Eco Animal Regulatory News (EAH)

26 July 2021

ECO Animal Health Group plc (''ECO")(AIM: EAH)

Results for the year ended 31 March 2021

ECO REPORTS A RECORD PERFORMANCE

HIGHLIGHTS

Financials

· Sales up 46% at £105.6m (2020: £72.1m)

· Gross margin increased to 51% (2020: 46%)

· Profit before tax increased significantly to £20.3m (2020 restated: £6.1m)

· Earnings per share increased significantly to 12.08p (2020 restated: 5.77p)

· Cash generated from operations significantly stronger at £15.8m (2020: £5.5m)

· Net cash at the end of the period £19.5m (2020: £9.8m)

· New product development expenditure 17% lower at £9.1m (2020: £10.9m)

· Dividend re-introduced - 1p per share (2020: Nil)

Operations

· Aivlosin® demand increased by 44% led by

o Rapid recovery & return to profitability in China as swine herds rebuilt following worst effects of African Swine Fever (ASF)

o Strong growth in USA amid domestic demand & strengthening exports

o Strong export driven growth in Brazil

· Aivlosin® water soluble formulation approval in pigs for M. hyopneumoniae granted in USA, Canada & EU

· First vaccine licence approval in Brazil

· Two worldwide exclusive research partnerships signed to develop & licence novel vaccines for pigs against Porcine Respiratory & Reproductive Syndrome virus (PRRSV)

· Business logistics, volumes and access uninterrupted during COVID-19 remote working

Marc Loomes, CEO of ECO Animal Health Group plc, commented: "These excellent results reflect the strong recovery in selected key markets which, together with the adaptability and innovation shown by our employees has delivered a record result during a year of formidable operational challenges arising from macroeconomic events. We are excited about the progress within our new product development programmes, with previous announcements demonstrating the potential of our in-house science and external collaborations. This year has had a solid start, we carefully monitor the demand for our products and recognise the easing in China, but remain confident of a successful out-turn for the year."

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'S STATEMENT

FOR THE YEAR ENDED 31 MARCH 2021

This has been a year of exceptional performance, where we passed the milestone of £100m of sales and saw major growth in profit and cash flow.

The main contributor to the growth was China where a favourable combination of industry structural changes and restocking of the pig herd after the ASF epidemic together with changes in regulations for use of antibiotics in feed created exceptional levels of demand and sales opportunity for Aivlosin®. Additionally, we also saw good growth of our business in the key territories of North America and Brazil and steady progress in others.

This would have been a great achievement in any year, but in a year where the world has been in the grips of COVID-19 and when the UK finally implemented Brexit, it is an exceptional performance.

Staff throughout the business have quickly adapted to new ways of working and risen to the many challenges they faced to deliver a year of considerable financial performance.

We have also made excellent progress with our strategy to build on our strong position with Aivlosin® in pig and poultry markets with a new complementary range of vaccines. We have an excellent portfolio of vaccine projects that are progressing well through the development process, backed by a team of highly experienced R&D scientists. The Board is excited by the value creation potential of our R&D programmes.

The performance has resulted in a strong recovery of our profits and cash generation from operations compared with the prior year. We are pleased to propose the resumption of the payment of a dividend. The Board is proposing a dividend of 1.00p per share, which subject to shareholder approval will be paid on 22 October 2021 to shareholders on the register on 24 September 2021. The ex-dividend date will be 23 September 2021.

We have made substantial progress in strengthening governance systems in the Company and continue to build on this:

· The work to restate historical financial statements is now complete.

· Shareholders approved the new Annual Bonus Plan (including a deferred element) and Long-Term Incentive Plan ("LTIP") at a General Meeting in March 2021, and implementation of these schemes is now underway. We believe these rewards schemes will drive both shorter- and longer-term value and better align the interests of management with shareholders.

· We recognise the importance of clear and transparent reporting on how the Company approaches activities that relate to Environmental, Social and Governance matters. We have for the first time included in this Annual Report a specific section, entitled "Sustainability Report" as a first step and plan to make a full review during the year and report in the next Annual Report.

I have already mentioned the great contribution by management and staff throughout the Company which led to the excellent recovery and growth in the business. I am hugely grateful for their commitment and energy in moving ECO to a significantly stronger position than it has been before.

We have today also announced the intention of Marc Loomes to retire. He wishes to retire on 31 December 2022 and will support the smooth transition to his successor. We are hugely grateful to Marc for his significant contribution and strong leadership he has provided over the last 17 years, and his total commitment to ensure a smooth succession process. I have particularly enjoyed my time working with Marc and he can be truly proud of the business that he has created and led.

I would also like to once again sincerely thank our shareholders for their support. The last two years have seen huge challenges for the Company and the Board is highly appreciative of the continued loyalty and support from investors.

Outlook

Performance in our first three months of the current financial year ending 31 March 2022 has been solid with Group revenue marginally behind the corresponding prior year period.

The strength seen in our Chinese market at the end of the last financial year has eased significantly following the recent pork price declines. This decline began to reverse ahead of the recent announcement on 28th June 2021 by the China state planner that central and local governments will start buying pork for state reserves. We have seen continuing strength in Latin America and early signs of recovery in Southeast Asia.

The Group's historical pattern of second half revenue weighting is expected to be retained during the current financial year particularly in relation to China where the market softness in the first three months of our current financial year is expected to reverse later in the year as state purchasing of pork improves the producer margins and encourages the purchasing of the Group's products.

We look forward to the rest of this financial year and our reporting prospects for 2022 with cautious optimism.

Dr Andrew Jones Chairman

25 July 2021

CHIEF EXECUTIVE'S REPORT

FOR THE YEAR ENDED 31 MARCH 2021

I am delighted to report on a year of unprecedented performance which culminated in a record performance for the year ended 31 March 2021 exceeding the upgraded market expectations.

The Company encountered a series of formidable operational challenges during a period of remarkable change; the global COVID-19 pandemic which disrupted work locations and practices, the consummation of Brexit and several ongoing regional outbreaks of African Swine Fever (ASF) in China and in other territories, required our employees to adapt, to innovate and to remain focused on the business. It is these staff attributes that have enabled the delivery of these notable results.

Operational Review

Global revenue grew by 46% to £105.6 million reflecting the rapid restructuring and return to profitability of the Chinese pork market, supported by solid growth in the important North American and Brazilian domestic and export markets. Good progress was made in a number of key territories reflecting the value of ECO's global footprint with sales generated in more than seventy countries, reflecting the global commoditised nature of pork and poultry production.

Sales of Aivlosin®, our patented antimicrobial which is used under veterinary prescription for the treatment of economically important diseases in pigs and poultry, increased by 44% to £87.5 million (2020: £60.7 million), accounting for 83% of total revenue.

Sales of the smaller Ecomectin® anti-parasitic range at £4.2 million (2020: £4.0 million), increased by 7% and represented 4% of the Group's revenue.

Sales of all other products were £13.8 million (2020: £7.5 million) and mainly comprised a range of supportive antimicrobial products for pigs in China.

Revenue from our external customers in China increased by 178%. This growth was underpinned by structural changes to the pork producing industry forced by the ASF pandemic and consequent rapid restocking of pig herds by major producers. Our Chinese subsidiary has focused on the respiratory health benefits of Aivlosin® for replacement breeding sows and piglets whose numbers at the major producers have increased rapidly in response to the pork shortage and very high pork prices. The value of these sows and their offspring has enabled the subsidiary to secure the business of an increasing number of key accounts as the industry faced the withdrawal of antimicrobials used as growth promoters together with a long hard winter which resulted in high respiratory disease prevalence.

Revenue in Japan declined by 7% with COVID-19 restrictions limiting access to producers.

North American revenue from external customers increased strongly by 19% reflecting the growing importance of Aivlosin®'s low yet effective dose rate and short treatment duration in medication protocols as veterinarians and producers adhere to responsible use of antimicrobial guidelines.

In the USA, revenue was 28% higher at £10.6 million, reflecting rapidly rising farm incomes, profitability at the producer and at the packer level, and buoyant exports brought about by ASF in China. Our strengthened sales and technical teams have focused on further business expansion at both key producers and dispensing veterinary practices.

Canadian revenue fell by 2% to £3.3 million largely because COVID-19 related enhanced biosecurity measures resulted in an exceptional overall health status of the national swine herd.

Brazilian revenue rose strongly by 32% to £7.1 million reflecting the benefits of ECO's key account management approach and the development of a very strong partnership with our local third-party distributor. Important supply tenders to major producers were won and the customer base broadened in a market where exports were strong but domestic demand subdued. The Mexican subsidiary's revenue fell by 7% to £4.8 million hampered by stock availability in a particularly difficult COVID-19 trading environment. Revenue across the other Latin American countries increased by 14% despite the extremely challenging economic and social conditions where gains in Bolivia, Cuba and Chile were partly offset by declines in Argentina, Colombia and Peru.

In South and Southeast Asia, revenue declined significantly by 36% to £9.1 million reflecting the impact of both ASF and COVID-19 across the region, notably in Thailand, our largest market, where despite difficulties the Company gained a positive treatment protocol listing for Aivlosin® with a major global producer. A new distributor was appointed in the Philippines, a recruitment process initiated for a key account manager in Indonesia for poultry where the business held up very well, and there were signs of an early and strong recovery in Vietnam. In India poultry market conditions remained extremely challenging.

European revenue declined by 13% to £6.6 million. Aivlosin® sales were strong in key markets such as Spain although overall revenue into continental markets fell.

Sales in the United Kingdom, which represented less than 2% of global revenue, declined by 17% to £1.5 million, across all products reflecting the difficult trading environment.

In Russia, an increasingly active exporter of pork and poultry meat, revenue was affected by disease outbreaks in swine and in poultry although relationships with the most important customers were strengthened.

Sales in the Rest of the World increased by 16% to £1.3 million largely due to strong demand for Aivlosin® in Egypt offsetting a declining presence in South Africa.

Product Approvals

Aivlosin® marketing authorisations for swine were received from the European Medicines Agency (EMA), the United States Center for Veterinary Medicine of the Food and Drug Administration and from the Veterinary Drugs Directorate of Health Canada. These approvals added the treatment and control of Mycoplasma hyopneumoniae to the Aivlosin® Water Soluble Granules formulation label. M. hyopneumoniae is a primary pathogen in swine respiratory disease ("SRD") complexes playing an important role in facilitating the entry of other bacterial and viral pathogens. SRD occurs worldwide and causes major economic losses to the pig industry.

A marketing authorisation from Brazil's Ministry of Agriculture, Livestock and Food Supply was received for Circo/MycoGard®, a vaccine for piglets against Porcine Circovirus type 2 ("PCV2") and M. hyopneumoniae, two of the most common primary pig respiratory disease pathogens affecting the health and productivity of swine globally. This first vaccine marketing authorisation, obtained in collaboration with Pharmgate Corp, USA marks a significant milestone as the Company builds capability with vaccines and broadens its product portfolio.

Pipeline

The Company's early-stage research and proof of concept development activities are managed through collaborations with leading research institutions and universities with later stage full development work managed in-house. This model mitigates the significant costs associated with in-house laboratories and Company owned research functions.

ECO has a formidable team of scientists and is building a significant product portfolio pipeline with a mix of well-established concepts and novel, highly competitive technologies and approaches with the emphasis on vaccines and other new products to complement our existing antimicrobial business. The pipeline is focused on providing solutions to respiratory and gastrointestinal (gut) diseases of major economic importance in pigs and poultry.

Two worldwide exclusive research partnerships were signed in October 2020 with The Pirbright Institute in the UK and The Vaccine Group, also in the UK, to develop and licence novel vaccines for use in pigs against porcine respiratory and reproductive syndrome virus ("PRRSV"), one of the most economically damaging diseases to the global pig industry.

New product development expenditure in the year was capped at £9.1 million (2020: £10.9 million) reflecting the Board's initiation of a project prioritisation exercise within the R&D development portfolio to conserve cash in response to the COVID-19 pandemic. Expenditure has been reinstated at the significant level of £10.2 million in 2021/22 which will ensure the acceleration of several key projects and that the product development portfolio is constantly refreshed. Our objective is to have several mid and late-stage projects able to deliver first revenues from the middle of the decade onwards.

COVID-19 Impact

The Group's transition to effective homeworking has been smooth. All staff have been retained and ECO has not required assistance from any UK or US Government financial support schemes. The Company's outsourced manufacturing model, the supply chain and our routes to market have, in most locations, functioned robustly.

Brexit

ECO's EU marketing authorisations have been transferred to the European subsidiary, ECO Animal Health Europe Limited registered in Dublin, Republic of Ireland and our contingency product supply plans are operational. The limited ongoing financial impact of Brexit is expected to be further mitigated as our new systems bed in. ECO's sales to the EU (excluding the UK) represented 6.2% of total revenue for the year.

People

ECO has provided flexibility to all our employees, supporting those with childcare and other caring responsibilities and ensured that homeworking has been as effective as possible. Notwithstanding this, our employees have demonstrated extraordinary levels of energy, engagement and professionalism in addressing the considerable challenges of the past year. Individually and collectively their ability to innovate and to adapt combined with sheer hard work and considerable fortitude underpins both these results and ECO's prospects. It is these characteristics that will enable ECO to meet current and future market challenges and for this I thank them.

We have today also announced my intention to retire on 31 December 2022. After 17 years I feel it is the right time to seek my retirement and I look forward to working with the Board to effect a smooth transition to my successor. I am immensely grateful for the support I have enjoyed over the years from colleagues and friends both within the business and outside. I will be available to help my successor in any way possible.

Marc Loomes

Chief Executive Officer

25 July 2021

FINANCE DIRECTOR'S REPORT

FOR THE YEAR ENDED 31 MARCH 2021

Introduction

I am pleased to present my second report as the Group Finance Director of ECO.

The year ended 31 March 2021 has been a significant year, most obviously marked by the need to work remotely and without the benefits of physical communication with customers, suppliers and colleagues. Naturally this has brought challenges, but we are proud to be able to report that ECO has worked through this period with minimal interruption. We have chosen not to access any governmental support, staff and external stakeholder morale has remained good and the business is reporting record revenues and earnings in the year ended 31 March 2021.

The "journey of change" I spoke about last year has continued throughout this financial year and the benefits are beginning to be seen. In particular, the audit this year has been a considerably smoother process and the financial control system improvements have functioned well. The internal audit function has conducted some useful reviews albeit that their inability to travel has hampered the geographical reach of their work this year.

Trading

In last year's accounts we reported a very strong second half revenue performance; the second half representing circa 60% of the overall total for the year. This second half weighting was repeated in the latest financial year and arose - much as it did last year, from growth in China. The recovery from the African Swine Fever outbreak in China has been widely reported and the combination of governmental incentives and commodity price drivers has benefitted major producers who have gained a larger market share among pork producers in China. These major producers represent the target market for Aivlosin®.

A geographical analysis of revenue is as follows:

Revenue from China and Japan in the second half of the year was £38.1 million compared to the first six months ended 30 September 2020 of £20.8 million and the six months ended 31 March 2020 of £16.1 million. Japan represents less than 5% of the combined revenues. These successive six month increases in revenue in China demonstrated the ability of ECO to harness the market potential at a time when a favourable combination of herd restocking,

and very high pork prices created exceptional levels of demand. The last full year of revenue in China and Japan before the ASF outbreak was the year ended 31 March 2018 and amounted to £27.6 million. This more than doubling of revenue compared to the last full year without ASF is significant but this may in part reflect a re-bound which is to be expected following a period of abnormally low demand. 

North America and Latin America have also advanced well during the year; commodity price stabilisation in the USA and export market opportunities in Brazil underpinning the ECO performance.

The sales performance in South and South East Asia has been disappointing, reflecting the impact of both ASF and COVID-19 in these markets. After a year of strong growth (the increase in 2020 compared to 2019 was 75%) the revenue has settled to £9.1 million (2020: £14.2 million) compared with £8.1 million in the year ended 31 March 2019. As highlighted in the CEO report there has been some positive commercial news in Thailand, encouraging developments in The Philippines and Indonesia and early signs of market recovery in Vietnam. India remains challenging where the poultry market has for the last 18 months been suffering with very low commodity prices and reduced demand.

Gross margins at 51% in the year ended 31 March 2021 (2020: 46%) showed a significant improvement. These gains were largely as a result of a favourable geographical mix - China and Japan represented 56% of Group revenues in the year ended 31 March 2021 (2020: 32%), where the margins are higher than the average of the rest of the Group.

Overheads, at £33.6 million were significantly greater in the year ended 31 March 2021 compared with the year ended 31 March 2020 (restated: £27.3 million). Wages and salaries increased to £12.4 million (2020: £8.2 million) reflecting a greater bonus accrual - specifically in China - as well as investment in sales and marketing, R&D and the finance team. In addition, the effect of the US Dollar weakening compared with Sterling resulted in a foreign exchange loss which increased by £1.7 million. Increases in insurance (greater revenue) and audit fee (new auditors with cost overruns incurred last year but impacting this year) were offset by COVID-19 related savings in advertising, travel expenditure and R&D.

Total cash expenditure on research and development in the year was £9.1 million (2020: £10.9 million). The total cash expenditure in R&D can be analysed as follows:

Overall R&D expenditure in the year reduced as a consequence of a cautious approach taken by the Board in the light of the COVID-19 pandemic. At the half year, the Board decided to increase expenditure once the trading patterns could be confidently discerned, and it was clear that the Group had adapted to the new ways of working. This expenditure was expensed to the extent that it related to projects at the research phase and capitalised in accordance with IAS38 to the extent that it related to projects in the latter stage (development phase) of the project life-cycle. About 11% of expenditure was capitalised in the year ended 31 March 2021 (2020: 19%) - this reflects the greater proportion of earlier stage project work such as vaccine and biologicals development.

EBITDA has historically represented a key performance measure; the removal of amortisation (which is a significant annual non-cash charge to profits) and depreciation provides a good indication of the underlying cash trading performance of the business. The charge for amortisation of intangible assets and depreciation in the year was £1.3 million (2020 restated: £1.1 million). The EBITDA margin (excluding foreign exchange movements and expressed as a percentage of revenue in the period) was 23.1% in the year ended 31 March 2021 compared with 11.6% in the year ended 31 March 2020. This doubling in the EBITDA margin arises in part from the increased gross margin; the remainder is the result of operational gearing from increasing revenue with overheads increasing at a lower rate. Greater emphasis is now placed by the Board and the Leadership team on profit before income tax which includes all elements of charges (both cash and non-cash). As described in the Remuneration Committee report the key profit measure by which executive management are rewarded is profit before tax. Accordingly, EBITDA will have far less prominence in the future.

Profit before income tax has increased to £20.3 million in the year ended 31 March 2021 (2020 restated: £6.1 million), through a combination of greater revenue (profit contribution of £15.5 million), stronger margins (profit contribution of £4.7 million) and lower investment in expensed research (£0.7 million) offset by increased foreign exchange differences (£1.7 million) and increased administrative expenses (£5.0 million).

The Group continues to benefit from a low effective tax rate in the UK due to the significant expenditure in the R&D programme for which R&D tax credits are claimed. Historic tax losses result in zero tax payable in the UK in the year. For the Group overall, in the year ended 31 March 2021 the effective tax rate was 17.9% (2020 restated: 10.7%). The increase in the rate this year reflects, in the main, a greater proportion of the Group's profits being taxed in higher tax rate jurisdictions such as China (which has a headline corporation tax rate of 25%).

Profit after tax was £16.6 million in the year ended 31 March 2021 (2020 restated: £5.5 million) reflecting the profit drivers described above offset by the higher effective tax rate. Earnings per share ("EPS") has grown from 5.77 pence in the year ended 31 March 2020 (restated) to 12.08 pence in the year ended 31 March 2021; the increase in EPS is less than the proportionate increase in profit after tax because the minority interest relating to the Group's joint venture partner in China was greater in the year ended 31 March 2021 arising from the significantly stronger trading in China.

The consolidated cash position in the Group has increased from £11.9 million at 31 March 2020 to £19.5 million at 31 March 2021. This consolidated cash position at 31 March 2021 includes £13.7 million (2020: £5.3 million) which is held in the Group's subsidiary in China. A portion of this cash is repatriated from China once per annum by dividend declaration; the Group's share of the China cash distribution which is received in the UK is 51%. During the year the dividend received from the Group's holding in the China subsidiary was £0.6 million - related to the China profitability in the year ended 31 December 2019 (2020: £1.0 million - related to year ended 31 December 2018). The greater impact from ASF in China arose in the year ended 31 December 2019. 

The cash generated from operations was significantly greater in the year ended 31 March 2021 at £15.8 million (2020: £5.5 million) reflecting the increased profitability of the Group. The cash conversion ratio (calculated as cash generated from operations divided by profit before income tax) decreased from 89% to 78% primarily due to an absorption of cash into inventories associated with rising revenues. Trade receivables increased by only 15% despite an increase in Group revenues of 46%, reflecting improved credit control. From operating cashflow, the overdraft was paid down (£2.0 million), income tax of £3.8 million was paid, investment of £0.9 million was made in capitalised development costs, dividends were paid to the minority interest in China (£0.6 million), the US Dollar and other foreign denominated cash balances translated to a foreign exchange loss of £0.7 million and other sundry cash movements (£0.1 million) resulted in an overall net cash improvement of £9.7 million and the higher cash balance at 31 March 2021. The Group's £5 million overdraft facility (undrawn at the year end) remains in place.

The non-controlling interest element of the consolidated Group profit is that portion of the profit attributable to the Group's 49% joint venture partner in China. The portion of the consolidated profit attributable to the non-controlling interest was 51% in the year ended 31 March 2021 (2020: 29%). This increase arises for two reasons: the significant increase in the Group's profits derived from China (the revenue analysis above shows that China represented over half the Group's revenue in 2021 compared with less than a third in 2020) and, secondly, the research and development for the Group being undertaken in the UK - this results in the net profit margin in the UK portion of the Group being less than the net margin in China. Advice has been received following a transfer pricing study which supports a royalty charge and an appropriate royalty agreement will be put in place to more equitably share the profitability relating to the exploitation of the Group's intellectual property.

Audit

The audit for the year ended 31 March 2021 was a more expeditious process than last year: this was the second year of auditing the ECO Group by BDO and the prior year balance sheet did not require a re-audit. BDO attended stock takes, providing them with the required support for the stock on hand at 31 March 2021.

The audit opinion for the year ended 31 March 2020 was qualified by virtue of limitation in scope on two grounds:

· Non-attendance at certain stock takes due to the outbreak of the COVID-19 pandemic

· The inability to access records to support intangible assets capitalised relating to costs incurred prior to 2012.

For the year ended 31 March 2021 the limitation of scope qualification in respect of non-attendance at stock takes is repeated only in respect of the comparative period.

Much work was undertaken on Intangible Assets in the balance sheet to finalise the Directors' assessment of costs in periods prior to 2014 and to remove the limitation in scope from the audit opinion.

In agreement with the auditors, the Directors concluded that IAS 8 allows previously capitalized development cost balances in the balance sheet, which as part of a prior period error adjustment exercise, cannot be supported due to a lack of accounting records, to be expensed. For the year ended 31 March 2020 annual report and accounts, the Directors applied estimates of what proportion of costs should be expensed, for earlier periods where accounting records could not be located in the available time before the 2020 Annual Report and Accounts were signed. Those estimates were consistent with the proportion of costs expensed as part of the prior year adjustment exercise for more recent periods where accounting records were available and reviewed. In order to effect this adjustment (and remove the audit qualification), a revision to the Prior Period Adjustment presented last year has been required and we include an explanatory note to describe this adjustment (note 3 in this Annual Report). The effect of the adjustment at 31 March 2019 is to reduce the carrying value of intangible assets and retained earnings by £6.4 million; at 31 March 2020 to reduce the carrying value of intangible assets by £5.4 million, reduce non-current liabilities by £0.4 million and to reduce retained earnings by £5.0 million; and reduce amortisation within administrative expenses, resulting in an increase in operating profit and profit before tax for the year ended 31 March 2020 of £0.9 million, and a decrease in income tax charge of £0.4m. Having undertaken this adjustment, BDO has now been able to remove the audit qualification and are able to satisfactorily conclude their opinion on the carrying value of intangible assets. This reduction in the carrying value of intangible assets at 31 March 2019 and 31 March 2020 has the secondary benefit of reducing the on-going amortisation charge.

Post balance sheet events

Awards were made to the CEO and the Finance Director under the new LTIP post year end on 28 April 2021. Further details are provided in the Remuneration Committee Report.

Marc Loomes, who joined ECO Animal Health Group plc in 2004, became Managing Director in 2005 and CEO in 2010, has informed the Board that he plans to retire on the 31 December 2022. The Board has commenced a process with a leading executive search consultancy to identify and appoint a successor to take over from Marc during the 2022-23 financial year.

Christopher Wilks 

Finance Director

25 July 2021

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 MARCH 2021

*Please refer to note 3 for further details on the prior year restatement.

The notes on pages 20 to 90 form part of these financial statements.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2021

*Please refer to note 3 for further details on the prior year restatement.

The notes on pages 20 to 90 form part of these financial statements.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2021

* Please refer to note 3 for further details on the prior year restatement.

The notes on pages 20 to 90 form part of these financial statements. 

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2021

Company

The notes on pages 20 to 90 form part of these financial statements.

STATEMENTS OF FINANCIAL POSITION (CO. NUMBER: 01818170)

AS AT 31 MARCH 2021

Approved by the Board and authorised for issue on 25 July 2021

Dr Andrew Jones, Chairman.

*Please refer to note 3 for further details on the prior year restatement.

The notes on pages 20 to 90 form part of these financial statements.

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 MARCH 2021

*Please refer to note 3 for further details on the prior year restatement.

**In the statement of cash flows, cash and cash equivalent is presented net of balances outstanding on bank overdrafts. Please refer to note 20 for further details.

The notes on pages 20 to 90 form part of these financial statements.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2021

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 78 Coombe Road, New Malden, Surrey, KT3 4QS.

The financial information set out in the announcement does not constitute the Group's statutory accounts for the year ended 31 March 2021 or 31 March 2020. The auditors reported on those accounts and their report (i) was qualified at both year ends by virtue of limitation in scope in respect of non-attendance at certain physical inventory counts on 31 March 2020 and, in respect of 31 March 2020 alone, qualified due to non-availability of accounting records prior to 2013 in relation to verification of capitalised development costs, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under section 498 (2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 March 2021 have not yet been delivered to the Registrar of Companies.

2. Summary of significant accounting policies

2.1 Basis of preparation

The Group has presented its annual report and accounts in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006, IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS.

The preparation of financial statements, in conformity with international accounting standards in conformity with the requirements of the Companies Act 2006, 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 of the Group are set out below and have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements.

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 accounts. The Directors concluded that the likelihood of such a reduction was remote, and therefore that no material uncertainty exists with respect of going concern.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.2 Adoption of new and revised standards

The following new standards, amendments and interpretations for existing standards became effective in the financial year. These standards have been applied in preparing these consolidated financial statements but did not have a material effect on the Group.

§ Definition of a Business (Amendments to IFRS 3);

§ Interest Rate Benchmark Reform (Amendments to IFRS 9 and IFRS 7);

§ COVID-19-Related Rent Concessions (Amendments to IFRS 16);

§ IAS 1 Presentation of financial statements, and IAS 8 Accounting policies, changes in accounting estimates and errors (Amendment - Definition of Material); and

§ Revisions to the Conceptual Framework for Financial Reporting.

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early.

The following amendments are effective for the period beginning 1 January 2022:

§ Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37);

§ Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);

§ Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and

§ References to Conceptual Framework (Amendments to IFRS 3).

The Directors do not expect that the adoption of the Standards and Interpretations listed above will have a material impact on the financial statements of the Group in future periods.

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 2021.

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.3 Basis of consolidation (continued)

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.

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 financial statements are presented in Pounds Sterling, which is the Company's functional and the Group's presentation 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. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.5 Foreign currency translation (continued)

(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

The Group's 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. 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.6 Financial instruments (continued)

Financial liabilities

The Group's 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)

· 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. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.8 Other intangible assets (continued)

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.8 Other intangible assets (continued)

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 (or other product) or an approval for marketing Aivlosin 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 more recently announced projects (for example the vaccine collaboration projects with The Pirbright Institute) would be considered to have not yet met the criteria for capitalisation and should have therefore been expensed. Such projects' costs 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.8 Other intangible assets (continued)

Where the Group has capitalised costs which relate to multiple products, a proportional method is adopted to determined what ratio of costs capitalised to date should be subject to amortisation. This method first looks at capitalised costs that relate to specific products and identifies the proportion of such costs that are subject to amortisation at the end of any given half-year period. The ratio thus calculated is then applied to those costs that relate to multiple products to determine the portion that should be subject to amortisation. 

These approaches have been modified where it is possible to allocate an individual capitalised cost to a single identifiable project. In these cases 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

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

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 the Group's 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. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.10 Impairment of non-financial assets (continued)

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 property 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.

An impairment is recognised in profit or loss when there is objective evidence that the asset is impaired and is measured as the difference between the investment's carrying amount and the present value of estimated future cashflows discounted at the effective interest rate adjusted for a risk premium. Impairment losses are reversed in subsequent periods when an increase in the investment's recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised costs would have been had the impairment not been recognised.

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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.13 Joint Arrangements (continued)

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 equals or exceeds 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.15 Leasing (continued)

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. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.15 Leasing (continued)

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. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position.

For the purpose of the statement of cash flows, bank overdrafts are included in the presentation of cash and cash equivalents.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

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 the assets of the Group 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 the Group has a present obligation as a result of a past event and it is probable that the Group 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.

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 Incoterms 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 accruals basis. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

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. 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.

Further details of the inputs to the Black-Scholes model can be found in note 24 to the accumulating share based payment charges in reserves. Share-based payment charges are credited to retained earnings only; the share-based payment reserve account balance is subsumed within 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 substantially 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 substantially 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. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.26 Taxation (continued)

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 recorded in the Group's results are recorded within retained earnings.

The cost of its own shares bought into treasury by the Company 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

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 statement of profit or loss.

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:

Capitalisation and impairment review 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.

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 (CGU's) 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 estimated remaining useful life of the asset. 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.30 Critical accounting estimates and judgements (continued)

Income taxes

The Group is subject to income taxes predominantly in the United Kingdom but 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.

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 23 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 amount of options expected to vest and various other inputs to the Black-Scholes valuation model, as disclosed in note 24. 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.

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%. 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

2.30 Critical accounting estimates and judgements (continued)

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 weighted average of the discount rates applied by the Group is as follows:

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 23);

§ Share-based payments (note 24); 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.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

3. Prior year restatement

Development costs capitalisation reassessment

The Group recognises certain costs as intangible assets, including costs relating to the development of drugs registration, patents, licenses, and distribution rights. Prior to recognising these intangible assets, the Group assesses the assets for attributes including identifiability, control, and future economic benefits as set out in note 2.8 of these financial statements.

For the year ended 31 March 2020 annual report and accounts, the Directors performed a detailed exercise to re-visit all prior periods' capitalised development costs, in order to determine which costs met the capitalisation criteria at the date they were incurred, based on all available accounting records and information, and recorded a prior period adjustment to expense all such costs which did not meet the capitalisation criteria. The Directors applied estimates of what proportion of capitalised development costs should have been expensed, for periods prior to 2014, where all applicable accounting records could not be located in the available time before the 2020 Annual Report and Accounts were signed. Those estimates were consistent with the proportion of capitalised costs subsequently expensed as part of the overall prior year adjustment exercise, which considered all prior periods' capitalised development costs, for more recent periods where accounting records were available and reviewed.

For the year ended 31 March 2021 annual report and accounts, the Directors revisited costs in respect of periods prior to 2014 and completed their search for all available evidence. The Directors also completed their search and provision of evidence to support the capitalisation of costs, incurred during the periods from 2014 to 31 March 2018, for audit purposes.

There were certain staff costs capitalised between 31 March 2011 and 31 March 2013 where there were insufficient records to support the time spent by certain development staff on projects qualifying for capitalisation.

For assets recognised prior to 31 March 2011, only limited records were available, and it was not possible to definitively support the original recognition of these assets. The Directors concluded, after extensive efforts, that it is no longer possible to locate or reconstruct these records.

As the Directors identified errors in the capitalisation of costs where sufficient records are still available, they reconsidered the requirements of IAS 8 for those costs for which sufficient records are not available (i.e. all costs prior to 31 March 2011 and staff costs prior to 31 March 2013) as they consider it is likely that further errors were made but the lack of records make it impracticable to fully quantify the errors.

The Directors concluded that, given the practical limitations to full retrospective restatement to correct the errors and the requirements of IAS 8 where such limitations exist, it is appropriate to retrospectively de-recognise any capitalised development cost balances in the balance sheet relating to the period before 31 March 2011 and any development staff costs prior to 31 March 2013. It is not practicable to determine what balances should have been recognised in their place.

In order to reflect the impact of this final exercise, a revision to the prior period adjustment in respect of development costs recorded in the 31 March 2020 Annual Report, has been required.

As a result, the Group has de-recognised all intangible assets relating to drugs registration, patents, licenses, and distribution rights recognised prior to 31 March 2011 and the aforementioned intangible assets relating to certain development staff costs capitalised between 31 March 2011 and 31 March 2013. The effect is equivalent to these assets not having been recognised originally.

The prior year restatement did not have an impact on the individual financial statements of the Company.

The impact of the prior year restatement on the Group's financial statements is detailed below.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

3. Prior year restatement (continued)

Impact on the Group consolidated income statement for the year to 31 March 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

3. Prior year restatement (continued)

Impact on the Group statement of comprehensive income for the year to 31 March 2020

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

3. Prior year restatement (continued)

Impact on consolidated Statement of financial position

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE YEAR ENDED 31 MARCH 2021

3. Prior year restatement (continued)

Impact on the Group statement of cash flows for the year ended 31 March 2020: