Hikma Pharmaceuticals Regulatory News (HIK)

London, 13 March 2019 - Hikma Pharmaceuticals PLC (Hikma, Group) (LSE: HIK) (NASDAQ Dubai: HIK) (OTC: HKMPY) (LEI: 549300BNS685UXH4JI75) (rated Ba1 Moody's / BB+ S&P, both stable), the multinational pharmaceutical company, today reports its preliminary audited results for the year ended 31 December 2018.

2018 core1 results summary

· Group core revenue of $2,076 million, up 7%

· Group core operating profit of $460 million, up 19%

· Core basic earnings per share of 137.8 cents, up 31%

· Cashflow from operating activities of $430 million

· Net debt reduced to $361 million and low leverage ratios maintained

2018 reported results summary

· Group revenue of $2,070 million, up 7%

· Group operating profit of $371 million

· Basic earnings per share of 117.0 cents

· Proposed full year dividend of 38 cents per share, up from 34 cents per share

Strategic highlights

· Appointed new Chief Executive Officer and strengthened leadership teams across the Group

· Leveraged our high-quality injectables manufacturing facilities and broad product portfolio to deliver critical medicines to our hospital customers

· Strengthened our Generics business, by enhancing commercial capabilities and streamlining operations

· Reinforced our position as 'partner of choice' in MENA, adding important in-licensed products

· Restructured our global R&D function to improve productivity and increase returns on investment

· Launched 122 new products across all markets, expanding our global product portfolio

· Strengthened our pipeline through a long-term agreement with Vectura to develop and commercialise generic versions of GSK's Ellipta® products

Siggi Olafsson, Chief Executive Officer of Hikma, said:

"The Group has delivered a strong performance in 2018, with revenue and profitability significantly ahead of our expectations at the start of the year. We also made good strategic progress, strengthening our management teams, growing our portfolio, investing in our capabilities and adding new partners.

Our Injectables business continued to perform very well, demonstrating the diversification of our portfolio, the flexibility of our operations in responding to customer needs and our ability to bring important products to market. The significant commercial and operational improvements we have made enabled our Generics business to deliver strong growth and our Branded business continued to grow steadily.

These results show considerable progress and I am confident that we can build on this momentum going forward."

Said Darwazah, Executive Chairman of Hikma, said

"In 2018, we have made transformational changes across our businesses that will enable us to be more competitive and achieve our strategic goals. I am very pleased with the progress we've made and the strong financial performance this year. Looking ahead to 2019 and beyond, I am very optimistic for the future of Hikma. I believe we have set ourselves the right strategic objectives and have a strong leadership team in place to deliver sustainable growth over the long term."

Enquiries

Hikma Pharmaceuticals PLC

FTI Consulting

Hikma helps put better health within reach every day for millions of people in more than 50 countries around the world. For more than 40 years, we've been creating high-quality medicines and making them accessible to the people who need them. Headquartered in the UK, we are a global company with a local presence across the United States (US), the Middle East and North Africa (MENA) and Europe, and we use our unique insight and expertise to transform cutting-edge science into innovative solutions that transform people's lives. We're committed to our customers, and the people they care for, and by thinking creatively and acting practically, we provide them with a broad range of branded and non-branded generic medicines. Together, our 8,400 colleagues are helping to shape a healthier world that enriches all our communities. We are a leading licensing partner in the MENA region, and through our venture capital arm, are helping bring innovative health technologies to people around the world. For more information, please visit www.hikma.com.

A presentation for analysts and investors will be held today at 09:30 UK time at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD. To join via conference call please dial: +44 (0) 20 3936 2999 (UK toll free) or +1 845 709 8568 (US toll free), password: 078263. Alternatively, the results presentation and a webcast recording of the event will be available on Hikma's website at http://webcast.openbriefing.com/hikmaPR2018/. The contents of the website do not form part of this preliminary results announcement.

Business and financial review

The business and financial review set out below summarises the performance of the Hikma Group and our three main business segments, Injectables, Generics and Branded, for the year ended 31 December 2018.

Group

Group revenue grew 7% to $2,070 million in 2018 and Group core revenue grew 7% to $2,076 million (2017: $1,936 million), reflecting good demand for our in-market products and new product launches. Group gross profit was $1,050 million (2017: $967 million). As previously announced, we consolidated our Generics manufacturing facilities and our US distribution facilities and we restructured our Columbus facility. Excluding the related costs, Group core gross profit grew 10% to $1,072 million (2017: $973 million), primarily due to a strong improvement in the profitability of our Generics business. Group gross margin was 50.7% (2017: 49.9%) and core gross margin was 51.6% (2017: 50.3%).

Group operating expenses were $679 million, compared to $1,714 million in 2017. Group operating expenses in 2017 included exceptional items of $1,084 million that arose as a result of an impairment of the Columbus intangible assets and property, plant and equipment. Excluding the amortisation of intangible assets other than software and exceptional items, Group core operating expenses were $612 million (2017: $587 million). The paragraphs below address the Group's main operating expenses in turn.

Sales and marketing (S&M) expenses were $224 million (2017: $236 million). Excluding the amortisation of intangible assets other than software and exceptional items, core S&M expenses were $191 million (2017: $188 million), up 2%. This slight increase reflects enhanced commercial activities in the US and MENA and investments to strengthen our sales and marketing capabilities.

General and administrative (G&A) expenses were $246 million (2017: $239 million), up 3%, due to the cost of strengthening our corporate functions and higher employee benefits. Net impairment reversals on financial assets were $11 million, which related to the release of doubtful debt provisions following collection during the year.

R&D expenses were $147 million (2017: $121 million). Excluding exceptional items,4 core R&D expenses were $118 million (2017: $115 million). This reflected increased investment in our Branded and Injectables R&D programmes, which was partially offset by a reduction in R&D expenditure for our Generics business following a detailed review of our R&D pipeline in 2017. Core R&D was 6% of Group core revenue, in line with 2017.

Other net operating expenses were $73 million (2017: $1,118 million). Excluding exceptional items, core other net operating expenses increased to $68 million (2017: $46 million), primarily reflecting a foreign exchange loss in 2018 compared to a gain in 2017.

The Group reported operating profit of $371 million (2017: $(747) million). Excluding the impact of amortisation other than software and exceptional items, Group core operating profit increased by 19% to $460 million (2017: $386 million) and core operating margin was 22.2% (2017:19.9%).

Group core revenue by business segment

Group core revenue by region

Injectables

In 2018, our global Injectables business performed well, with core revenue up 7% to $832 million (2017: $776 million). In constant currency, global Injectables core revenue was also up 7%.

US Injectables core revenue was $607 million, up 4% (2017: $586 million). While competition on certain products increased significantly, strong demand from our hospital customers for our large and diversified portfolio, recent product launches and our flexibility in responding to market shortages enabled our US business to deliver growth.

MENA Injectables revenue was $120 million, up 17% (2017: $103 million). In constant currency, MENA Injectables revenue increased by 21%, reflecting a strong performance in Saudi Arabia and a significant increase in sales of Remsima®, our infliximab biosimilar product licensed from Celltrion.

European Injectables revenue was $105 million, up 21% (2017: $87 million). In constant currency, European Injectables revenue increased by 15%, reflecting the contribution from recently launched products and expanded capacity for our lyophilised products.

Injectables core gross profit increased to $503 million (2017: $480 million) and core gross margin remained relatively stable at 60.5% (2017: 61.9%), reflecting a favourable product mix. Core operating profit, which excludes the amortisation of intangible assets other than software and exceptional items,5 was $335 million (2017: $315 million). Core operating margin remained extremely strong at 40.3% (2017: 40.6%). This reflects the strong gross margin, which more than offset increased investment in R&D.

During the year, the Injectables business launched 15 products in the US, 17 in MENA and 20 in Europe. We submitted 130 filings to regulatory authorities across all markets and signed a number of licensing agreements to add more complex products to our pipeline. In the US, this included licensing agreements with Hansoh Pharmaceutical Group Co., Ltd. (Hansoh), for a portfolio of injectable oncology medicines, and Beijing Sciecure Pharmaceutical Co., Ltd (Sciecure) for one of their niche injectable anti-viral medicines. In MENA, we signed a licensing agreement with Laboratorios Farmaceúticos Rovi SA (Rovi) for their enoxaparin.

In 2019, we expect global Injectables revenue to be in the range of $850 million to $900 million. We expect revenue growth from new product launches and good demand for our in-market portfolio to more than offset continued price erosion and an easing in demand for products on shortage. We expect core operating margin to be in the range of 35% to 38%.

Generics

In 2018, our Generics business performed extremely well, exceeding the expectations we set at the beginning of the year. Revenue grew 13% to $692 million (2017: $615 million). While the US retail generics market remains competitive, we benefitted from our enhanced commercial capabilities and strengthened business operations. Good growth from our more differentiated product portfolio and new product launches more than offset the impact of continued price erosion.

Generics gross profit was $279 million (2017: $219 million). As previously announced, we consolidated our manufacturing and distribution facilities during the year and restructured our Columbus facility. Excluding related costs, core gross profit was $295 million (2017: $225 million). Gross margin was 40.3% (2017: 35.6%), and core gross margin increased to 42.6% (2017: 36.6%), reflecting an improvement in the product mix, operating leverage and a significant reduction in overheads, partly due to closure of our Eatontown plant.

Generics core operating profit, which excludes the amortisation of intangible assets other than software and exceptional items,6 increased to $93 million (2017: $22 million). This primarily reflects the strong improvement in gross profit. Core operating margin was 13.4% (2017: 3.6%). On a reported basis, Generics operating profit was $40 million compared to an operating loss of $1,082 million in 2017 that arose as a result of an impairment of the intangible assets and property, plant and equipment of the Columbus business.

During the year, the Generics business launched 13 products, including a first-to-file Paragraph IV product with market exclusivity. We continued to invest in pipeline development, submitting eight filings to regulatory authorities, as well as adding products through licensing and partnership agreements. In particular, we expanded our partnership with Vectura with an agreement to develop and commercialise their Open, Inhale, Close (OIC) dry powder inhaler (DPI) platform, including generic versions of GSK's five Ellipta® DPI products. The generic respiratory market is a key area of focus for us and this agreement leverages the investment we have made and the experience we are gaining through our generic Advair Diskus® development programme.

As previously announced, we initiated a repeat clinical study for generic Advair Diskus® during the year. The study is progressing well and we expect to submit a response to the FDA with new clinical data in 2019.

We expect Generics revenue to be in the range of $650 million to $700 million in 2019. This reflects continued price erosion on our marketed portfolio, which we expect to be partially offset with market share gains and new product launches. We expect our focus on cost reduction and operational efficiencies to enable us to achieve a core operating margin in the mid-teens.

Branded

On a reported basis, Branded revenue was $542 million, up 1% (2017: $536 million). On a constant currency basis before adverse movements against the US dollar, primarily in the Sudanese pound and the Algerian dinar, Branded revenue grew 5% to $560 million.

Egypt delivered double-digit revenue growth, reflecting strong underlying market growth, an improvement in our product mix and new product launches. This strong performance in Egypt more than offset lower revenue in Saudi Arabia and Algeria. Revenue in Saudi Arabia decreased slightly, reflecting the timing of sales. A strong pipeline of new launches is expected to drive a return to growth in 2019. In Algeria, planned upgrades at our general formulation plant impacted revenue growth in the first half of the year. We expect a stronger performance in 2019 now that the plant is back on line and manufacturing has commenced at our recently-acquired cephalosporin facility. Our businesses in Iraq, Jordan, Libya and Sudan delivered strong growth in constant currency during the year.

Revenue from in-licensed products represented 36% of Branded revenue (2017: 37%). During the year, we strengthened and expanded our partnerships, adding new in-licensed products to our portfolio. We signed a partnership agreement with Omega Pharma Trading NV, an affiliate of Perrigo Company PLC (Perrigo), for the exclusive right to license and distribute more than 30 consumer healthcare products across MENA, with the exception of current agreements in place. We also have the right of first refusal to the full range of Perrigo's OTC medicines in the region.

During the year, the Branded business launched 57 products and submitted 68 filings to regulatory authorities.

Branded gross profit was $271 million, up 2% (2017: $265 million) and gross margin was 50.0% (2017: 49.4%). In constant currency, gross profit increased by 7% and gross margin increased to 50.7% (2017: 49.4%), reflecting the receipt of an allowance from a supplier to compensate for changing market dynamics.

Core operating profit, which excludes the amortisation of intangibles, was $117 million, up 3% (2017: $114 million), and core operating margin was 21.6%. In constant currency, core operating profit grew 15% and core operating margin increased to 23.4%, up 210 basis points. This primarily reflects the improvement in the gross margin and the release of doubtful debt provisions following collection during the year.

We expect Branded revenue to grow in the mid-single digits in constant currency in 2019.

Other businesses

Other businesses, which is primarily comprised of Arab Medical Containers, a manufacturer of plastic specialised medicinal sterile containers, International Pharmaceuticals Research Centre, which conducts bio-equivalency studies, Hikma Emerging Markets and Asia Pacific FZ LLC, and the chemicals division of Hikma Pharmaceuticals LLC (Jordan) contributed revenue of $10 million in 2018 (2017: $9 million) and an operating loss of $5 million (2017: $(4) million).

Research and development

Our investment in R&D and business development is enabling us to continue expanding the Group's product portfolio. During 2018, we had 122 new launches and received 136 approvals.

To ensure the continuous development of our product pipeline, we submitted 206 regulatory filings.

Net finance expense

Core net finance expense decreased 12% to $51 million (2017: $58 million), due to lower debt in the year. After recognising a non-cash expense of $26 million, which primarily resulted from the remeasurement of the contingent consideration related to the Columbus business, net finance expense was $77 million. We expect Group core net finance expense to be around $50 million in 2019.

Profit before tax

The Group reported profit before tax of $293 million (2017: $(738) million). Core profit before tax was $408 million (2017: $328 million).

Tax

The Group incurred a tax expense of $8 million (2017: $101 million). The reported effective tax rate was 2.7% (2017: (13.7)%), primarily due to the recognition of previously unrecognised deferred tax assets and favourable prior year tax rulings in the US.

Excluding exceptional items, Group core tax expense was $73 million (2017: $72 million). The core effective tax rate decreased to 17.9% (2017: 22.0%), primarily due to a reduction in the effective tax rate in the US and smaller uncertain tax positions in 2018. We expect the Group core effective tax rate to be around 21% in 2019.

Profit attributable to shareholders

Profit attributable to shareholders was $282 million, compared with a loss of $843 million in 2017. Core profit attributable to shareholders increased by 32% to $332 million, compared with $252 million in 2017.

Earnings per share

Core basic earnings per share increased by 31% to 137.8 cents (2017: 105.0 cents) and core diluted earnings per share increased by 31% to 137.2 cents (2017: 104.6 cents). Basic earnings per share was 117.0 cents (2017: (351.3) cents). The basic loss per share in 2017 arose as a result of an impairment of the intangible assets and property, plant and equipment of the Columbus business.

Dividend

The Board is recommending a final dividend of 26 cents per share (approximately 20 pence per share) (2017: 23 cents per share) bringing the total dividend for the full year to 38 cents per share (approximately 29 pence per share) (2017: 34 cents per share, approximately 24 pence per share). The proposed dividend will be paid on 22 May 2019 to eligible shareholders on the register at the close of business on 5 April 2019, subject to approval at the Annual General Meeting on 17 May 2019.

Net cash flow, working capital and net debt

The Group generated strong operating cash flow of $430 million (2017: $443 million). Group working capital days were down 15 days to 210 days, primarily driven by improved cash collections and improved supplier payment terms across the Group in 2018.

Capital expenditure was $107 million (2017: $107 million). Of this, around $45 million was spent in the US to expand the manufacturing capacity and capabilities of our Generics and Injectables businesses. In MENA, around $44 million was spent on strengthening our manufacturing capabilities in Algeria and upgrading our facilities in Jordan, Algeria and Egypt to manufacture new in-licensed products. In Europe, we spent approximately $18 million, primarily on the expansion of our manufacturing facilities in Portugal. We expect Group capital expenditure to be in the range of $120 million to $140 million in 2019.

The Group's net debt (excluding co-development agreements and contingent liabilities) was $361 million at 31 December 2018 (31 December 2017: $546 million).10 The significant decrease was due to the paydown of debt during the year. We continue to have a very strong balance sheet with a net debt to core EBITDA ratio of 0.66x.

In January 2019, a litigation matter with an external party was concluded in Hikma's favour and Hikma received compensation of $32 million.

Balance sheet

Net assets at 31 December 2018 were $1,697 million (31 December 2017: $1,528 million). Net current assets were $775 million (31 December 2017: $777 million).

Outlook

The Group delivered a strong financial performance in 2018 and we made good strategic progress.

Going forward, we expect global Injectables revenue to be in the range of $850 million to $900 million in 2019. We expect revenue growth from new product launches and good demand for our in-market portfolio to more than offset continued price erosion and an easing in demand for products on shortage. We expect core operating margin to be in the range of 35% to 38% in 2019.

We expect Generics revenue to be in the range of $650 million to $700 million in 2019. This reflects continued price erosion on our marketed portfolio, which we expect to partially offset with market share gains and new product launches. We expect our focus on cost reduction and operational efficiencies to enable us to achieve a core operating margin in the mid-teens.

We expect Branded revenue to grow in the mid-single digits in constant currency in 2019.

We expect Group net finance expense to be around $50 million in 2019 and the core effective tax rate to be around 21%. We expect Group capital expenditure to be in the range of $120 million to $140 million.

Looking beyond 2019, we expect to benefit from our continued investment in R&D across our businesses and we will look to fill pipeline gaps through business development.

Responsibility statement

The responsibility statement below has been prepared for the year ended 31 December 2018. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

• The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole;

• The business and financial review, which is incorporated into the strategic report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

• Financial statements taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to access the company's performance, business model and strategy.

By order of the Board

The Board

The Board of Directors that served during all or part of the twelve-month period to 31 December 2018 and their respective responsibilities can be found on the Leadership team section of www.hikma.com.

Cautionary statement

This preliminary announcement has been prepared solely to provide additional information to the shareholders of Hikma and should not be relied on by any other party or for any other purpose.

Definitions

We use a number of non-IFRS measures to report and monitor the performance of our business. Management uses these adjusted numbers internally to measure our progress and for setting performance targets. We also present these numbers, alongside our reported results, to external audiences to help them understand the underlying performance of our business. Our core numbers may be calculated differently to other companies.

Adjusted measures are not substitutable for IFRS results and should not be considered superior to results presented in accordance with IFRS.

Core results

Reported results represent the Group's overall performance. However, these results can include one-off or non-cash items that mask the underlying performance of the Group. To provide a more complete picture of the Group's performance to external audiences, we provide, alongside our reported results, core results, which are a non-IFRS measure. Our core results exclude the exceptional items and other adjustments set out in note 5.

Constant currency

As the majority of our business is conducted in the US, we present our results in US dollars. For both our Branded and Injectable businesses, a proportion of their sales are denominated in a currency other than the US dollar. In order to illustrate the underlying performance of these businesses, we include information on our results in constant currency.

Constant currency numbers in 2018 represent reported 2018 numbers re-stated using average exchange rates in 2017, excluding price increases in the business which resulted from the devaluation of currencies.

EBITDA

EBITDA is earnings before interest, tax, depreciation, amortisation and impairment charges.

Working capital days

We believe Group working capital days provides a useful measure of the Group's working capital management and liquidity. Group working capital days are calculated as Group receivable days plus Group inventory days, less Group payable days. Group receivable days are calculated as Group trade receivables x 365, divided by trailing 12 months Group revenue.

Group net debt

We believe Group net debt is a useful measure of the strength of the Group's financing position. Group net debt is calculated as Group total debt less Group total cash. Group total debt excludes co-development agreements and contingent liabilities.

Forward looking statements

This announcement contains certain statements which are, or may be deemed to be, "forward looking statements" which are prospective in nature with respect to Hikma's expectations and plans, strategy, management objectives, future developments and performance, costs, revenues and other trend information. All statements other than statements of historical fact may be forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of forward looking words such as "intends", "believes", "anticipates", "expects", "estimates", "forecasts", "targets", "aims", "budget", "scheduled" or words or terms of similar substance or the negative thereof, as well as variations of such words and phrases or statements that certain actions, events or results "may", "could", "should", "would", "might" or "will" be taken, occur or be achieved.

By their nature, forward looking statements are based on current expectations and projections about future events and are therefore subject to assumptions, risks and uncertainties that are beyond Hikma's ability to control or estimate precisely and which could cause actual results or events to differ materially from those expressed or implied by the forward looking statements. Where included, such statements have been made by or on behalf of Hikma in good faith based upon the knowledge and information available to the Directors on the date of this announcement. Accordingly, no assurance can be given that any particular expectation will be met and Hikma's shareholders are cautioned not to place undue reliance on the forward-looking statements. Forward looking statements contained in this announcement regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future.

Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation ((EU) No. 596/2014) and the UK Listing Rules and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority), Hikma does not undertake to update the forward looking statements contained in this announcement to reflect any changes in events, conditions or circumstances on which any such statement is based or to correct any inaccuracies which may become apparent in such forward looking statements. Except as expressly provided in this announcement, no forward looking or other statements have been reviewed by the auditors of Hikma. All subsequent oral or written forward looking statements attributable to Hikma or any of its members, directors, officers or employees or any person acting on their behalf are expressly qualified in their entirety by the cautionary statement above. Past share performance cannot be relied on as a guide to future performance. Nothing in this announcement should be construed as a profit forecast.

Neither the content of Hikma's website nor any other website accessible by hyperlinks from Hikma's website are incorporated in, or form part of, this announcement.

Principal risks and uncertainties

The Group faces risks from a range of sources that could have a material impact on our financial commitments and ability to trade in the future. The principal risks are determined via robust assessment considering our risk context by the Board of Directors with input from executive management. The principal risks facing the company have not materially changed over the year and they are set out in the 2018 annual report on pages 60-62. The Board recognises that certain risk factors that influence the principal risks are outside of the control of management. The Board is satisfied that these risks are being managed appropriately and consistently with the target risk appetite. The set of principal risks should not be considered as an exhaustive list of all the risks the Group faces.

1Core results throughout the document are presented to show the underlying performance of the Group, excluding the exceptional items and other adjustments set out in note 5.

2 Constant currency numbers in 2018 throughout the document represent 2018 numbers re-stated using average exchange rates in 2017, excluding price increases in the business which resulted from the devaluation of currencies

3 EBITDA is earnings before interest, tax, depreciation, amortisation and impairment charges. EBITDA is a non-IFRS measure, see page 13 for a reconciliation to reported IFRS results

4 In 2018, Hikma incurred $29 million of R&D costs related to a repeat clinical endpoint study for generic Advair Diskus®. In 2017, Hikma recognised a $29 million contingent consideration gain from Boehringer Ingelheim as compensation for failure to receive FDA approval of generic Advair Diskus® before 24 December 2017. To obtain approval, the FDA requires the completion of an additional clinical endpoint study. Both the contingent consideration and the repeat clinical study have been treated as exceptional items. See note 5 for further information

5 Exceptional items include the costs related to the consolidation of our distribution facilities in the US. Refer to note 5 for further information

6 Exceptional items include the expenses related to a repeat clinical endpoint study for generic Advair Diskus®, the restructuring of our Columbus facility and the closure of our Eatontown manufacturing plant. Refer to note 5 for further information

7 Submissions for new products includes Marketing Authorisations, NDAs, ANDAs, supplements, line extensions, and re-introduction of legacy products by country, submitted in 2018

8 New product approvals includes technical approvals and tentative approvals, line extensions, and the re-introduction of legacy products by country, approved in 2018

9 New product launches includes line extensions and the re-introduction of legacy products by country, launched in 2018

10 Group net debt is calculated as Group total debt less Group total cash. Group net debt is a non-IFRS measure, see page 13 for a reconciliation of Group net debt to reported IFRS results 

11 Includes obligations under finance leases 

Hikma Pharmaceuticals PLC

Consolidated income statement

Hikma Pharmaceuticals PLC

Consolidated statement of comprehensive income

1. This investment was previously designated as available-for-sale financial assets, upon transition to IFRS 9 it has been re-categorised as Investments measured at fair value through profit or loss (FVTPL).

2. This investment was previously classified as available-for-sale and stated at cost (under IAS 39 cost exemption), upon transition to IFRS 9 it has been re-categorised as Investments measured at fair value through other comprehensive income (FVTOCI).

Hikma Pharmaceuticals PLC

Consolidated balance sheet

Hikma Pharmaceuticals PLC

Consolidated statement of changes in equity

1. In 2017 a loss of $1,039 million have been allocated from retained earnings to the merger and revaluation reserves in relation to the Columbus business impairment. (note 5, 9 and 10)

2.This investment was previously designated as available-for-sale financial assets, upon transition to IFRS 9 it has been re-categorised as FVTPL

3.The Group adopted IFRS 9 and IFRS 15 from 1 January 2018. (note 1,3 and 15)

4.This investment was previously classified as available-for-sale and stated at cost (under IAS 39 cost exemption), upon transition to IFRS 9 it has been re-categorised as Investments at FVTOCI

Hikma Pharmaceuticals PLC

Consolidated cash flow statement

1.These cash flows relate to long-term financial debts (note 17) and the movements above reconcile to the movement per the note. In the prior year, the movement reconciled to the note after including a non-cash movement of $1 million in respect of unfavourable translation differences.

2.These cash flows relate to bank overdraft and loans (note 16) and the movements above reconcile to the movement per the note after including a non-cash movement of $2 million (2017: $5 million) in respect of favourable translation differences.

Hikma Pharmaceuticals PLC

Notes to the consolidated financial statements

1. Accounting policies

General information

Hikma Pharmaceuticals PLC is a public limited liability company incorporated and domiciled in England and Wales under the Companies Act 2006.

The Group's principal activities are the development, manufacture, and marketing of a broad range of branded and non-branded generic pharmaceuticals products across the US, the Middle East and North Africa (MENA) and Europe. Hikma is also a leading licensing partner in MENA.

Basis of preparation

The Group consolidated financial statements are prepared in accordance with:

i) EU endorsed International Financial Reporting Standards (IFRS) and interpretations of the International Financial Reporting Standards Interpretations Committee and those parts of the Companies Act 2006 as applicable to companies using IFRS.

(ii) International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB).

The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation to fair value of certain financial assets and liabilities.

The accounting policies included in this note have been applied consistently other than where new policies have been adopted.

The Group's previously published consolidated financial statements were also prepared in accordance with IFRSs issued by the IASB and also in accordance with IFRSs adopted for use in the European Union.

The presentation and functional currency of the Group is the US dollar as the majority of the Group's business is conducted in US dollars.

Adoption of new and revised standards

The following new and revised standards and interpretations have been adopted in the current year. Several other amendments and interpretations apply for the first time in 2018, but do not have an impact on the consolidated financial statements of the Group, but may impact the accounting for future transactions and arrangements.

The following standards and interpretations have not been applied in these consolidated financial statements because while in issue, these are not yet effective:

IFRS 15

IFRS 15 'Revenue from Contracts with Customers' is effective for accounting periods beginning on or after 1 January 2018 and replaces IAS 18 'revenue'. It provides enhanced detail on the principle of recognising revenue to reflect the transfer of goods and services to customers at a value which the Company expects to be entitled to receive. The standard also updates revenue disclosure requirements.

The key revenue recognition policy impacted under IFRS 15 is the accounting of free goods. Previously, free goods were recorded only at cost, within cost of sales and no transaction price was allocated to the free goods revenue. Under IFRS 15 an option to acquire additional goods or services gives rise to a separate performance obligation, if the option provides a material right to the customer that customer would not receive without entering into that contract. The standard requires management to estimate the transaction price to be allocated to the separate performance obligations, to defer revenue and to recognise a contract liability for the performance obligations that will be satisfied in the future. The Group recognises revenue for the option when those future goods or services are transferred to the customer.

The Group has adopted IFRS 15 applying modified retrospective approach on 1 January 2018 with a cumulative adjustment as an increase to other current liabilities of $27 million (contract liability), reflecting the free goods obligations outstanding as at 1 January 2018, an increase of trade receivables by $1 million, decrease in the income tax provision by $1 million and the corresponding net adjustment to decrease retained earnings by $25 million. There is no restatement to prior periods as permitted in the transition rules for IFRS 15. The impact of IFRS 15 on the consolidated financial statements for 31 December 2018.

IFRS 9

IFRS 9 'Financial Instruments' replaces IAS 39 'Financial Instruments: Recognition and Measurement' and is effective for annual periods beginning on or after 1 January 2018, bringing aspects of the accounting for financial instruments: classification, measurement and impairment.

(a) Classification and measurement

The principal impact is that the portfolio investments (quoted securities portfolio) previously, designated as available for sale financial assets have been re-categorised on initial application as Investments FVTPL. For further details see note 13, of the consolidated financial statements. The Group recorded the fair value movements for such investments through of the consolidated income statement for the year ended 31 December 2018.

Equity instruments are normally measured at fair value through profit or loss. However, on initial recognition, the Group may make irrevocable election (on instrument-by-instrument basis) to present in other comprehensive income subsequent changes in the fair value of equity instrument not held for trading.

The fair value movements on investments in unlisted equity instrument (i.e. the Group's venture capital investments) are recorded in other comprehensive income. This category only includes equity instruments, which the Group intends to hold for the foreseeable future. The Group has irrevocably elected (on instrument-by-instrument basis) to classify these equity investments as measured at FVTOCI upon transition to IFRS 9.

Previously, the investments in unlisted shares that were not held for trading were stated at cost, less a provision for any impairment loss (under IAS 39 cost exemption). At transition date, the investments in unlisted shares ($16 million) are re-classed as financial assets measured at FVTOCI.

(b) Impairment

The adoption of IFRS 9 has changed the Group's accounting for impairment losses for financial assets by replacing IAS 39's incurred loss approach with a forward-looking expected credit loss (ECL) approach. IFRS 9 requires the Group to record an allowance for ECLs for all loans and other debt financial assets not held at FVTPL.

The Group has adopted IFRS 9 retrospectively, but with certain permitted exceptions. As a result, prior year results are also not restated, but a cumulative adjustment as a decrease in trade receivables and a corresponding adjustment to decrease equity at 1 January 2018 by $3 million.

The adoption of the ECL requirements of IFRS 9 resulted in an increase in impairment allowance of the Group's debt financial assets.

The other changes introduced in IFRS 9 have not had a significant impact on the Group.

IFRS 16

IFRS 16 was issued in January 2016 and it replaces IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement Contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal form of a Lease'.

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees - leases of 'low-value' assets (e.g. personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset.

Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

IFRS 16 also requires lessees and lessors to make more extensive disclosures than under IAS 17.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019.

Early application is permitted. A lessee can choose to apply the standard using either a full retrospective or a modified retrospective approach. The standard's transition provisions permit certain reliefs, it is currently anticipated that the standard will be adopted on a modified retrospective approach.

In 2018, the Group has assessed the potential effect of IFRS 16 on its consolidated financial statements. The Group expects to recognise lease liabilities of approximately $49 million on 1 January 2019, right-of-use assets of $46 million (after an adjustment for accrued rent of $3 million recognised as at 31 December 2018).

IFRIC 23

IFRIC 23 'Uncertainty over income tax treatments' was issued in June 2017 and will be implemented by the Group from 1 January 2019. The interpretation clarifies that if it is considered probable that a tax authority will accept an uncertain tax treatment, the tax charge should be calculated on that basis. If it is not considered probable, the effect of the uncertainty should be estimated and reflected in the tax charge. In assessing the uncertainty, it is assumed that the tax authority will have full knowledge of all information related to the matter.

The Group has assessed the potential impact of the new interpretation and believes the application of IFRIC 23 on 1 January 2019 will not result in a material change to the provisions held for uncertain tax positions.

2. Going concern

The Directors have, at the time of approving the consolidated financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence and therefore considered the going concern basis as appropriate. Therefore, they continue to adopt the going concern basis of accounting in preparing the consolidated financial statements

3. Revenue from contracts with customers

Business and geographical markets:

The following table provides an analysis of the Group's sales by segment and geographical market, irrespective of the origin of the goods/services:

The top selling markets in 2018 are as below:

Included in revenue arising in the Generics and Injectables segments is revenue of approximately $309 million (2017: $301 million) which arose from the Group's largest customer which is located in the US.

Contract balances:

Trade receivables are non-interest bearing. Typical credit terms in the US range from 30 to 90 days, in Europe from 30 to 120 days, and in MENA from 180 to 360 days.

Contract liabilities mainly relate to returns provisions and free goods balances. The movement in the year is mainly due to the increase in contract liability offset by the settlement of free goods liability of $28 million in relation to a customer account receivable balance.

There was nominal amount of revenue recognised in the year in relation to the contract liability balance recognised at the beginning of the year.

4. Business segments

For management reporting purposes, the Group is organised into three principal operating divisions - Injectables, Generics and Branded. These divisions are the basis on which the Group reports its segmental information.

Core operating profit, defined as 'segment result', is the principal measure used in the decision-making and resource allocation process of the chief operating decision maker, who is the Group's Chief Executive Officer.

Information regarding the Group's operating segments is reported below:

'Others' mainly comprises Arab Medical Containers LLC, International Pharmaceutical Research Center LLC, Hikma Emerging Markets and Asia Pacific FZ LLC, and the chemicals division of Hikma Pharmaceuticals LLC (Jordan).