investment in a subsidiary is where the Group own a controlling interest in an entity. Investments in subsidiaries are stated at cost less impairment in the Parent Company's statement of financial position.

Other non-current asset investments are stated at fair value. They are recognised or derecognised on the date when the contract for acquisition or disposal requires the delivery of that investment.

Investments are assessed for impairment at the end of each reporting period. An impairment is recognised in profit or loss when the recoverable amount of an asset is less than its carrying amount, with the value of any impairment being the difference between the recoverable amount and carrying amount.

Impairments can be reversed in subsequent periods where there is any indication that the impairment loss recognised in a prior period may no longer exist or have decreased.

2.13 Joint Arrangements

A joint arrangement is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control; that is, when the strategic financial and operating policy decisions relating to the activities require the unanimous consent of the parties sharing control.

The group classifies its interests in joint arrangements as either:

- Joint ventures: where the group has rights to only the net assets of the joint arrangement.

- Joint operations: where the group has both the rights to assets and obligations for the liabilities of the joint arrangement.

In assessing the classification of interests in joint arrangements, the Group considers:

- The structure of the joint arrangement.

- The legal form of joint arrangements structured through a separate vehicle.

- The contractual terms of the joint arrangement agreement.

- Any other facts and circumstances (including any other contractual arrangements).

The Group has interests in joint operations. The Group recognises its share of the assets, liabilities, income, expenses and cashflows of joint operations combined with the equivalent items in the consolidated financial statements on a line-by-line basis.

2.14 Investments in Associates

An associate is an entity in which an investor has significant influence but not control or joint control. Significant influence is defined as "the power to participate in the financial and operating policy decisions but not to control them".

The Group reports its interests in associates using the equity method of accounting. Under this method, an equity investment is initially recorded at cost (subject to initial fair value adjustment if acquired as part of the acquisition of a subsidiary) and is subsequently adjusted to reflect the Group's share of the net profit or loss of the associate. If the Group's share of losses of an associate equal or exceed its "interest in the associate", the Group discontinues recognising its share of further losses. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

2.15 Leasing

The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Group applies a single recognition and measurement approach for all leases under IFRS 16, except for short-term leases and leases of low-value assets.

Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease, which is the date the underlying asset is available for use. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any re-measurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date, less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the lease term.

If ownership of the leased asset transfers to the Group at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.

The right-of-use assets are also subject to impairment. Refer to the accounting policies in the section 2.10 for further details.

Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of the lease payments to be made over the lease term. The lease liabilities include the present value of the following lease payments:

• fixed payments (including in-substance fixed payments), less any lease incentives receivable;

• variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date;

• amounts expected to be payable by the Group under residual value guarantees;

• the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and

• payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option.

Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee's incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. In addition, the carrying amount of lease liabilities is re-measured if there is a modification, a change in the lease term, a change in the lease payments (for example, changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.

The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset.

Lease payments are allocated between principal and finance cost. The finance cost is charged to profit or loss over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Extension and termination options

Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group's operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.

The Group applies judgement in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate.

Recognition exemptions

The Group applies the short-term lease recognition exemption to its short-term leases, being those leases that have a lease term of twelve months or less from the commencement date and do not contain a purchase option.

The Group also applies the recognition exemption to leases of which the underlying asset is of low value, comprising assets below the Group's capitalisation threshold. Lease payments on short-term leases and leases of low-value assets are recognised as an expense on a straight-line basis over the lease term.

Practical expedients

The Group applies a single discount rate to a portfolio of leases with reasonably similar characteristics.

2.16 Inventories

Inventories are valued at the lower of cost and net realisable value. Cost is determined using the historical batch price of the principal raw materials and the weighted average cost for other ingredients and other product costs. The cost of finished goods comprises raw materials, packaging costs and sub-contracted manufacturing costs. Net realisable value is the estimated selling price in the ordinary course of business, less any costs which would be incurred in completing the goods ready for sale.

2.17 Trade receivables

Trade receivables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method. Trade receivables are presented net of discounts or other variable consideration adjustments earned, where the expectation and intention is to settle the balance net. Impairment provisions are recognised based on the simplified approach in accordance with IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. See impairment section in section '2.6 Financial instruments' for more details.

2.18 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held on call with banks, other short‑term highly liquid investments with original maturities of three months or less. For the purpose of the statement of cash flows, bank overdrafts are included in the presentation of cash and cash equivalents.

2.19 Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in assets after deducting all of its liabilities.

2.20 Bank borrowings and loans

Interest-bearing bank loans and overdrafts are recorded as the proceeds received, net of direct issue costs (which equate to fair value). Finance charges including premiums payable on settlement or redemption and direct issue costs are accounted for on an amortised cost basis in profit or loss using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

2.21 Trade payables

Trade payables are initially measured at fair value and are subsequently measured at amortised cost using the effective interest rate method.

2.22 Provisions

Provisions are recognised when there is a present obligation as a result of a past event and it is probable that the an outflow of resources will be required to settle the obligation. Provisions are measured at the Directors' best estimate of the expenditure required to settle the obligation outstanding at the year end and are discounted to present value where the effect is material.

2.23 Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group's activities. The Group's revenue is principally derived from selling goods with revenue recognised at a point in time when control of the goods has transferred to the customer. This point in time is determined with reference to INCO terms with that customer, with control of goods deemed to have transferred as per the relevant INCO terms. The most common terms used by the group are Carriage, Insurance and Freight ("CIF"), Free On Board ("FOB"), ExWorks ("EXW") and Carriage and Insurance Paid to ("CIP").

· For transactions under CIF and FOB, the revenue is recognised at the point the goods are loaded onto the vessel or aircraft and a bill of lading or airway bill is issued.

· For transactions under EXW, the revenue is recognised at the point the goods are collected from the Group's warehouses or factory.

· For transactions under CIP, the revenue is recognised at the point the goods are loaded on to a truck at the designated point of departure and a loading note is issued.

Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating sales within the Group. Transaction price is determined by the contract and variable consideration relating to discounts, free goods or volume rebates have been constrained in estimating contract revenue that is highly probable by using the most likely amount method.

The Group's contracts for delivery of goods are less than 12 months, there are no warranties within its sales contracts.

Revenue is recognised when the performance obligation is fulfilled, and the amount can be measured reliably. The performance obligation is fulfilled when control of the goods passes to the customer, which is normally in accordance with INCO terms or receipt by customer. No goods are dispatched on a sale or return basis. Distributors trade on their own account and not as agents.

The Group also receives interest and royalty income, which are recognised on an accrual basis.

2.24 Pensions

Defined Contribution Scheme

The pension costs charged against operating profits represent the amount of the contributions payable to the schemes in respect of the accounting period.

Defined Benefit Scheme

The regular cost of providing retirement pensions and related benefits is charged to the income statement over the employees' service lives on the basis of a constant percentage of earnings. The present value of the defined benefit obligation less the fair value of the plan assets is disclosed as an asset or liability in the statement of financial position in accordance with IAS 19. The disclosure of a net defined benefit asset is limited to the present value of any economic benefit available in the form of refunds from the plan or reductions in future contributions to the plan. Actuarial gains or losses are recognised through other comprehensive income.

2.25 Share-based payments

The Group issues equity-settled share options to certain employees in exchange for services from those employees. Equity-settled share options are measured at fair value (excluding the effect of non -market based vesting conditions) at the date of grant.

The fair value determined at the grant date of such equity-settled share options is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions (with a corresponding movement in equity).

Fair value is measured by use of the Black-Scholes model for those options granted with non-market performance conditions. The expected life used in the model has been established based on management's best estimate of the effects of non-transferability, exercise restrictions and behaviour considerations.

In addition, the binomial model has been used to model future market outcomes for those options granted with a market performance condition.

Further details of the inputs to the Black-Scholes and the binomial model can be found in note 25 to the accounts.

Share-based payment charges are credited to retained earnings.

2.26 Taxation

Tax expense for the period comprises current and deferred tax.

Current tax, including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the year end. Tax expenses are recognised in profit or loss or other comprehensive income according to the treatment of the transactions which give rise to them.

Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amount in the financial statements.

Deferred income tax is determined using tax rates (and laws) that have been enacted, or substantively enacted, by the date of the statement of financial position and are expected to apply when the related deferred tax asset is realised or deferred tax liability is settled.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.

IFRIC 23 Uncertainty over Income Tax Treatments

IFIRC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which there is uncertainty over income tax treatments. The interpretation requires:

· the Group to determine whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;

· the Group to determine if it is probable that the tax authorities will accept the uncertain tax treatment; and

· if it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. The measurement is required to be based on the assumption that each of the tax authorities will examine amounts they have a right to examine and have full knowledge of all related information when making those examinations.

2.27 Equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Amounts arising on the restructuring of equity and reserves to protect creditor interests are credited to the capital redemption reserve.

Amounts arising from share-based payment expenses are recorded within retained earnings.

The cost of its own shares bought into treasury is debited to retained earnings as required by the Companies Act 2006. A subsequent sale of these shares would result in this entry being wholly or partly reversed with any profit on the sale being credited to Share Premium.

Amounts arising from the revaluation of non-monetary assets and liabilities held in foreign subsidiaries, and joint operations are held within the foreign exchange revaluation reserve.

2.28 Non-controlling interest

For each business combination, the Group elects to measure any non-controlling interest in the acquiree either at fair value or at their proportionate share of the acquiree's identifiable net assets. Changes in the Group's interest in a subsidiary that do not result in a loss of control are accounted for as transactions with owners in their capacity as owner. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. No adjustments are made to goodwill and no gain or loss is recognised in the income statement.

2.29 Dividend distribution

Dividends are recorded when they become a legal obligation of the Company. For final dividends, this will be when they are approved by the shareholders at the AGM. For interim dividends, this will be when they have been paid.

2.30 Critical accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:

Impairment review of intangible assets

The Group tests annually whether intangible assets with indefinite life, or not yet available for use, have suffered any impairment. Other intangible assets are reviewed for impairment when an indication of potential impairment exists. Impairment provisions are recorded as applicable based on Directors' estimates of recoverable values.

The recoverable amounts of the Cash Generating Units (CGUs) to which intangible assets are allocated are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and the assumption of an indefinite future life for the assets giving rise to the cash flows. Where intangible assets relate to future product releases the key assumptions also relate to forecasts for market share and product pricing. These assumptions and other commercial outlook conditions may change, which in turn might result in material changes in the recoverable amount in the future. The Group also reviews and quantifies the tax implications related to any recognised impairments and these are included within tax calculations as appropriate.

Further details of the impairment reviews performed can be found in note 12 of the financial statements.

Fair value measurement

A number of assets and liabilities included in the Group's financial statements require measurement, and/or disclosure of, fair value.

The fair value measurement of the Group's financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the 'fair value hierarchy'):

- Level 1: Quoted prices in active markets for identical items (unadjusted).

- Level 2: Observable direct or indirect inputs other than Level 1 inputs.

- Level 3: Unobservable inputs (i.e. not derived from market data).

The classification of an item into the above levels is based on the lowest level of inputs used that has a significant effect on the fair value measurement of the item.

The Group measures a number of items at fair value, including:

· land and buildings (note 13);

· investment property (note 14);

· Pension and other post-retirement benefit commitments (note 24);

· share-based payments (note 25); and

· initial recognition of financial instruments (note 32).

For more detailed information in relation to the fair value measure of the items above please refer to the applicable notes.

2.30 Critical accounting estimates and judgements (continued)

Provisions

Certain aspects of a sales tax related to imported products in a Group subsidiary might have been applicable. The subsidiary has been importing an increasing volume of product in recent years. This matter is at an early stage and subject to further review of the tax legislation and case law. No tax payment has yet been determined. However, a substantial tax settlement may be required in due course and a provision has been recognised.

Pension scheme

The Group maintains one defined benefit pension scheme which has been accounted for according to the provisions of IAS 19. Although the assumptions were determined by a qualified actuary, any change in those assumptions may materially impact the financial position and results of the Group. Details of the assumptions used can be found in note 24 of the financial statements.

Share-based payments

The charge to the Income Statement in respect of share-based payments has been externally calculated using management's best estimates of the number of options expected to vest and various other inputs to the Black-Scholes and the binomial model, as disclosed in note 25. Variations in those assumptions in the model may have a material impact on the Group's results and financial position at the time of valuation.  Those options that contain market conditions have been valued using the binomial model, and those without have been calculated using the Black-Scholes model. Management assess whether the charge or vested portion should be amended based on an annual reassessment of the likelihood of non-market based vesting conditions being met.

Leases - estimating the incremental borrowing rate

Where the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group 'would have to pay', which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease.

In practice, the Group considered the following aspects in the assessment of IBR. Once decided, the IBR will remain unchanged unless there are modifications in lease terms or changes in the assessment of an option to purchase the underlying asset.

A base rate that reflects economic environment and the term of the lease. This is mainly derived from the yield of a government bond issued by the country in which the Group has in scope leases. Where the term of the lease does not conform with the maturity period of the bond, the Group considered other available information such as yields on the bonds with the nearest maturity period, or the yield curve published by the country's treasury department. Considering there is often a difference in the cash flow profile between a lease and government bond, the Group has decided to reduce the base rate by 0.05% to 0.10%.

Financing factors that reflect the lessee companies' risk premium on borrowing. Management considered the financial strength and credit risk of the lessee companies and has estimated the credit spread to be in the range of 1.50% to 5.00%.

Asset factors that reflect the quality of hypothetical security. Depending on the location and type of underlying assets, the Group expects the quality of security in this hypothetical borrowing transaction to vary. For example, the right to use a warehouse in rural areas may provide less relevant security compared to commercial office in a major city's central business district. Based on the Group's assessment, the asset factor ranges between - 0.45% to - 0.50%.

The following are the critical judgements that have been made in the process of applying the Group's accounting policies and have the most significant effects on the amounts recognised in financial statements.

Accounting for ECO Biok as a subsidiary

The Group has determined that it has control over Zhejiang ECO Biok Animal Health Products Limited ("ECO Biok") and its results are therefore consolidated within the Group accounts. The Group owns a 51% interest in ECO Biok and is the entity through which the Group has chosen to enter the Chinese market. ECO Biok depends on the Group for the right to sell Aivlosin products.

Capitalisation of intangible assets

The Group assesses development costs incurred for capitalisation in accordance with the requirements of IAS38 and the Group's accounting policy described in note 2.8. The stage of development and assessment of technical and commercial feasibility, in particular, require the use of judgements and estimates in consultation with the new product development team.

Income taxes

The Group is subject to income taxes in the United Kingdom and also in other jurisdictions.

Significant judgements are required in determining the provision for income taxes including the use of tax losses and in estimating deferred tax assets arising from unused tax losses or credits. There are some transactions and calculations for which the ultimate tax determination is uncertain, including tax credits for research and development expenditures. The Group recognises assets and liabilities based on estimates of the final agreed position.

Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

Deferred tax assets on timing differences are recognised to the extent by which the Directors estimate that future profits will be generated to utilise the underlying costs or losses to which they relate.

3. Prior Year Restatement

The Group reviewed the accounting for share incentive awards made to employees of subsidiary companies and concluded that the previous approach to recording the transaction in the balance sheet of the parent company should be by increasing the value of the investment in subsidiary, rather than recording it as an intercompany receivable. Accordingly, the prior year balance sheets of the Parent company have been restated to show this presentation. There is no impact or effect on the consolidated financial statements.

4. Segment information

Management has determined the operating segments based on the reports reviewed by the Board to make strategic decisions. The Board considers the business from a geographical perspective. Geographically, management considers the performance in the Corporate/UK, China and Japan, North America, South and South East Asia, Latin America, Europe and the Rest of the World.

Revenues are geographically allocated by the destination of customer.

The performance of these geographical segments is measured using Earnings before Interest, Tax, Depreciation and Amortisation ("Adjusted EBITDA**"), adjusted to exclude share-based payments, revaluation, impairment and personnel related litigation matters. Adjusted EBITDA is a non-GAAP measure used by the management to assess the underlying business performance.