Posting of Annual Report and AGM Notice

Risk

Controls and Mitigating Actions

Trend

Product quality failure:

The Group operates in highly regulated markets with strict quality requirements. Any quality failure involving the Group's products could lead to loss of reputation, reduction in revenues, recall costs or sanction by the regulators.

The Group has rigorous quality management and assurance processes. Incoming raw materials are analysed, production processes are controlled, and products are sampled for testing prior to release.

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Reliance upon key customers/products:

Both the Aesica and Bespak divisions have a degree of reliance on a relatively small number of key customers/products and the loss of one such customer/product could lead to a significant reduction in revenues.

The Group has significant intellectual property and there are significant barriers to entry. Regulation restricts customers' ability to transfer business elsewhere so a loss of business once approved on a customer programme is unusual. We maintain a close dialogue with all of our customers. Our strategy of diversification has opened up a broader range of products and customers, and is progressively diluting customer/ product concentration.

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Regulatory risk:

The operations of the Group are subject to various regulatory requirements which confer a degree of protection as well as an element of compliance risk, in particular to delivering growth.

A strong compliance regime is in place and regular reviews and audits take place, not only by regulatory bodies such as the FDA and MHRA but also by customers. Bespak is ISO13485 accredited and operates SAP in all its main processes, and has recently expanded its externally recognised regulatory competence in acquiring commercial and clinical trials licenses for drug handling. Aesica's API facilities are inspected and approved by the FDA and all manufacturing sites are approved by the MHRA and comply with cGMP manufacturing standards and requirements. Aesica has consistently invested in facilities and technology ensuring "best in class" quality and reliability.

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Development risk:

Bespak is developing a range of medical device products. Aesica is providing pharmaceutical product formulation development, analytics and manufacturing services to pharmaceutical and biotech companies. At any time, any of the products may fail in clinical trials, be stopped by the customer or may not become commercially successful once launched.

The Group follows rigorous processes for the development of new products. Bespak, where possible, is developing its device technology as a platform for multiple programmes to reduce the exposure to any individual trial. Development and industrialisation of medical devices is considered a core competence of Bespak. Aesica's development services are on a fee per project basis with the core of its revenues coming from manufacturing services.

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Growth risk:

The Aesica acquisition, together with Bespak's success in acquiring an extensive product development portfolio, places significantly increased demands for resources on the business.

The business has well-honed programme planning and management systems and processes. These provide good visibility of resource requirements, whether capital, space, equipment or people, and enable timely fulfilment on multiple parallel programmes.

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Cyber Risk:

Cyber crime is increasing in sophistication, consequences and incidence, with risks including virus 'infection', unauthorised access (hacking), and phishing email-based frauds.

The Group has conducted a cyber security risk assessment and identified mitigating actions and training to reduce the risks. Continual vigilance and training are required to mitigate risks, as perpetrators are creative and dynamic on a wide spectrum of strategies. These risk assessments have been extended to the Aesica business since acquisition.

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Our internal controls include risk management processes to identify key risks and, where possible, to manage those risks through systems and processes and by implementing specific risk mitigation strategies. The most significant risks identified through our progressive review of the risk register that could materially alter the Group's ability to achieve its financial and operating objectives are summarised in this section. Other risks are either unknown or deemed less material. 

Risk

Controls and Mitigating Actions

Trend

Credit risk

The Group has implemented policies and processes that require appropriate credit checks to be made on potential customers before sales over certain limits are agreed. Credit limits and outstanding receivables are reviewed monthly and action taken if a new risk is identified. The Group has an excellent record on collection of receivables. The Group monitors the levels of cash held with financial institutions and the credit rating of those institutions in order to manage the credit risk on cash balances.

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Interest rate risk

The Group is subject to interest rate risk on its revolving bank facility, the terms of which are reviewed by the Board on a regular basis. In the current low interest rate environment, the Group has decided not to hedge its floating rate debt into fixed rate for the time being. However, the Group actively monitors interest rates and debt markets and will manage any floating rate interest rate exposure, as appropriate.

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Currency risk

Currency exposures are reviewed regularly on a monthly basis. The Group has a currency hedging strategy in place to cover known currency exposures. Since the acquisition, the Group has been analysing Aesica's business to understand the nature and timing of the business' currency flows to enable the Group to hedge those exposures appropriately. Bespak's currency exposures remain broadly constant and transactional hedges are executed routinely.

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Liquidity & Leverage risk

The Aesica acquisition has increased the overall leverage of the Group. This will result in increasing borrowing costs and more restrictive covenants than the Group has previously operated under which could limit the Group's commercial and financial flexibility. The Group has strong cash flows, and good earnings visibility ensures that its margins are sufficient to exceed normal operating costs. Its business is cash-generative, and there are well-embedded cash and working capital management processes. Current borrowing levels and financial covenants can be supported comfortably by forecast profit and cash flows. Facilities are in place until 2019.

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Pension risk

The Group works closely with the Pension Trustees to ensure that the Defined Benefit Scheme is adequately funded and that the assets are invested appropriately to meet future liabilities as they fall due. The Scheme was closed to new members in 2002. As at 30 April 2015, the IAS 19 deficit was £17.9m compared with £2.1m as at 30 April 2014. The movement was primarily as a result of unfavourable movements in discount rates and a review of other actuarial assumptions. The last triennial actuarial valuation of the pension scheme was at 30 April 2014: the Company is in discussion with the scheme of Trustees to finalise this. Since the last triennial valuation in 2011, prevailing discount rates have worsened and it is expected that this, in particular, may have a material effect on the revaluation.

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