Annual Report & ACCOUNTS for the year ended 30 June 2014

HYR 2014

Acquisition of Phycox

On 20 May 2014, the Group acquired certain trade and assets of PSPC Inc. for a maximum total consideration of US$14.2 million. PSPC's principal product is Phycox, a patented nutraceutical which competes in the US veterinary joint health supplement market. Additionally, a new product is in the final phase of development. The acquisition enhances our US product portfolio and adds further critical mass to our US business. US$8.5 million of the consideration was payable on completion, US$1.5 million was contingent upon the successful registration of the new product, which occurred in June 2014, and US$4.2 million is contingent on future sales.

Book value
£000
Fair value
£000
Recognised amounts of identifiable assets acquired and liabilities assumed
Identifiable assets
Property, plant and equipment701319
Trade and other receivables8686
Inventory617436
Identifiable intangible assets7,483
Net identifiable assets1,4048,324
Goodwill84
Total consideration8,408
Satisfied by:
Cash5,047
Contingent consideration arrangement — paid on 20 June 2014891
Contingent consideration2,470
Total consideration transferred8,408
Net cash outflow arising on acquisition
Cash consideration5,047
Contingent consideration arrangement — paid on 20 June 2014891
5,938

The fair value adjustments mostly relate to harmonisation with the Group IFRS accounting policies, including the application of fair values on acquisition, principally the recognition of product rights in accordance with IFRS 3. No deferred tax has been recognised on the identifiable intangible assets as no temporary differences arise between the carrying amounts of the assets for financial purposes and the amounts used for taxation purposes (the tax base).

The book value of receivables in the table above represents the gross contractual amounts receivable.

The goodwill of £84,000 arising from the acquisition consists of the assembled workforce and technical expertise. None of the goodwill is expected to be deductible for income tax purposes.

Acquisition related costs (included in operating expenses) amounted to £150,000. Phycox's results are reported within the US Pharmaceuticals Segment.

Contingent consideration of US$1.5 million was paid on 20 June 2014 following the successful registration of the new product. The remaining contingent consideration of US$4.2 million (£2.5 million) represents royalties payable of 10% of future global net sales (with a further 2.5% payable on sales over US$7.5 million, and a further 2.5% payable on sales over US$12.5 million).

Phycox contributed £nil revenue and £nil to the Group's underlying pre-tax profit for the period between the date of acquisition and the balance sheet date. If the acquisition of Phycox had been completed on the first date of the financial year, Group revenues for the period would have been £196.4 million and the Group underlying pre-tax profit for continuing operations would have been £40.1 million.

Acquisition of Genitrix Limited

On 1 December 2010, the Group acquired 100% of the share capital of Genitrix Limited. The acquisition of Genitrix Limited, a veterinary pharmaceuticals company based in Billingshurst, UK, is consistent with our strategy to grow our domestic and international pharmaceutical business.

The remaining £300,000 contingent consideration outstanding for this acquisition was paid in the prior period.

Acquisition of DermaPet Inc.

On 22 October 2010, the Group acquired 100% of the share capital of DermaPet Inc., a Florida based business which develops and markets a range of dermatological preparations, including shampoos, conditioners and ear products, for the US and overseas companion animal markets. These veterinary products are marketed and distributed through the same channels as Dechra's current US product portfolio.

During the prior period the Group paid a further US$16,000,000 (£10,033,000) in respect of the acquisition of DermaPet, Inc. A payment of US$15,000,000 was made which related to the achievement of a contingent milestone target; the remaining US$1,000,000 related to deferred consideration which was paid on the second anniversary of the completion date.

The maximum further consideration payable is US$6,000,000 of which US$1,000,000 is payable on the fourth anniversary of the completion date (being 22 October 2014). The remaining US$5,000,000 is contingent upon revenue exceeding US$20,000,000 in any rolling 12 month period ending on the sixth anniversary of the completion date.