28th Feb 2006 07:02
Dechra Pharmaceuticals PLC28 February 2006 Issued by Citigate Dewe Rogerson Ltd, BirminghamDate: Tuesday, 28 February 2006 Embargoed: 7.00am Dechra Pharmaceuticals PLC Interim Results for the six months ended 31 December 2005 "Solid progress across all businesses reflecting both strong market conditions and further penetration of our products and services within the veterinary market" All figures now reported under International Financial Reporting Standards asadopted by the European Union 2005 2004 Revenue £116.1m £104.3m +11% Operating profit £5.8m £5.5m +5% Operating profit (pre-product and USA developmentcost) £6.6m £5.9m +13% Profit before taxation £5.2m £4.8m +9% Profit before taxation (pre-product and USAdevelopment cost) £6.0m £5.1m +18% Earnings per share 6.99p 6.49p +8% Interim dividend 1.91p 1.70p +12% Net borrowings £10.2m £13.2m All businesses continue to make solid progress Approval gained in the EU for Vetoryl(R) capsules NVS has improved its competitive position and gained new accounts Continued increase in own brand pharmaceutical sales "Market penetration of our veterinary pharmaceutical portfolio into new andexisting markets is increasing and we expect to deliver further growth andreport positively on the clinical trials in North America in the future." Ian Page, Chief Executive FULL STATEMENT ATTACHED Enquiries:Ian Page, Chief Executive Fiona Tooley, DirectorSimon Evans, Group Finance Director Katie Dale, Senior Account ManagerDechra(R) Pharmaceuticals PLC Citigate Dewe RogersonToday: 0207 638 9571 (until 11.30am) Today: 0207 638 9571Mobile: 07775 642222 (IP) or 07775 642220 (SE) Mobile: 07785 703523 (FMT)Thereafter: 01782 771100 Thereafter: 0121 455 8370www.dechra.com -2- Dechra Pharmaceuticals PLC Interim Results for the six months ended 31 December 2005 Introduction The Group continues to make solid progress across all businesses, with revenuegrowth of 11%. This reflects both strong market conditions and furtherpenetration of our products and services within the veterinary market. In addition to the strong organic growth achieved, the Group has continued tolay the foundations of future growth by, as previously indicated, significantlyincreased product development expenditure compared to the same period last year,and further investment in the establishment of our USA operation. Therefore,whilst operating profit showed a 5% improvement over the comparable period andpre-tax profit a 9% improvement, these figures rise to 13% and 18% respectivelyif stated before increased product and USA development cost, both of which willbe key drivers of value over the long term. Our strategic focus continues to be the ongoing development of the Group's ownveterinary pharmaceutical portfolio for the world's companion animal markets. Itis pleasing to report that two milestones have been achieved in the period.Firstly, through the mutual recognition procedure, we have gained approval inthe EU for one of our lead products, Vetoryl capsules. Marketing will commencevia our European partners in the key territories prior to the end of thisfinancial year. Secondly, the Group continues to make progress on the licensingof both Vetoryl capsules and Felimazole(R) tablets in the USA. Feedback receivedfrom the Food and Drug Administration ("FDA") on the safety and efficacysections of our applications has provided clarity on the specific requirementsto licence these key products in the world's largest companion animal market. Weremain confident of the potential for substantial sales. Further details areprovided later in this report. Financials These interim results are our first to be presented using InternationalFinancial Reporting Standards ("IFRS"). The comparative figures for the yearended 30 June 2005 and the six months ended 31 December 2004 have been re-statedaccordingly. In the six months ended 31 December 2005, Group revenues were up 11% to £116.1million (2004: £104.3 million), whilst operating profit increased by 5% to £5.8million (2004: £5.5 million), and profit before taxation rose 9% to £5.2 million(2004: £4.8 million). Basic earnings per share amounted to 6.99 pence, against 6.49 pence in 2004, up8%. As normal, inventory levels were at a seasonally high level at the end of theperiod being reported on and this caused net borrowings to increase compared to30 June 2005. However, the net borrowings at 31 December 2005 of £10.2 millionshowed a 22% reduction when compared to the £13.2 million at the same point lastyear. We expect by the year-end to have reduced borrowings further, reflectingthe Group's strong cash generation. Interest cover remains strong at 9.2 times operating profit (2004: 7.1 times). Dividend In view of the Board's confidence in the future direction of the Group, theDirectors are declaring an Interim dividend of 1.91 pence (2004: 1.70 pence), anincrease of 12%. The Interim dividend will be paid on 7 April 2006 to shareholders on theRegister as at 10 March 2006. This dividend is covered 3.6 times by earnings(2004: 3.8 times). continued... -3- Review Pharmaceutical Division This division comprises Dechra Veterinary Products ("DVP"), Arnolds VeterinaryProducts ("Arnolds") and Dales Pharmaceuticals ("Dales"). Sales and Marketing The re-branding of our UK pharmaceuticals is progressing to plan with our majorstrategic products now being marketed under the global 'Dechra VeterinaryProducts' brand. DVP continues to increase pharmaceutical sales, driven by accelerated growth ofone of our lead products, Felimazole, within the UK and EU. This was achieved bylaunches into new EU territories by our marketing partners and the UKintroduction of a new 2.5 mg dosage form. DVP USA, established in April 2005, has successfully launched our own brandedThyroxyl oral solution and Thyroxyl tablets for the treatment of caninehypothyroidism in this important region. DVP, led by our experienced US team,recently presented and exhibited at the North American Veterinary Conferencewhere our introduction to the market and our long term plans were well receivedby veterinarians. Terms have been agreed with all the major national andregional distributors, a key step in establishing our presence in North America. We continue to develop the Arnolds brand, which is now focussed on instruments,consumables, and critical care products. We have made progress as market leadersin critical care with market share gains and product introductions. The Vetivex(R) range of licensed products used for fluid therapy, which we acquired lastyear, has seen improvement in market share and pleasing revenue growth. Althoughour Instruments and Consumables business has suffered from competitivepressures, grey imports and price deflation, it produced a satisfactoryperformance with volume sales being maintained. Pharmaceutical ManufacturingDales, our manufacturing facility, enjoyed a positive first half performancethrough further productivity improvements and investment. Service levels to customers are now at record highs, and we expect this trend to be maintained. A complete revision of our Quality Management Systems is at an advanced stage.Also during the first half, we began the commissioning of a new IT system. Thesechanges will enhance quality procedures and improve efficiency as we worktowards achieving FDA compliance. Services Division This division comprises National Veterinary Services ("NVS"), Vetcom Systems("Vetcom"), NationWide Laboratories ("NWL") and Cambridge Specialist LaboratoryServices ("CSLS"). DistributionDespite the continuing competitive market conditions, our wholesaling businessNVS has focussed on improving its competitive position and gaining new accounts.This has produced strong sales growth and further strengthened NVS's marketshare. We have commenced a substantial investment in NVS's central facility, which willincrease capacity and further improve operational efficiency. The warehouse hasbeen extended by a new 16,000 square foot mezzanine floor with major extensionsand operational improvements also being made to the automatic picking circuit. continued... -4- Vetcom Systems This month has seen the launch of 'Vpod', a hand-held, stand-alone, electronicon-line ordering device. Utilising barcode technology, this fast and easy-to-useordering system will allow veterinary practices to maintain optimum stock levelsand place orders at any time of the day. Laboratory ServicesOur laboratory businesses, NWL and CSLS, have produced strong results with salesand operating profit significantly ahead of 2004. Organic growth has been achieved from gaining new accounts, by maximising thereturn from existing customers and by providing new services. Our allergy testing brand, "Allervet" launched last year, continues to exceedour sales expectations. Product Development As outlined in the introduction, Vetoryl capsules, which are used for thetreatment of Cushing's disease in dogs, have received approval for marketing inall 19 European territories which were applied for. This is a major achievementfor our Regulatory team and is now the second product we have successfullylicensed throughout the key territories of Europe. Guidance has been received on Vetoryl capsules from the US regulators, the FDA,providing clear requirements on the further clinical trial work necessary tosatisfy US regulations. Protocols for these trials have been submitted and areawaiting approval. Trial sites have been identified on the East coast of Americaand implementation will commence shortly. These trials are expected to becompleted by the end of 2007. A 10mg strength Vetoryl capsule, which willimprove maintenance dosage options, is also under development for introductionto all markets. Felimazole, our own developed tablet for feline hyperthyroidism, is alsocurrently undergoing clinical trials within the USA. The protocol for theefficacy study has been approved by the FDA and the trials have commenced. Felimazole tablets and Vetoryl capsules also represent a sizeable opportunity inother territories. Dossiers have already been submitted to the Australian andCanadian authorities and negotiations are underway to identify partners in otherterritories where there are significant companion animal markets. Following the recent launch of Urilin, our first UK licensed branded genericproduct, used for the treatment of canine urinary incontinence, we have beengranted a UK marketing authorisation for a further licensed branded genericwhich will be launched in Q4 of this financial year. People Training and development remain key to the future of the business and wecontinue to invest in our people. During the period, we have welcomed a number of new staff, including seniorappointments: Martin Riley as Managing Director and Caitrina Harrison as Sales &Marketing Director at NVS. During the second half, we will be looking to add to our regulatory team,through the recruitment of a US national to monitor our US based field trials. continued... -5- Prospects and Current Trading Our Group wholesaling business NVS, will continue to build on its solid marketshare and take advantage of opportunities within a sector that has recentlywitnessed a significant consolidation. Market penetration of our veterinary pharmaceutical portfolio into new andexisting markets is increasing and we expect to deliver further growth andreport positively on the clinical trials in North America in the future. Overall, trading continues to be in-line with management expectations and welook forward to the future with confidence. Michael Redmond Ian PageNon-Executive Chairman Chief Executive -6- Consolidated Income Statement for the six months ended 31 December 2005 Six months ended Year ended Note 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Revenue 3 116,088 104,263 210,267 Cost of sales (100,015) (90,023) (180,550) --------------------------------- Gross profit 16,073 14,240 29,717 Operating expenses (10,264) (8,705) (18,462)-------------------------------------------------------------------------------Operating profit before product andUSA development cost 6,646 5,873 12,493 Product development costs (680) (310) (1,053) USA development cost (157) (28) (185)------------------------------------------------------------------------------- Operating profit 3 5,809 5,535 11,255 Finance income 4 378 161 355 Finance expense 5 (1,012) (937) (1,909) ------------------------------- Profit before taxation 5,175 4,759 9,701 Income tax expense 6 (1,595) (1,451) (2,674) ------------------------------- Profit for the period attributable toequity holders of the parent 3,580 3,308 7,027 =============================== Earnings per share (pence) Basic 8 6.99p 6.49p 13.77p =============================== Diluted 8 6.86p 6.38p 13.54p ===============================Dividend per share (declared/proposed) 7 1.91p 1.70p 5.20p =============================== -7- Consolidated Balance Sheet At 31 December 2005 As at As at As at 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000ASSETS Non-Current AssetsIntangible assets- goodwill 4,385 4,385 4,385- software 226 203 255- development costs 536 360 510- other intangibles 1,880 789 1,889Property, plant & equipment 5,431 5,073 4,946Deferred taxes 540 155 406 ------------------------------Total non-current assets 12,998 10,965 12,391 ============================== Current AssetsInventories 27,616 24,394 20,390Trade and other receivables 32,656 31,466 33,708Cash and cash equivalents 7,893 6,224 13,924 ------------------------------Total current assets 68,165 62,084 68,022 ============================== Total assets 81,163 73,049 80,413 ============================== LIABILITIES Current LiabilitiesBorrowings (2,315) (1,506) (1,502)Trade and other payables (40,367) (37,869) (41,971)Current tax liabilities (2,535) (1,793) (2,057) ------------------------------Total current liabilities (45,217) (41,168) (45,530) ============================== Non-Current LiabilitiesBorrowings (15,819) (17,903) (17,281) ------------------------------Total non-current liabilities (15,819) (17,903) (17,281) ==============================Total liabilities (61,036) (59,071) (62,811) ==============================Net assets 20,127 13,978 17,602 ============================== EQUITY Issued share capital 515 510 511Share premium account 27,417 26,828 26,953Hedging reserve (71) - -Merger reserve 1,720 1,720 1,720Retained earnings (9,454) (15,080) (11,582) ------------------------------Total equity attributable to equity holders ofthe parent 20,127 13,978 17,602 ============================== -8- Consolidated Statement of Changes in Shareholders' Equity for the six months ended 31 December 2005 Issued Share Hedging Merger Retained Total Share Premium Reserve Reserve Earnings Capital Account £'000 £'000 £'000 £'000 £'000 £'000 Six months ended 31December 2004 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002 Profit for theperiodbeing total - - - - 3,308 3,308recognised incomeandexpense for theperiod Dividends paid - - - - (1,606) (1,606) Share-based paymentsincluding deferredtax taken directly - - - - 230 230to equity Shares issued - 44 - - - 44 --------------------------------------------------------At 31 December 2004 510 26,828 - 1,720 (15,080) 13,978 ======================================================== Year ended 30 June 2005 At 1 July 2004 510 26,784 - 1,720 (17,012) 12,002Profit for theperiodbeing total - - - - 7,027 7,027recognised incomeandexpense for theperiod Dividends paid - - - - (2,473) (2,473) Share-based paymentsincluding deferredtax taken directly - - - - 876 876to equity Shares issued 1 169 - - - 170 --------------------------------------------------------At 30 June 2005 511 26,953 - 1,720 (11,582) 17,602 ======================================================== Six months ended 31December 2005 At 1 July 2005 aspreviously stated 511 26,953 - 1,720 (11,582) 17,602 Impact of adoptionofIAS32 and IAS39 on 1 - - (71) - - (71)July 2005 -------------------------------------------------------- At 1 July 2005 -re-stated 511 26,953 (71) 1,720 (11,582) 17,531 Profit for theperiodbeing total - - - - 3,580 3,580recognised incomeandexpense for theperiod Dividends paid - - - - (1,794) (1,794) Share-based paymentsincluding deferredtax taken - - - - 342 342directly to equity Shares issued 4 464 - - - 468 --------------------------------------------------------At 31 December 2005 515 27,417 (71) 1,720 (9,454) 20,127 ======================================================== -9- Consolidated Statement of Cash Flows for the six months ended 31 December 2005 Six months ended Year ended Note 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Cash flows from operating activities------------------------------------ Profit for the period 3,580 3,308 7,027 Adjustments for:Depreciation 431 489 935Amortisation 68 18 41Gain on sale of property, plant andequipment (10) (32) (42) Finance income (378) (161) (355) Finance expense 1,012 937 1,909 Equity-settled share-based paymentexpenses 199 (34) 488 Income tax expense 1,595 1,451 2,674 ------------------------------ Operating profit before changes inworking capital 6,497 5,976 12,677 Increase in inventories (7,226) (7,415) (3,411) Decrease/(increase) in trade and otherreceivables 970 1,427 (787) (Decrease)/increase in trade and otherpayables (1,711) 884 5,070 ------------------------------ Cash generated from operations (1,470) 872 13,549 Interest paid (967) (1,101) (2,022) Income taxes paid (1,078) (909) (1,996) ------------------------------Net cash from operating activities (3,515) (1,138) 9,531 Cash flows from investing activities------------------------------------ Proceeds from sale of property, plant andequipment 10 130 140 Interest received 334 161 355 Purchase of property, plant and equipment (821) (283) (644) Capitalised development expenditure (56) (148) (321) Purchase of other intangible fixed assets - - (1,100) ------------------------------Net cash from investing activities (533) (140) (1,570) Cash flows from financing activities------------------------------------ Proceeds from the issue of share capital 500 40 138 New borrowings 66 13,160 13,160 Repayment of borrowings (755) (768) (1,538) Dividends paid (1,794) (1,606) (2,473) -------------------------------Net cash from financing activities (1,983) 10,826 9,287 Net (decrease)/increase in cash and cashequivalents (6,031) 9,548 17,248 Cash and cash equivalents at start of period 13,924 (3,324) (3,324) ------------------------------- Cash and cash equivalents at end of period 7,893 6,224 13,924 =============================== Reconciliation of net cash to movement in net borrowings-------------------------------------------------------- Net (decrease)/increase in cash and cashequivalents (6,031) 9,548 17,248 Repayment of borrowings 755 768 1,538 New borrowings (66) (13,160) (13,160) New finance leases - (346) (438) Other non-cash changes (40) 115 63 ------------------------------Movement in net borrowings in the period (5,382) (3,075) 5,251 Net borrowings at start of period (4,859) (10,110) (10,110) ------------------------------Net borrowings at end of period 9 (10,241) (13,185) (4,859) ============================== -10- Notes to the Financial Statements For the six months ended 31 December 2005 1. Transition to International Financial Reporting StandardsThe attached interim financial statements are the first Group interim financialstatements following the adoption of International Financial Reporting Standardsas adopted by the European Union "adopted IFRS". These interim financialstatements have been prepared in accordance with the accounting policies set outbelow and are consistent with the policies the Group expects to follow at theyear-end, taking into account the requirements and options in IFRS 1 'First-timeadoption of International Financial Reporting Standards'. The transition date for the Group's application of adopted IFRS is 1 July 2004and the comparative figures for 31 December 2004 and 30 June 2005 have beenrestated accordingly. Reconciliations of the income statement, balance sheet andnet equity from previously reported UK GAAP to IFRS are shown in note 10. Theconsolidated interim statements are prepared on the basis of adopted IFRSpublished by the International Accounting Standards Board ('IASB') that arecurrently in issue. The adopted IFRS that will be effective (or available forearly adoption) in the annual financial statements to 30 June 2006 are stillsubject to change and additional interpretations. Therefore, the accountingpolicies set out below may be updated by the time the Group prepares its firstfull set of financial statements under IFRS for the year ending 30 June 2006. The information relating to the six months ended 31 December 2005 and 31December 2004 is unaudited and does not constitute statutory accounts. Thecomparative figures for the year ended 30 June 2005 are not the Company'sstatutory accounts for that financial year. The statutory accounts for the yearended 30 June 2005, prepared under UK GAAP, have been reported on by theCompany's auditors and delivered to the Registrar of Companies. The report ofthe auditors was unqualified and did not contain statements under section 237(2)or (3) of the Companies Act 1985. The interim financial statements are unaudited but have been reviewed by theauditors and their report to Dechra Pharmaceuticals PLC is set out at the end ofthis document. 2. Accounting PoliciesThe Group's significant accounting policies are listed below: (a) First Time Adoption The Group has applied IFRS1 'First time adoption of International FinancialReporting Standards' in its initial application of IFRS. The Group is requiredto select appropriate accounting policies under IFRS and, subject to a fewexemptions detailed below, apply them retrospectively to its financialstatements such that all comparative information is presented on the same basis.Accordingly this necessitates the restatement of the balance sheet at 1 July2004, the date of transition (this being the date of the beginning of theearliest financial year for which full comparative information is required) aswell as at 30 June 2005. IFRS1 permits certain exemptions to the full retrospective restatement. Theexemptions that have been adopted by the Group are as follows: Business combinations - business combinations made prior to 1 July 2004 have notbeen restated in accordance with IFRS3 'Business Combinations'. Share based payments - IFRS2 'Share-based payments' has only been applied toawards of share options granted after 7 November 2002 which had not vested by 1January 2005. continued... -11- Financial instruments - IAS32 'Financial Instruments : Disclosure andPresentation' and IAS 39 'Financial Instruments : Recognition and Measurement'have been adopted prospectively from 1 July 2005 with no restatement ofcomparative information which continues to be presented in accordance with UKGAAP. (b) Basis of Preparation The financial statements are presented in Sterling, rounded to the nearestthousand. They are prepared on the historical cost basis except for derivativefinancial instruments that are stated at fair value. The restated financial information for the transition to IFRS at 1 July 2004,the interim period ended 31 December 2004, the year ended 30 June 2005 and theadoption of IAS 32 and IAS 39 at 1 July 2005 has been prepared in accordancewith adopted IFRS and in accordance with the accounting policies as set outbelow. The preparation of financial statements in conformity with adopted IFRSsrequires management to make judgements, estimates and assumptions that affectthe application of policies and reported amounts of assets and liabilities,income and expenses. The estimates and associated assumptions are based onhistorical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis ofmaking the judgements about carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates. The estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period, or in the periodof the revision and future periods if the revision affects both current andfuture periods. (c) Basis of Consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) Transactions Eliminated on Consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. (d) Foreign Currency Foreign Currency Transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Sterling at the foreign exchange rates ruling at the dates the fair value was determined. continued... -12- (e) Derivative Financial Instruments (applicable from 1 July 2005) The Group uses derivative financial instruments to manage its exposure toforeign exchange and interest rate risks. In accordance with its treasurypolicy, the Group does not hold or issue derivative financial instruments forspeculative purposes. However, derivatives that do not qualify for hedgeaccounting are accounted for as trading instruments. On adoption of IAS32 and IAS39, the comparative financial statements have notbeen restated. As permitted under IFRS1 'First time adoption of InternationalFinancial Reporting Standards' the comparative statements continue to hedgeaccount under UK GAAP. On 1 July 2005, the fair values of derivatives used forhedging were included in a hedging reserve. The corresponding adjustments wereto increase trade and other payables by £102,000 and the deferred tax asset by£31,000. As the Group has not adopted hedge accounting under IAS39 from 1 July2005 the hedging reserve is frozen and will only be released to the incomestatement when the related forecast transactions occur. Derivative financial instruments are recognised initially at fair value.Subsequent to initial recognition, derivative financial instruments are statedat fair value. The gain or loss on remeasurement to fair value is recognisedimmediately in the income statement. The fair value of interest rate swaps, floors and ceilings, is the estimatedamount that the Group would receive or pay to terminate the instrument at thebalance sheet date. The fair value of forward exchange contracts and options istheir quoted market price at the balance sheet date, being the present value ofthe quoted forward price. (f) Property, Plant and Equipment (i) Owned Assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (see accounting policy k). (ii) Leased Assets Leases under the terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets acquired by finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. (iii)Subsequent Costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied with the item will flow to the Group and the cost of the item can be measured reliably. All other costs are recognised in the income statement as an expense as incurred. (iv) Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: leasehold improvements period of lease fixtures, fittings and equipment 10% - 33% motor vehicles 25% The residual value, if not insignificant, is reassessed annually. continued... -13- (g) Intangible Assets (i) Goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries, associates and joint ventures. In respect of business acquisitions that have occurred since 1 July 2004, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. In respect of acquisitions prior to this date, goodwill is included on the basis of its deemed cost, which represents the amount recorded under previous GAAP. The classification and accounting treatment of business combinations that occurred prior to 1 July 2004 has not been reconsidered in preparing the Group's opening IFRS balance sheet at 1 July 2004. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is not amortised but is allocated to cash generating units and is tested annually for impairment. (ii) Research and Development Costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense is incurred. The Group is also engaged in development activity with a view to bringing new pharmaceutical products to market. Costs of development are capitalised in the balance sheet unless those costs cannot be measured reliably or it is not probable that future economic benefits will flow to the Group, in which case the relevant costs are expensed to the income statement as incurred. Due to the strict regulatory process involved, there is inherent uncertainty as to the technical feasibility of development projects often until regulatory approval is achieved, with the possibility of failure even at a late stage. The Group considers that this uncertainty means that the criteria for capitalisation are not met unless it is probable that regulatory approval will be achieved and the project is commercially viable. Where development costs are capitalised, the expenditure includes the cost of materials, direct labour and an appropriate proportion of overheads. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. (iii) Other Intangible Assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Expenditure on internally generated goodwill and other intangibles is recognised in the income statement as an expense as incurred. (iv) Subsequent Expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. continued... -14- (v) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite useful life are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date that they are available for use. The estimated useful lives are as follows: software 5 years capitalised development costs 5 - 10 years patent rights Period of patent marketing authorisations Indefinite life product rights Period of product rights (h) Trade and Other Receivables Trade and other receivables are stated at their amortised cost. (i) Inventories Inventories are stated at the lower of cost and net realisable value. Netrealisable value is the estimated selling price in the ordinary course ofbusiness, less the estimated costs of completion and selling expenses. The cost of inventories is based on the first-in first-out principle andincludes expenditure incurred in acquiring the inventories and bringing them totheir existing location and condition. In the case of manufactured inventoriesand work in progress, cost includes an appropriate share of overheads based onnormal operating capacity. (j) Cash and Cash Equivalents Cash and cash equivalents comprises cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of the Group'scash management are included as a component of cash and cash equivalents for thepurpose of the statement of cash flows. (k) Impairment The carrying amounts of the Group's assets, other than inventories and deferredtax assets, are reviewed at each balance sheet date to determine whether thereis any indication of impairment. If any such indication exists, the asset'srecoverable amount is estimated. The recoverable amount of assets is the greater of their net selling price andvalue in use. In assessing value in use, the estimated future cash flows arediscounted to their present value using a pre-tax discount rate that reflectscurrent market assessments of the time value of money and the risks specific tothe asset. For an asset that does not generate largely independent cash inflows,the recoverable amount is determined for the cash-generating unit to which theasset belongs. For goodwill, assets that have an indefinite useful life and intangible assetsthat are not yet available for use, the recoverable amount is estimated at eachbalance sheet date and, in the case of goodwill, at the date of transition toIFRS. An impairment loss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocatedfirst to reduce the carrying amount of any goodwill allocated to cash-generatingunits (group of units) and then, to reduce the carrying amount of the otherassets in the unit (group of units) on a pro rata basis. continued... -15- An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been achange in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carryingamount does not exceed the carrying amount that would have been determined, netof depreciation or amortisation, if no impairment loss had been recognised. (l) Dividends Dividends are recognised in the period in which they are approved by theCompany's shareholders or, in the case of an interim dividend, when the dividendis paid. (m) Interest-Bearing Borrowings Interest-bearing borrowings are recognised at fair value less attributabletransaction costs. Subsequent to initial recognition, interest-bearingborrowings are stated at amortised cost with any difference between cost andredemption value being recognised in the income statement over the period ofborrowings on an effective interest basis. (n) Employee Benefits (i) Pensions The Group operates a defined contribution pension plan for certain employees. Obligations for contributions are recognised as an expense in the income statement as incurred. (ii) Share Based Payment Transactions The Group operates a number of equity-settled share based payment programmes that allow employees to acquire shares of the Company. The Group also operates a Long Term Incentive Plan for Directors and Senior Executives. The fair value of shares or options granted is recognised as an employee expense on a straight line basis in the income statement with a corresponding movement in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the shares or options (the vesting period). The fair value of the shares or options granted is measured using a valuation model, taking into account the terms and conditions upon which the shares or options were granted. For schemes with no market related performance conditions, the amount recognised as an expense in the income statement is adjusted to take into account an estimate of the number of shares or options that are expected to vest together with an adjustment to reflect the number of shares or options that actually do vest. In the case of schemes that already contain market related performance criteria no such adjustments are necessary. The fair value of grants under the Long Term Incentive Plan has been determined using the Monte Carlo simulation model. The fair values of options granted under all other share option schemes have been determined using the Black-Scholes option pricing model. (o) Trade and Other Payables Trade and other payables are stated at their amortised cost. continued... -16- (p) Revenue (i) Goods Sold Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Appropriate provision is made, based on past experience, for the possible return of goods and discounts given to customers. (ii) Milestone Payments Milestone payments received from the granting of distribution and marketing rights for products are recognised in the income statement over the period in which the Company fulfils all of its obligations relating to such payments. (q) Expenses (i) Operating Lease Payments Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement evenly over the period of the lease, as an integral part of the total lease expense. (ii) Finance Lease Payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. (iii) Net Financing Costs Net financing costs comprise interest payable on borrowings, interest receivable on funds invested, foreign exchange gains and losses, and gains and losses on hedging instruments that are recognised in the income statement (see accounting policy e). Interest income is recognised in the income statement as it accrues. The interest expense component of finance lease payments is recognised in the income statement using the effective interest rate method. (r) Income Tax Income tax on the profit or loss for the year comprises current and deferredtax. Income tax is recognised in the income statement except to the extent thatit relates to items recognised directly in equity, in which case it isrecognised in equity. Current tax is the expected tax payable on the taxable income for the year usingtax rates enacted or substantively enacted at the balance sheet date, and anyadjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method and representsthe tax payable or recoverable on most temporary differences which arise betweenthe carrying amounts of assets and liabilities for financial reporting purposesand the amounts used for taxation purposes (the tax base). Temporary differencesare not provided on: goodwill that is not deductible for tax purposes, theinitial recognition of assets or liabilities that affect neither accounting nortaxable profit and do not arise from a business combination; and differencesrelating to investments in subsidiaries to the extent that they will probablynot reverse in the foreseeable future. The amount of deferred tax provided isbased on the expected manner of realisation or settlement of the carrying amountof assets and liabilities, using tax rates expected to apply in the period inwhich the liability is settled or the asset is realised and is based upon taxrates enacted or substantively enacted at the balance sheet date. continued... -17- A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is not probablethat the related tax benefit will be realised against future taxable profits.The carrying amounts of deferred tax assets are reviewed at each balance sheetdate. (s) Segment Reporting A segment is a distinguishable component of the Group that is engaged either inproviding products or services (business segment), or in providing products orservices within a particular economic environment (geographical segment), whichis subject to risks and rewards that are different from those of other segments. (t) Operating Profit and Operating Cash Flow Operating profit and operating cash flow is stated before investment income andfinance costs. 3. Segmental AnalysisThe Group's primary reporting segment is business divisions which correspondwith the way the operating businesses are organised and managed within the Groupand its secondary segment is geographical origin. The following table analyses revenue and operating profit accordingly: Six months ended Year ended 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Business Segment----------------RevenuePharmaceuticals 11,179 9,949 21,381Services 108,101 97,230 194,611Inter division (3,192) (2,916) (5,725) ---------------------------------------------- 116,088 104,263 210,267 ============================================== Operating ProfitPharmaceuticals 2,047 2,081 4,292Services 4,275 3,910 7,973Central costs (513) (456) (1,010) ----------------------------------------------- 5,809 5,535 11,255 =============================================== Geographical OriginRevenueUnited Kingdom 115,945 104,263 210,267USA 143 - - ---------------------------------------------- 116,088 104,263 210,267 ============================================== Operating ProfitUnited Kingdom 6,479 6,019 12,450USA (157) (28) (185)Central costs (513) (456) (1,010) ----------------------------------------------- 5,809 5,535 11,255 =============================================== continued... -18- 4. Finance Income Six months ended Year ended 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Bank interest receivable 318 161 355 Other interest receivable 36 - - Fair value gains on derivative financialinstruments 24 - - ------------------------------------ 378 161 355 ==================================== 5. Finance Expense Six months ended Year ended 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Bank loans and overdrafts 928 873 1,774 Amortisation of arrangement fees 53 51 103 Finance charges payable on finance leases and 19 13 32hire purchase contracts Fair value losses on derivative financialinstruments 12 - - --------------------------------- 1,012 937 1,909 ================================= 6. TaxationThe tax charge for the six months ended 31 December 2005 has been based on theestimated effective rate for the year ending 30 June 2006 of 30.8% (six monthsended 31 December 2004: 30.5%). All taxation is in the United Kingdom. 7. DividendsThe Directors have declared an interim dividend of 1.91p per share (2004: 1.70p)costing £983,000 (2004: £867,000). It is payable on 7 April 2006 to shareholderswhose names are on the Registrar of Members at close of business on 10 March2006. The ordinary shares will become ex-dividend on 8 March 2006. As the dividend was declared after the end of the period being reported and inaccordance with IAS10 'Events After the Balance Sheet Date', the interimdividend has not been accrued for in these financial statements. It will beshown as a deduction from equity in the financial statements for the year ending30 June 2006. continued... -19- 8. Earnings per ShareEarnings per ordinary share have been calculated by dividing the profitattributable to equity holders of the parent on ordinary activities aftertaxation for each financial period by the weighted average number of ordinaryshares in issue during the period. Six months ended Year ended 31.12.05 31.12.04 30.06.05 Pence Pence Pence Basic earnings per share 6.99 6.49 13.77 =================================Diluted earnings per share 6.86 6.38 13.54 =================================The calculation of basic and dilutedearnings per share is basedupon: £'000 £'000 £'000Earnings for basic and diluted earningsper share calculations 3,580 3,308 7,027 ================================= No. No. No.Weighted average number of ordinaryshares for basic earnings per share 51,229,294 50,997,064 51,022,645 Impact of share options 938,907 832,674 879,018 ----------------------------------Weighted average number of ordinaryshares for diluted earnings 52,168,201 51,829,738 51,901,663per share ================================== 9. Analysis of Net Borrowings As at As at As at 31.12.05 31.12.04 30.06.05 £'000 £'000 £'000 Bank loans and overdraft (17,750) (19,058) (18,410)Finance leases and hire purchase contracts (384) (351) (373)Cash and cash equivalents 7,893 6,224 13,924 --------------------------------- (10,241) (13,185) (4,859) ================================= 10. Explanation of Transition to IFRSThe accounting policies set out in note 2 have been applied in preparing theconsolidated interim financial statements for the six months ended 31 December2005, the comparative information for the six months ended 31 December 2004 andthe year ended 30 June 2005 and the preparation of the opening IFRS balancesheet at 1 July 2004 (the Group's date of transition). In preparing its opening balance sheet, comparative information for the sixmonths ended 31 December 2004 and the year ended 30 June 2005 the Group hasadjusted amounts reported previously in financial statements prepared inaccordance with UK GAAP. A full explanation of the principal changes in accounting policies and how thetransition from UK GAAP to IFRS has affected the Group's income statement,balance sheet and net equity was published on 19 October 2005 and is summarisedbelow. A copy of the full document can be obtained from the Company's Corporateweb-site www.dechra.com by clicking on the press releases section. continued... -20- (a) IFRS Reconciliation of Income Statement Comparatives Six months ended Year ended 31 December 2004 30 June 2005 Restated Restated Notes Published IFRS under Published IFRS under UK GAAP adjustments IFRS UK GAAP adjustments IFRS £'000 £'000 £'000 £'000 £'000 £'000 Revenue a 103,263 1,000 104,263 208,197 2,070 210,267 Cost of a (89,023) (1,000) (90,023) (178,480) (2,070) (180,550)sales ------------------------------------------------------------------------------- Gross 14,240 - 14,240 29,717 - 29,717profit Operatingexpenses b, c, (9,097) 392 (8,705) (19,305) 843 (18,462) d, e ------------------------------------------------------------------------------- Operatingprofit 5,143 392 5,535 10,412 843 11,255 Finance 161 - 161 355 - 355income Financeexpense (937) - (937) (1,909) - (1,909) ------------------------------------------------------------------------------Profitbefore 4,367 392 4,759 8,858 843 9,701taxation Income taxexpense (1,418) (33) (1,451) (2,590) (84) (2,674) ============================================================================== Profitattributableto 2,949 359 3,308 6,268 759 7,027equityholders oftheparent ============================================================================== Earnings pershare(pence) Basic 5.78p 0.71p 6.49p 12.28p 1.49p 13.77p ============================================================================== Diluted 5.69p 0.69p 6.38p 12.08p 1.46p 13.54p ============================================================================== continued... -21- (b) IFRS Reconciliation of Balance Sheet Comparatives 31 December 2004 30 June 2005 Notes Published IFRS Restated Published IFRS Restated UK GAAP adjustments under UK GAAP adjustments under IFRS IFRS £'000 £'000 £'000 £'000 £'000 £'000 Non-current assets------------------ Intangible assets - goodwill a 4,103 282 4,385 3,821 564 4,385 - software b - 203 203 - 255 255 - otherintangibles c 789 360 1,149 1,889 510 2,399 Propertyplant b 5,276 (203) 5,073 5,201 (255) 4,946and equipment Deferred d - 155 155 - 406 406taxes ------------------------------------------------------------------------- Totalnon-currentassets 10,168 797 10,965 10,911 1,480 12,391 Current assets-------------- Inventories 24,394 - 24,394 20,390 - 20,390 Trade andotherreceivables 31,466 - 31,466 33,708 - 33,708 Deferred d - - - 4 (4) -taxes Cash and cashequivalents 6,224 - 6,224 13,924 - 13,924 ------------------------------------------------------------------------- Total currentassets 62,084 - 62,084 68,026 (4) 68,022 ------------------------------------------------------------------------- Total 72,252 797 73,049 78,937 1,476 80,413assets ------------------------------------------------------------------------- Current liabilities------------------- Borrowings (1,506) - (1,506) (1,502) - (1,502) Trade andother e (37,726) (143) (37,869) (41,826) (145) (41,971)payables Current taxliabilities (1,793) - (1,793) (2,057) - (2,057) Proposeddividend f (867) 867 - (1,789) 1,789 - -------------------------------------------------------------------------- Total currentliabilities (41,892) 724 (41,168) (47,174) 1,644 (45,530) Non-current liabilities----------------------- Borrowings (17,903) - (17,903) (17,281) - (17,281) Provisions - - - - - - Deferred d (174) 174 - - - -taxes -------------------------------------------------------------------------- Totalnon-currentliabilities (18,077) 174 (17,903) (17,281) - (17,281) --------------------------------------------------------------------------Totalliabilities (59,969) 898 (59,071) (64,455) 1,644 (62,811) -------------------------------------------------------------------------- Net assets 12,283 1,695 13,978 14,482 3,120 17,602 ========================================================================== Equity------ Called upshare capital 510 - 510 511 - 511 Share premiumaccount 26,828 - 26,828 26,953 - 26,953 Merger 1,720 - 1,720 1,720 - 1,720reserve Retainedearnings g (16,775) 1,695 (15,080) (14,702) 3,120 (11,582) --------------------------------------------------------------------------- Equityholders 12,283 1,695 13,978 14,482 3,120 17,602fundsattributableto the ===========================================================================parent continued... -22- c) Reconciliation of Equity 1 July 2004 31 December 2004 30 June 2005 £'000 £'000 £'000 Equity under UK GAAP 10,157 12,283 14,482 Write-back of proposeddividend 1,606 867 1,789 Deferred tax 98 329 402 Lease incentive (89) (143) (145) Capitalisation of developmentcosts 230 360 510 Write-back of goodwillamortisation - 282 564 ----------------------------------------------Equity under IFRS 12,002 13,978 17,602 ============================================== Explanatory notes to the UK GAAP to IFRS Reconciliations Income Statement a. Under IAS18 'Revenue' certain items, such as the sale of trading data tosuppliers, have been reclassified to revenue from cost of sales. There is noimpact on profit, earnings per share or net assets. b. Under UK GAAP, goodwill was amortised over its estimated useful life. UnderIFRS3 'Business Combinations', goodwill is not amortised but is subject toannual impairment review. This has resulted in a credit to the income statementof £282,000 for the six months ended 31 December 2004 and £564,000 for the yearended 30 June 2005. c. Under UK GAAP the accounting policy of the Group was, in general, to writeoff all development expenditure to the income statement as incurred. Under IAS38'Intangible Assets' development expenditure meeting the required criteria mustbe capitalised. This has resulted in a credit to the income statement of£130,000 for the six months ended 31 December 2004 and £280,000 for the yearended 30 June 2005. d. Under IFRS2 'Share-based Payments', the cost of employee share optionsrecognised in the income statement is based upon the excess of the fair value ofthe option over the exercise price at the date of grant. Under UK GAAP, the costrecognised was generally the intrinsic value being the difference in exerciseprice and market price at the date of grant of the option. The change in method of calculation has resulted in a net credit to the incomestatement of £34,000 in respect of the six months ended 31 December 2004 and£55,000 in respect of the year ended 30 June 2005. e. Under UK GAAP, the benefit of lease incentives received (in the form of rentfree periods) was spread over the period until the rent reverts to market rates.Under IAS17 'Leases', the benefit must be spread over the entire lease period.This change has resulted in an additional charge to the income statement of£54,000 for the six months ended 31 December 2004 and £56,000 for the year ended30 June 2005. f. The income tax expense has been adjusted to reflect the tax effect of theabove adjustments. Balance Sheet a. The increase in goodwill reflects the write-back of amortisation previouslycharged under UK GAAP. b. Under IAS38 'Intangible Assets', software costs are classed as intangibleassets. They have therefore been reclassified from property, plant andequipment. There is no impact on the income statement or net assets. continued... -23- c. The increase in other intangible assets represents capitalised developmentcosts under IAS38 'Intangible Assets'. d. The calculation of deferred tax under IAS12 'Income Taxes' can be differentfrom UK GAAP, under which deferred tax is calculated based upon income statementtiming differences. The principal reason for the increase in the deferred taxasset is that deferred tax in respect of share-based payments is calculated byreference to a figure which differs from the charge for such payments in theincome statement. Deferred tax in respect of share-based payments chargeddirectly to the income statement is also taken to the income statement but anyexcess tax relief over this amount is taken directly to equity. e. The increase in trade and other payables represents the balance of leaseincentives received that are being spread over the remaining lease periods. f. Under IAS10 'Events After the Balance Sheet Date' dividends are recognisedwhen they are paid or approved by the shareholders. This generally results in alater recognition in the financial statements than under UK GAAP. g. The increase in retained earnings at 31 December 2004 is made up as follows: - net adjustments to the income statement of £359,000- reduction to credit to equity in respect of share-based payments of (£34,000)- capitalised development costs at 1 July 2004 of £230,000- increase in lease incentives carried forward at 1 July 2004 of (£89,000)- de-recognition of the interim dividend of £867,000- credit to deferred tax recognised directly in equity of £362,000 The increase in retained earnings at 30 June 2005 is made up as follows: - net adjustments to the income statement of £759,000- reduction to credit to equity in respect of share based payments of (£55,000)- capitalised development costs at 1 July 2004 of £230,000- increase in lease incentives carried forward at 1 July 2004 of (£89,000)- de-recognition of the final dividend of £1,789,000- credit to deferred tax recognised directly in equity of £486,000 -24- Independent review report to Dechra Pharmaceuticals PLC Introduction We have been engaged by the Company to review the financial information set outon pages 6 to 23 and we have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the Company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other that the Company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the Directors. The Directorsare responsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes and the reasonfor them are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the Group will be prepared in accordance with IFRSs as adopted bythe European Union. The accounting policies that have been adopted in preparingthe financial information are consistent with those that the Directors currentlyintend to use in the next annual financial statements. There is, however, apossibility that the Directors may determine some changes to these policies arenecessary, when preparing the full annual financial statements for the firsttime in accordance with those IFRSs adopted by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of Interim Financial Information issued by the Auditing PracticesBoard for use in the United Kingdom. A review consists principally of makingenquiries of Group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly we donot express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 31 December 2005. KPMG Audit PlcChartered AccountantsBirmingham28 February 2006 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
DPH.L