Chief Executive's Review

Consistent strong financial performance and strategic execution.

In our last Annual Report, I outlined how the Group had executed on its growth strategy in both Bespak and King Systems.

That progress has continued in FY2013. In Bespak, we have launched a product from the development pipeline, and have also been awarded a potentially transformational programme from Nicoventures. King Systems was divested from the Group in February 2013, with a very full valuation being realised, reflecting the success of the new investment and strategy in the business in the last few years. We have also delivered on our financial expectations and end the year with a very strong balance sheet, and with a development portfolio that is set to deliver significant organic growth.

On a like for like basis1, revenue from products and services increased by £1.7m (1.3%) to £129.5m (FY2012: £127.8m). Bespak revenues2 from products and services rose by £1.5m (1.7%) to £95.0m (FY2012: £93.5m) and King revenues2 rose by £0.2m (0.4%) to £34.5m (FY2012: £34.3m).

On a like for like basis1, operating profit before special items increased by 2.9% to £21.5m (FY2012: £20.9m). Bespak's operating profit2 grew 6.6% to £19.5m (FY2012: £18.2m) with its operating margin increasing to 20.5% (FY2012: 19.5%). King's operating profit2 decreased 23.0% to £2.0m (FY2012: £2.6m) with its operating margin declining to 5.9% (FY2012: 7.6%).

On a like for like basis1, profit before tax and special items increased by £0.9m (4.4%) to £19.6m (FY2012: £18.7m).

Adjusted EPS from continuing and discontinued operations increased by 5.2% to 54.9p per share (FY2012: 52.2p). Basic EPS from continuing and discontinued operations increased by 71.7% to 84.9p per share (FY2012: 49.5p) due to the gain on disposal of King Systems (see note 11 to the financial statements).

Like for like Cash Flow from operating activities1 increased to £20.0m (FY2012: £17.6m).

Like for like EBITDA1 before special items was up £1.1m (4.0%) at £28.3m (FY2012: £27.2m). Working Capital on a like for like basis was down at £8.4m (FY2012: £9.3m) representing 8.8% of sales (FY2012: 10.1%) following a sustained tightening of working capital management processes throughout the year.

Jonathan Glenn

"...continued progression of the development pipeline towards launch and the divestment of King Systems for a full price before contingent consideration."

Capital expenditure of £11.0m (FY2012: £12.1m) was lower than the previous year, which saw investment in the King Systems transformation programme draw to a close. The cash proceeds on disposal of King Systems totalled £74.7m of which £57.1m was used to repay the Group's debt in full leaving the Group balance sheet in a net cash position of £37.0m (2012: Net debt £37.7m). With headroom of £76.1m under its undrawn banking facility, and a further £25.0m available under the accordion facility, the Group has significant cash resources available.

Further commentary on the financial results is contained within the Chief Financial Officer's review, in particular this year to clarify the financial performance on a like for like and statutory reporting basis, in the light of the King Systems' disposal.

The Board is proposing a 5% increase in the final dividend to 12.71p (FY2012: 12.1p), making a total dividend for the year of 19.71p. This increase rebases the Company's dividend cover, and underlines the Board's confidence in the sustainability of the current performance, and in the prospects for the conversion of its development opportunities into increased revenue and operating leverage.

Last year we reported that we had added three new programmes to our development pipeline. This year, our focus has been on progressing these opportunities through our pipeline towards launch. I am pleased to report that in March this year the Chiesi NEXThaler (DEV750) was launched, and production is ramping up to support demand. We also signed an exclusive commercial supply agreement with Nicoventures for a novel nicotine delivery device. We also have a number of new opportunities which are under discussion, including novel IP-led opportunities from our Cambridge-based Innovations team.

In December 2012 we announced that we had signed a contract with Nicoventures, to supply a novel nicotine inhalation device (previously referred to as the Oxette device). The device is intended as a safer alternative to smoking, delivering a regulated dose of nicotine to the user. In the previous year we had been developing the Oxette product with Kind Consumer, and producing samples for them to conduct clinical trials. Kind Consumer Limited has responsibility for obtaining market authorisation for the product, and their application is currently [being considered] by the MHRA. Following regulatory authorisation, through a licensing agreement, the global commerical rights will pass to Nicoventures. Nicoventures awarded Bespak a multi-year exclusive supply contract. This programme is an important business win for Bespak. We are very encouraged by this opportunity.

We have continued to invest in our Innovations team during this year: the Cambridge-based team now stands at ten and growing, and we are now investing over £1m per annum in this aspect of our R&D alone. During a recent Investor Day at Bespak, we unveiled for the first time some of the developments which are being worked on. We have a clear Innovation philosophy and methodology, at the core of which is the identification and satisfaction of unmet needs in patients, clinicians, Life Sciences companies, commercial arena and other technical requirements. We have received positive responses to our innovations, and we expect to be translating some of them into firm commercial development opportunities in the coming months and years.

Innovation Pipeline

In December we announced the divestment of King Systems, our US-based subsidiary engaged in the development and manufacture of disposable supplies to anaesthetists and emergency care practitioners. In recent years, we have made significant investments to improve the efficiency and reduce the operating costs of the business through factory consolidation and automation, and to deliver enhanced organic revenue growth through the development of the King Vision video laryngoscope. It is testament to the turnaround achieved in the business that we received a number of unsolicited approaches to purchase the business, and agreed a sale which provided us with both an attractive up front consideration, and a potentially substantial earn out. The sale completed on 15 February 2013.

We have continued to execute on our strategy for diversified growth which we launched in 2008. At that time, Bespak was primarily focused on the respiratory market, and King Systems was in need of new revenue streams and a more efficient cost base. Our strategy enabled us to reposition King's cost base and to create a strong engine of new organic growth for the business, which enabled us to sell it at a full valuation. In 2008, Bespak was principally engaged in the design and manufacture of devices for respiratory drugs; by contrast, today it has diversified such that it operates in nasal, injectables, nicotine delivery, ocular and POC diagnostics. Moreover it has secured a greater share of the value chain than previously, through the addition of drug handling services to its customers, through one of the nasal development contracts as well as to Nicoventures.

Following the divestment of the King Systems business, our core strategy remains unchanged. Over the past five years, we have successfully diversified the business both horizontally and vertically, strengthened the cost base, and made selective investments into both the Medical House Injectables technology, and the Atlas Genetics POC diagnostics business. Our strategy will continue with a tighter focus on the Life Sciences market, as we exploit the organic development opportunities in front of us. In addition, we will look to grow the business

through inorganic means as suitable and value enhancing opportunities which fit with the Bespak business become available, and which can be leveraged to create further enhanced shareholder value.

In summary it has been a very significant year in a number of areas: consistent strong financial performance; strategic execution in progressing the development pipeline towards launch; the successful launch of the Chiesi NEXThaler; securing a potentially transformational contract from Nicoventures; and the divestment of King Systems at an attractive valuation. We look forward optimistically to continuing strong performance as our strategy continues to deliver.

Jonathan Glenn

Chief Executive

  1. Like for like basis adjusts the comparative figures to reflect the fact that King Systems was disposed of on 15 February 2013. A reconciliation of the like for like figures to the statutory accounts is included in the Finance Review.
  2. Bespak (£19.5m) and King (£2.0m) operating profit before special items performance measures are prepared on a basis that is consistent with the historical segmentation analysis. Operating profit before special items is reconciled in total to the Group statutory accounts (£21.5m).