Iain Menneer
"I am very pleased to report that good progress has been made in our product development pipeline."

Iain Menneer Chief Executive Officer

Dog in Repose

Introduction

I am very pleased to report increased sales for the business during a period of investment. Revenues have grown in the period by 5.1% to £13.5m (2014: £12.8m). During the last two years we have been building a business that provides a strong platform from which to launch a new period of growth. This has been based on bringing together the best team possible and giving them the right environment to deliver our key strategic objectives. I am very happy with the progress we are making to deliver that growth.

Business Review

The veterinary market continues to evolve, presenting new opportunities to work differently with a customer base that is consolidating and looking for increasing value from the products and services we provide.

Latest industry figures show that dog numbers in the UK have declined by 4.7% to 8.5m and cats by 6.8% to 7.4m (Pet Food Manufacturers' Association, www.pfma.org.uk), with this trend appearing to reflect across other pet species too. There are no clear reasons for this change at a time when the economy is getting stronger in the UK after several years of recession. The national dog and cat charities believe these changes are as a result of their campaigns promoting responsible pet ownership. We believe we have limited exposure to these changes in pet population due to the clinical nature of our product portfolio and the demographic of veterinary customers likely to have been affected by changes in pet ownership.

Licensed Veterinary Medicines

The Licensed Veterinary Medicines group again generated strong sales, growing by 8.8%. During the first half of the period the main competitor to our product Buprecare (an analgesic and controlled drug) was absent from the market for a period of several months allowing Animalcare to benefit from non-recurring sales estimated at £0.2m.

In the first half of the year we launched the Pet Remedy range of over the counter products on distribution in the UK and Ireland. Pet Remedy is based on a patented formulation containing valerian at a specific level to calm pets. It can be used across all species and has proved very popular and effective in many domestic and veterinary settings.

During the second half we launched four new pharmaceutical products, all on distribution from an EU partner. Synthadon and Anaestamine both complemented our growing anaesthetic and analgesic range; Clavubactin and Fungiconazole are an antibiotic and antifungal product respectively. All are focused on the companion animal market. Whilst in the first few months of their launch phase, sales of each are progressing well.

Encouragingly, our pharmaceutical products are growing above market rates in comparison to the most recent UK market data which show a 1.1% increase for companion animal medicines revenues in the 12 months to March 2015 (National Office of Animal Health, www.noah.co.uk).

Companion Animal Identification

The sales volume of our Identichip microchips increased in the period by 1.7%, however UK revenues decreased by 2.2%, like for like. A significant equine order fulfilled late in the prior period adversely affected revenues from the equine channel in this reporting period.

In April 2016 it will be a legal requirement for all dogs in England to be microchipped and in addition it will be an offence if the owners' details are not kept up to date on the associated microchip database. The Scottish Parliament and Welsh Assembly have recently followed suit in introducing similar legislation, effective April 2016.

This impending change in the law has not had a dramatic effect on the uptake of microchipping. However, our veterinary customers have become more price sensitive and responsive to short-term promotional campaigns. We have plans underway to bring value back into the market once it settles down.

Pleasingly through this period our revenues from services derived from the microchip database have continued to rise.

Animal Welfare Products

The Animal Welfare Products group grew by 2.6% in the period. The infusion accessories range complements our prescription medicine intravenous fluids range and grew in the period by 5.3%, representing over 50% of the product group. Other categories in this group achieved revenues meeting our expectations with very modest levels of commercial support.

As stated before, we continue to assess our product portfolio not only to rationalise poor performing or lower margin items but to selectively invest in new opportunities that complement our existing ranges to enhance revenue growth and profit generation.

People

General

Animalcare is a great place to work and we pride ourselves on the positive and supportive culture. I have highlighted in previous reports that changes have been made to bring the personnel systems up to date and to a level befitting a company of its size and stature. I am very pleased that further progress has been made during the year to incentivise and reward colleagues better. Attention has now focused on staff engagement by improving company-wide communication and awareness raising. These efforts are having a positive effect in all areas of the business; and I am pleased that this year we have again experienced more staff promotions into new and responsible positions.

Management

Senior management changes during the financial year have resulted in a stronger, more capable leadership team. Sarah McKenzie joined as Head of Marketing from a senior commercial position at Teva UK, the global generic pharmaceutical company. Sarah brings directly applicable skills and experience from some very similar dynamics in the human generics market.

More recently, Martin Gore, formerly of Novartis Animal Health's leadership team in the UK, was appointed to a newly created position to focus on European development. Martin has a wealth of commercial skills gained in the animal and human health sector and has recent experience as a country manager in Ireland.

Sales

During the period we have concluded the reorganisation of our sales team. It is divided into two regions addressing the north and south of the UK. A structure has been introduced to support sales management. This change allows us to reward and motivate senior representatives more effectively. Field sales have been supported by the successful introduction of a telesales team. The final development is the strengthening of our key account support necessitated by the increase in corporate and buying group customers. Structural changes have been complemented by significant investment in training and development of our sales team. It is our goal to better serve our customers' changing requirements and build a team that is capable of fully exploiting the new products and services that our product pipeline will bring to market.

Product Pipeline

I am very pleased to report that good progress has been made in our product development pipeline. Development work has focused on identifying new product opportunities and also ways to significantly enhance the commercial potential of existing pharmaceutical products.

Four new and four existing product development projects reached the 'Regulatory' stage of our pipeline (see page 9), three being submitted to the authorities for assessment. One of these products has already been approved and will be launched to the UK market early in the second half of the current financial year. The other two are currently progressing through regulatory assessment successfully to date.

These submissions are a clear sign that the strengthening of the development process is having an effect and that progress is being made; evidence of which will be in their launch from January 2016 onwards. Furthermore, other submissions will be made during the current financial year.

Europe

Animalcare's sales outside the UK have been broadly constant for several years, averaging 8% of total turnover. The growth in our home UK market has not been reflected in mainland Europe. Therefore one of Animalcare's stated strategic objectives is to increase sales outside the UK and reach the potential that patently exists.

A major step forward was the creation of a new post with the sole responsibility to achieve this. As outlined above, Martin Gore was appointed Head of Export Development late in the period.

Martin will assess current distribution arrangements in existing territories, offering support and insight from our central technical and marketing functions as required. In addition he will also identify new territory and distribution partner opportunities. In doing so Martin will increase our exposure in Europe with the intention to stimulate more inward product opportunities too.

Operations

Supply Chain

During the year our operations function has started a structured programme to manage the supply chain more robustly, including monitoring supplier performance and developing more informed forecasting models. It is believed that both of these elements will improve product supply and tighten control of stock levels.

Outlook

Over the past two financial years significant effort has been made to build a strong platform to launch into a new growth phase in Animalcare's history. I believe the essential ingredients are now in place and are already delivering progress in key areas of sales, product development and European growth.

During the past six months significant progress has been made increasing networks and contacts in an effort to source products to acquire or in-license. Whilst still in the early stages, there are some exciting opportunities under discussion.

Our business is strongly cash generative giving us the necessary resources to invest significantly in our product pipeline. We will continue to invest in and develop our enthusiastic and committed Animalcare team who are at the core of everything we do.

Iain Menneer

Chief Executive Officer

Veta-clean