REG - Hikma Pharmaceutical - Interim Results <Origin Href="QuoteRef">HIK.L</Origin> - Part 3
29/10/2014 14:01
- Part 3: For the preceding part double click ID:nRST5697Pb
Group
companies are liable to tax. Disagreements with, and between, revenue authorities as to intra-Group transactions, in
particular the price at which goods and services should be transferred between Group companies in different tax
jurisdictions, has the potential to produce conflicting claims from revenue authorities as to the profits to be taxed in
individual territories.
The promotion, marketing and sale of pharmaceutical products and medical devices is highly regulated and the operations of
market participants, such as Hikma, are closely supervised by regulatory authorities and law enforcement agencies,
including the FDA and the US Department of Justice. As a result the Group is subject to certain ongoing investigations by
governmental agencies as well as other various legal proceedings considered typical to its business relating to employment,
product liability and commercial disputes.
17. Foreign exchange rates
Period end rates Average rates
30 June 2014 30 June 2013 31 December 2013 H1 2014 H1 2013 FY 2013
USD/EUR 0.7325 0.7685 0.7263 0.7293 0.7614 0.7529
USD/Sudanese Pound 5.9666 5.5785 5.9755 5.9666 5.6544 5.6988
USD/Algerian Dinar 79.2555 80.0232 78.1082 78.5767 78.4885 79.3595
USD/Saudi Riyal 3.7495 3.7495 3.7495 3.7495 3.7495 3.7495
USD/British Pound 0.5866 0.6572 0.6064 0.5991 0.6473 0.6390
USD/Jordanian Dinar 0.7090 0.7090 0.7090 0.7090 0.7090 0.7090
USD/Egyptian Pound 7.1633 7.0294 6.9586 7.0274 6.8311 6.8861
USD/Japanese Yen 101.5480 99.1710 105.2188 102.5001 95.5219 97.4659
USD/Moroccan Dirham 8.1805 8.5614 8.1069 8.4116 8.8315 8.3517
USD/Tunisian Dinar 1.6866 1.6548 1.6467 1.6126 1.5949 1.6253
18. Subsequent events
On 15 July 2014 Hikma announced that it had completed its acquisition of assets of the US generic injectables business,
Bedford Laboratories ("Bedford") from Ben Venue Laboratories, Inc. ("Ben Venue"), a member of the Boehringer Ingelheim
Group of Companies. The total consideration for the acquisition is up to $300 million comprised of an upfront cash payment
of $225 million which was paid on 15 July 2014 and contingent cash payments of up to $75 million, subject to the
achievement of performance-related milestones over a period of five years from closing the transaction. Moreover, on 24
July 2014 Hikma announced that it had agreed with Ben Venue to acquire substantially all of the assets of their generic
injectables manufacturing site in Bedford, Ohio. The acquisition is pursuant to the exclusivity arrangement entered into
with Ben Venue on 28 May 2014. No incremental consideration will be payable in relation to Hikma's acquiring the Ben Venue
manufacturing site.
Operational risks
Risk Potential impact Mitigation
Compliance with regulatory requirements
> Failure to comply with applicable regulatory requirements and manufacturing standards (often referred to as 'Current Good Manufacturing Practices' or cGMP) > Delays in supply or an inability to market or develop the Group's products> Delayed or denied approvals for the introduction of new products> Product complaints or recalls> Bans on product sales or importation> Disruptions to operations > Plant closure> Potential for litigation > Commitment to maintain the highest levels of quality across all manufacturing facilities> Strong global compliance function that oversees compliance across the Group> Remuneration and reward structure that helps retain experienced personnel> Continuous staff training and know-how exchange> On-going development of standard operating procedures
Regulation changes
> Unanticipated legislative and regulatory actions, developments and changes affecting the Group's operations and products > Restrictions on the sale of one or more of our products > Restrictions on our ability to sell our products at a profit> Unexpected additional costs required to produce, market or sell our products> Increased compliance costs > Strong oversight of local regulatory environments to help anticipate potential changes > Local operations in all of our key markets> Representation and/or affiliation with local industry bodies> Diverse geographical and therapeutic business model
Commercialisation of new products
> Delays in the receipt of marketing approvals, the authorisation of price and re-imbursement > Lack of approval and acceptance of new products by physicians, > Slowdown in revenue growth from new products > Inability to deliver a positive return on investments in R&D, manufacturing and sales and marketing > Experienced regulatory teams able to accelerate submission processes across all of our markets> Highly qualified sales and marketing teams across all markets> A diversified product pipeline with 752 products pending approval, covering a broad range of therapeutic areas> A systematic commitment to quality that helps to secure approval and acceptance of new
patients and other key decision-makers> Inability to confirm safety, efficacy, convenience and/or cost-effectiveness of our products as compared to competitive products and mitigate potential safety issues
products> Inability to participate in tender sales
Product safety
> Unforeseen product safety issues for marketed products, particularly in respect of in-licensed products > Interruptions to revenue flow> Costs of recall, potential for litigation > Reputational damage > Diversification of product portfolio across key markets and therapies> Working with stakeholders to understand issues as they arise> Strong quality, compliance and pharmacovigilance teams capable of addressing issues and providing solutions
Product development
> Failure to secure new products or compounds for development > Inability to grow sales and increase profitability for the Group> Lower return on investment in research and development > Experienced and successful in-house R&D team, with specifically targeted product development pathways> Continually developing and multi-faceted approach to new product development > Strong business development team> Track record of building in-licensed brands> Position as licensee of choice for our key MENA geography
Co-operation with third parties
> Inability to renew or extend in-licensing or other co-operation agreements with third parties> Fraudulent activities by third parties (vendors, partners, > Loss of products from our portfolio> Revenue interruptions> Failure to recoup sales and marketing and business development costs> Negative actions by various regulatory bodies (e.g. US SEC, UK Serious Fraud Office, etc.) > Investment in long-term relationships with existing in-licensing partners> Experienced legal team capable of negotiating robust agreements with our partners > Continuous development of new partners for licensing and co-operation> Diverse revenue model with in-house R&D capabilities> Due diligence by the Group Compliance function on potential vendors,
etc.) partners and other third parties
Integration of acquisitions
> Difficulties in integrating any technologies, products or businesses acquired > Inability to obtain the advantages that the acquisitions were intended to create> Adverse impact on our business, financial condition and results of operations> Significant transaction and integration costs could adversely impact our financial results> Post acquisition discovery of fraudulent activity by the business acquired > Extensive due diligence, including that performed by the Group Compliance function, undertaken as part of any acquisition process > Track record of acquisitions and subsequent business integration> Human resources personnel focussed on managing employee integration following acquisitions > Close monitoring of acquisition and integration costs
Increased competition
> New market entrants in key geographies> On-going pricing pressure in increasingly commoditised markets > Loss of market share> Decreasing revenues on established portfolio > On-going portfolio diversification, differentiation and renewal through internal R&D, in-licensing and product acquisition> Continuing focus on expansion of geographies and therapeutic areas
Disruptions in the manufacturing supply chain
> Inability to procure active ingredients from approved sources > Inability to procure active ingredients on commercially viable terms> Inability to > Inability to develop and/or commercialise new products> Inability to market existing products as planned > Lost revenue streams on short notice> Reduced service levels and damage to customer relationships> Inability to supply finished product to our customers in a timely fashion > Alternate approved suppliers of active ingredients> Long-term relationships with reliable raw material suppliers> Corporate auditing team continuously monitors regulatory compliance of API suppliers > Focus on improving service levels and optimising our supply chain
procure the quantities of active ingredients needed to meet market requirements
Economic and political and unforeseen events
> The failure of control, a change in the economic conditions (including the Middle East, North Africa and the Eurozone), political environment or sustained civil > Disruptions to manufacturing and marketing plans> Lost revenue streams> Inability to market or supply products > Geographic diversification, with 26 manufacturing facilities and sales in more than 50 countries> Product diversification, with 702 products and 1,687 dosage strengths and forms> Strong track record in crisis management
unrest in any particular market or country > Unforeseen events such as fire or flooding could cause disruptions to manufacturing or supply
Litigation
> Commercial, product liability and other claims brought against a company within the Group or the Group as a whole > Financial impact on Group results from adverse resolution of proceedings > Reputational damage > In-house legal counsel with relevant jurisdictional experience> Use of top-tier external legal firms in all jurisdictions > Management team with extensive experience of the generics industry
Financial risks
Risk Impact Mitigation
Foreign exchange risk
> Exposure to foreign exchange movements, primarily in the Algerian, Egyptian, European, Moroccan, Sudanese and Tunisian currencies > Fluctuations in the Group's net asset values and financial results upon translation into US dollars > Entering into currency derivative contracts where possible> Foreign currency borrowing> Matching foreign currency revenues to in-jurisdiction costs
Interest rate risk
> Volatility in interest rates > Fluctuating impact on profits before taxation > Optimisation of fixed and variable rate debt as a proportion of our total debt> Use of interest rate swap agreements
Credit Risk
> Inability to recover trade receivables> Concentration of significant trade balances with key customers in the MENA region and the US > Reduced working capital funds> Risk of bad debt or default > Clear credit terms for settlement of sales invoices > Group Credit policy limiting credit exposures> Use of various financial instruments such as letters
of credit, factoring and credit insurance arrangements
Liquidity Risk
> Insufficient free cash flow and borrowings headroom > Reduced liquidity and working capital funds> Inability to meet short-term working capital needs and, therefore, to execute our long term strategic plans > Continual evaluation of headroom and borrowing> Committed debt facilities > Diversity of institution, subsidiary and geography of borrowings
Tax
> Changes to tax laws and regulations in any of the markets in which we operate > Negative impact on the Group's effective tax rate> Costly compliance requirements > Close observation of any intended or proposed changes to tax rules, both in the UK and in other key countries where the Group operates> Specialised department
that structures compliant, tax effective solutions> Regular use of top professional advisory firms
1 Before the amortisation of intangible assets (excluding software) and exceptional items, as set out in note 4 to the
condensed set of financial statements
2 Earnings before interest, tax, depreciation and amortisation. EBITDA is stated before impairment charges and share of
results from associated companies
3 In H1 2014, amortisation of intangible assets (excluding software) was $7 million compared with $7 million in H1 2013.
In H1 2014, exceptional items included within operating expenses were $2 million compared with $39 million in H1 2013
4 Products are defined as pharmaceutical compounds sold by the Group. New compounds are defined as pharmaceutical
compounds not yet launched by the Group and existing compounds being introduced into a new segment
5 Totals include 123 dermatological and cosmetic compounds in 401 dosage forms and strengths that are only sold in
Morocco
6 Totals include all compounds and formulations that are either launched or approved or pending approval across all
markets, as relevant
7 In the first half of 2013 the Board paid a special dividend of 3.0 cents per share, which reflected the exceptional
performance of the Generics business in the first half of 2013
This information is provided by RNS
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