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UDG Annual Report 2016 - UDG Healthcare plc

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Improving Transforming Growing
UDG Healthcare plc is a leading international partner of choice delivering commercial, clinical, communication and packaging services to the healthcare industry. Improving the lives of patients through our Values: Quality, Partnership, Ingenuity, Expertise and Energy.
Transforming our business to be fit for purpose for the next phase of our development, with investment in our people, our processes and our services.
Growing our client base and service offering to maximise the return to shareholders through organic growth and acquisitions.
Strategic Report Highlights of the Year 01
At a Glance 02
Chairman’s Statement 04
Market Opportunity 10
Business Model 12
Chairman’s Introduction to Corporate Governance 58
Corporate Governance 59
Risk, Investment & Financing Committee Report 88
Report of the Directors 90
Financial Statements Independent Auditor’s Report 94
Group Income Statement 98
Group Statement of Changes in Equity 100
Group Balance Sheet 101
Notes forming part of the Group Financial Statements 103
Company Statement of Comprehensive Income 155
Company Statement of Changes in Equity 156
Company Balance Sheet 157
Notes forming part of the Company Financial Statements 159
Financial Calendar 170
Financial Statem ents
D irectors’ R
eport Strategic R
2015201420132012 2016
* All references to ‘operating profit’ and ‘earnings per share’ included in the Strategic Report are stated excluding the amortisation of acquired intangible assets, transaction costs and exceptional items.
Highlights of the Year
Delivering growth
€104.2m +8%
Non-GAAP information The highlights disclosed above relate to the Group’s continuing operations adjusted for amortisation of acquired intangible assets, transaction costs and exceptional items. The Group reports certain financial measures that are not required under International Financial Reporting Standards (IFRS) which represent the generally accepted accounting principles (GAAP) under which the Group reports. The Group believes that the presentation of these non-GAAP measures provides useful supplemental information which, when viewed in conjunction with our IFRS financial information, provides investors with a more meaningful understanding of the underlying financial and operating performance of the Group and its divisions. These measures are also used internally to evaluate the historical and planned future performance of the Group’s operations and to measure executive management’s performance based remuneration. Reference to these performance measurements throughout this report are to the adjusted measurements unless otherwise stated.
These non-GAAP financial measures are primarily used for the following purposes: • to evaluate the historical and planned underlying results of our operations; • to set director and management remuneration; and • to communicate the Group’s performance to the investment community.
Please see further information and definitions on pages 172 to 176.
28.61c +8%
Asheld Sharp
At a Glance
What we do The Group has three divisions delivering services to the healthcare industry:
Where we operate Ashfield Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Norway, Portugal, Republic of Ireland, Spain, Sweden, Turkey, United Kingdom, United States
Sharp Belgium, the Netherlands, Republic of Ireland, United Kingdom, United States
Operating margin %
A global leader in contract packaging and clinical trial supply services
Packaging design, labelling and printing solutions and industry-leading serialisation solution ‘Track and Trace’ Compliance
A global leader in commercial, clinical and communication services
Providing scientific communication content, advisory and patient-centred services
Medical information and commercial audit services
Turnover by region (€) Turnover by region (€)
385.5m 44.9m199.0m 221.5m
Financial Statem ents
D irectors’ R
eport Strategic R
What we stand for Our Values unite us in how we deliver our mission and vision.
Aquilant Republic of Ireland, the Netherlands, United Kingdom
Quality For us only the best is good enough.
Read more on page 29
Partnership We build on trust through delivering on our promises.
Read more on page 27
Expertise Together we have a wealth of knowledge and skills built over many years.
Read more on page 35
Ingenuity We are committed to solving problems and resourceful thinking every day.
Read more on page 33
Energy We achieve our clients’ goals with imagination and passion.
Read more on page 39
Operating margin %
A leading provider of outsourced services to the medical and scientific sector
Medical and scientific device sales, marketing, engineering and distribution in areas such as endoscopy, cardiology, radiology, surgical and orthopaedics
Turnover by region (€)
Investing for growth Strong organic growth continues and capital reinvestment begins in a challenging macroeconomic environment.
OVERVIEW The year to 30 September 2016 has been a year of excellent progress, with good organic growth continuing while all the major announcements made late last year were finalised and the reinvestment of the capital released was begun.
Revenue growth was 3% in our continuing businesses, while adjusted profit before tax grew 10% and adjusted earnings per share grew 8%. They also generated €85.2 million of operating cash flow, and the return on capital employed (ROCE) in the continuing businesses was 13.7% compared to 13.5% last year (see page 17).
Total earnings per share including discontinued businesses increased only slightly compared to last year arising from the sale of our supply chain businesses and pending the reinvestment of the proceeds. Nonetheless, we are proposing a 5% increase in the dividend to 11.55 cents per share as we have excellent liquidity, and are confident we will increase earnings materially as we reinvest our capital.
From last year’s announcements, the sale of our Irish pharmaceutical wholesale and distribution businesses to McKesson was completed in April, releasing €365.5 million in cash after all expenses and taxes and generating an exceptional profit of €132.1 million. In addition, the CEO handover occurred in February, which was a little earlier than originally announced – a pragmatic decision made on the grounds that an effective handover had at that stage been excellently achieved by Liam FitzGerald and Brendan McAtamney, and the organisation was ready. I will again pay tribute to Liam who seamlessly passed the baton to Brendan and continued to support and assist Brendan up the end of September, when he stepped down from the Board, as previously announced.
One of the consequences of the sale of the Supply Chain business in Northern Ireland was that our minority investment in Medicare, a large pharmacy chain, no longer made strategic sense. Thus, we have begun a process of disposing of this holding and in doing so, the results are now treated as discontinued and we
05UDG Healthcare plc Annual Report and Accounts 2016
Financial Statem ents
D irectors’ R
eport Strategic R
be the best reporting currency for the future. Unfortunately, currency volatility may make comparisons less clear in 2017, but for the long term we believe this to be the right decision.
GOVERNANCE During the year we had a review of the Board conducted by external experts, the second such exercise we’ve undertaken in the last three years, and were pleased with the overall positive assessment. We have some work to do to ensure that the remit of the Nominations & Governance Committee and the Risk, Investment & Financing Committee are fully understood by and communicated to the Board (for more detail about this review see page 61).
The Board continues to run smoothly and effectively, with good, informed debate taking place around our major decisions. In June, recognising the increasing importance of the US market, we added a new non- executive director who is based in the US and works in the pharmaceutical industry. Nancy Miller-Rich is a seasoned executive, who has already brought interesting and valuable perspectives to our discussions.
As recently announced, Chris Corbin, the founder of Ashfield and head of what has become the largest division in the Group, has indicated his intention to retire in 2019, giving the Group plenty of time to ensure a smooth succession. He will remain a director at least until he steps down in 2019.
Philip Toomey, Chair of the Audit Committee and Senior Independent Director, will have been a director for nine years in February 2017. The Board has determined that he remains independent and has asked him to remain on the Board for a further year. Nonetheless, to avoid any negative recommendations from proxy voting advisors, we have decided to recruit a further non- executive director, and to appoint a new Chair to the Audit Committee. We are using an independent recruitment consultant to search for international and plc experienced, Irish-based, financially qualified candidates, and expect to announce a further appointment in the near future.
We are placing our Remuneration Policy, only slightly amended, before you at the upcoming AGM. The appointment of a new CEO prompted us to do considerable work to evaluate our pay levels. As a result, we have made some amendments which we believe are appropriate, taking into account there had only been a 1% increase in CEO pay over the last eight years during which profits grew 56% and our market capitalisation increased by 133%, while the Group’s complexity and geographic spread developed significantly. The details of the changes we have made are set out in the Directors’ Remuneration Report, and these are supported unanimously by the Board.
A lot of attention nowadays is being focussed on the importance of culture in organisations. We believe that a positive, open and honest culture is a trademark of our Company and vital to our future success. While primary responsibility for the creation and nurturing of this culture lies with the management team, the Board is cognisant of its role in supporting this and in seeking evidence that the right culture is being fostered. By its nature this tends to be informal, but we intend to do more in this regard in the coming year.
OUTLOOK Excluding currency translation impacts arising from recent currency volatility, we expect to achieve further good organic growth in the continuing businesses in 2017 even while making significant investments in building our management, IT and physical infrastructure. The latter are designed to ensure the Group has the systems and structures necessary to support its growth as it expands and makes further acquisitions in the months and years ahead. With a good flow of acquisition opportunities, we plan to further enhance earnings as we redeploy our available capital.
Peter Gray Chairman
decided to write down the value of our investment.
We are now a more focused Group with capital to deploy, and the management and Board have put considerable work into further refining our strategic plans and evaluating several significant strategic opportunities. As part of this process we engaged outside experts to gain more insight into the key drivers of the markets in which we operate and those we plan to enter, to ensure our next steps are the best we can take to drive growth and build competitive advantage. Our first acquisitions following the disposal of the Supply Chain businesses were Pegasus (in April) and STEM Marketing (in October) which fit excellently with this objective. We are pleased that we continue to see a strong flow of opportunities, large and not so large, some of which are challenging us to define our risk appetite more clearly.
Of course further challenges exist which are outside our control. The UK’s decision to leave the European Union (Brexit) has disrupted financial markets, and particularly the currency markets. With approximately 41% of our continuing profits currently generated in the UK market, the value of these earnings as expressed in Euro or US Dollars has been eroded by the fall in Sterling, an effect which will become more apparent in our results in 2017 if rates remain as they are. Of course as we invest in new businesses we expect the percentage of profits earned in the UK to fall, but the broader impacts of Brexit are still unknown. We do not expect material impacts on our trading per se but cannot predict how Brexit will impact economic growth in the UK itself, in Europe and globally.
Following the sale of the Irish businesses, the percentage of our profits earned in Euro reduced significantly and it thus no longer made sense to continue reporting our results in that currency. With over 50% (and growing) of our profits generated in the US, with the US being the largest outsourced pharmaceutical services market, and with a strong flow of acquisition opportunities arising there, we decided that the US Dollar would
ROCE For more information on ROCE, turn to page 17.
06 UDG Healthcare plc Annual Report and Accounts 2016
Chief Executive’s Review Brendan McAtamney
Improving, transforming and growing 2016 saw the UDG Healthcare Group deliver good underlying growth as we continue to transform our business.
OVERVIEW AND MARKET I am pleased to present my first Chief Executive’s Review and report that 2016 has seen the positive transformation of UDG Healthcare continue. These changes have positioned us for continued growth into the next phase of our development.
Profit before tax was up 10% and EPS was 8% ahead of 2015. The sale of our United Drug Supply Chain businesses and MASTA to the McKesson Corporation has further advanced our transition to higher margin and higher growth activities. We are now focussed on growing our Ashfield, Sharp and Aquilant divisions by leveraging their strong international platforms. We will remain focussed on strong organic growth and will supplement this with complementary asset acquisition. In doing so we believe we will continue to drive sustainable value creation for our shareholders.
Improving the lives of patients through Quality, Partnership, Ingenuity, Expertise and Energy
Transforming our business to be fit for purpose for the next phase of our development
Growing our client base and service offering to maximise the return to shareholders
07UDG Healthcare plc Annual Report and Accounts 2016
Financial Statem ents
D irectors’ R
eport Strategic R
The vision of UDG Healthcare is to improve the lives of patients around the world every day by partnering with and providing innovative solutions for our pharmaceutical and healthcare clients. As we express that vision we continue to evolve our strategy, which is to capitalise on an increasing trend among pharmaceutical and healthcare companies to outsource non-core and specialist activities on an international basis. I am pleased to report that in 2016 we made significant progress in delivering this strategy. Our clients are also changing to meet patient needs and increasingly looking for us to help them deliver more patient-centric solutions, frequently in a digital form. We are well placed to meet those needs in both creative and innovative ways given the scale, scope and geographic reach of our businesses.
In 2016 we made progress across a number of fronts:
• The overall Group adjusted operating profit grew by 8% and it was very pleasing that the two main growth platforms of Ashfield and Sharp, which account for 90% of overall profit, grew by an aggregated 10%. The overall Group adjusted operating margin also grew significantly to 11.1%.
• The disposal of the United Drug Supply Chain and MASTA businesses was completed in April. This means that the Group is well positioned, with an end of year €128.3 million net cash position, to continue our corporate development activities thereby complementing our underlying organic growth.
• We delivered two acquisitions in calendar year 2016, Pegasus Public Relations, a UK-based integrated communications agency in April and STEM Marketing Limited, a leading global provider of commercial and medical audits to pharmaceutical companies, operating in 35 countries, in October.
DIVISIONAL HIGHLIGHTS ASHFIELD Ashfield has delivered another successful year with operating profits increasing by 7% across the division.
Ashfield Commercial & Clinical: Ashfield has been providing outsourced sales force, nursing and contact centre solutions for over 20 years and in the last year significant progress has been made in evolving our service offer, introducing new innovative commercial models and winning larger contracts, particularly with global clients.
The US business has secured a number of significant new contracts and we now work with 12 out of the top 15 US pharmaceutical companies. Due to the rapid expansion of the business, Ashfield’s US headquarters will move to a new corporate head office in Pennsylvania with larger, enhanced office, meeting and training facilities, which will ensure we are better equipped to meet our clients’ needs.
In Europe we had another year of incremental profit and margin growth with contracts being secured not only on a multi-country basis but also multi-channel, meaning a variety of services being sold in addition to the base sales representative offering. One of our newer solutions introduced was a customer service representative model which was implemented in a number of countries and was seen as a clear differentiator for Ashfield versus its competition.
Our Japanese joint venture, CMIC Ashfield, which launched on 1 October 2014, continues to progress strongly and is now the second largest contract sales organisation in Japan. During 2016, the business launched several new service offerings including a contact centre and a new syndicated sales representative offering and both have been performing very well.
Our vision is to improve the lives of patients around the world, every day.
Ashfield Communications: Ashfield Communications had another strong year in 2016 with significant business wins contributing to the positive performance. We have continued to broaden our range of high value service offerings by fully integrating digital solutions, increasingly with an additional patient-centred approach. Across the globe we now have more than 1,300 employees working in the communications group with significant expertise in the largest disease and therapeutic areas.
The Group acquired Pegasus Public Relations Limited in April 2016, for an initial consideration of £10.1 million with an additional £6.7 million payable, based on the achievement of agreed profit targets over the next three years. Pegasus is a UK-based integrated communications agency complementing the existing services provided by Ashfield Communications. We are pleased with the performance of the business so far, excited by the talented new employees joining our Group and also the additional capability this acquisition brings, particularly in the digital and social media space.
SHARP Sharp delivered another year of strong performance in 2016 with operating profits up by 16% and operating margin up to 12.9%.
In the US our strong performance was driven by organic growth on the back of our market leading position in the delivery of packaging solutions to our clients. This year saw us increase our packaging capacity by 30% with a $45 million investment in Allentown, Pennsylvania, our second major expansion within this campus since 2014. This new expansion went live in June and has enabled us to arrange our business around four main facilities which allowed the creation of centres of excellence for Biotech, Blistering, Bottling and Clinical.
In Europe the realignment of the cost base continued and, whilst we had hoped for higher volumes flowing through the facilities, we saw some improvement, particularly in the second half of the year. We completed an FDA inspection of our Belgian facility where I am pleased to say that we were re-certified. The Board has also approved a new facility for our clinical business in South Wales, UK. Both will provide strong support for business development going forward.
Sharp also continued to invest in serialisation in advance of legislative requirements in 2017. To date we have serialised over three billion units across four of our sites and currently run 35 programmes for our clients.
AQUILANT Aquilant is a leading provider of outsourced sales, marketing, distribution and engineering services to the medical and scientific sectors in the UK, Ireland and the Netherlands. This year was challenging with revenue 8% behind the prior year, however, adjusting for the closure of Aquilant’s UK laboratory business in February 2015 and negative currency movements, underlying revenue was in line with the prior year.
Aquilant renewed a number of important client contracts during the period, added a…