A year of excellent progress in our strategic evolution

Overview

2017 has been a year of excellent progress in our strategic evolution, with good underlying growth achieved while making significant strides in enhancing and broadening Ashfield (our Advisory, Communications, Commercial and Clinical Division) through acquisition while strengthening Sharp (our Commercial & Clinical Packaging Division) through capital expenditures on new facilities, equipment and technology.

Significant currency volatility occurred during the year but, excluding its effect, organic revenue growth was 10% while organic profit growth was 13%. This good organic performance was supplemented significantly by the contribution from newly acquired businesses. Our Return on Capital Employed (ROCE) was 12.8%, compared to 13.6% last year, reflecting the significant investments, both capital and acquisitive, made in FY2017 which have not yet had time to deliver full benefit.

Based on the strong results achieved the Board is pleased to recommend a 7% increase in dividend for the year thus continuing our 30 year upward dividend growth trajectory.

Strategy

As I’ve outlined over the past several years, we have been transitioning the Group away from our traditional lower-growth businesses into ones we believe will offer stronger growth in the years ahead as the pharmaceutical industry and healthcare systems adapt to innovation, increasing costs, more regulation, an ageing population and greater price pressure. We believe that these factors will offer opportunities to service providers who can respond to them with nimble, cost effective and innovative solutions.

In the Ashfield Division, during FY2017, we acquired two companies (STEM Healthcare, UK based and Vynamic US based) that provide advisory services to clients to help them improve their efficiency in key areas and respond to the changing market. We believe providing relevant advisory services can help us build strong relationships with clients and give us greater insights into their needs.

We also acquired three companies (Cambridge BioMarketing and MicroMass Communications both US based, and Sellxpert, German based) to enhance the breadth and depth of our existing communications and commercial services. In the Sharp Division, we acquired an FDA-approved facility in Bethlehem, Pennsylvania which will expand and enhance our packaging services and capabilities, especially in the clinical supplies area. Significant progress was also made in reversing the underperformance in the European operations of Sharp. All in all, during 2017 we reinvested in excess of $270m of the $415m we realised from the sale of the Supply Chain business in 2016.

Our evolution in Ashfield will continue and we plan to add further selling, clinical, communications, creative, digital and advisory capabilities in the future, while our investments in Sharp will also continue to expand capacity and introduce new capabilities, both physical and technological.

Board and Governance

We discuss in the Corporate Governance Report the activities of the Board in 2017, so I won’t repeat them here. Suffice to say 2017 was again active and stimulating for the Board as it continued to oversee the ongoing evolution and growth of the Group. We will bid farewell with great regret to Gerard van Odjik at our upcoming AGM. Gerard has recently taken on a demanding new role and feels he would be unable to give UDG Healthcare the time it requires. He has been an excellent contributor to our deliberations, which we will miss. We have begun the search for a replacement. As we went to print, Alan Ralph, our CFO, informed the Board of his intention to retire from his role in UDG Healthcare next year. This was not entirely unexpected as Alan had previously signalled his desire to do new things. The process of identifying his successor is now well underway.

We were delighted to welcome Myles Lee as a new Board member in April and he has now taken over the chairmanship of the Audit Committee. Myles’ experience, both as CEO and CFO of a global FTSE 100 company which was built over a long period through significant M&A, is already proving to be very valuable. Chris Corbin transitioned during the year from being CEO of our Ashfield division to the role of Executive Chairman of Ashfield. He continues to be a director and his deep experience and entrepreneurial spirit is hugely valued by the Board. Sadly, shortly after he began this transition, he suffered the loss of his wife, Sam, after a very short illness. She had helped him found Ashfield and up to 2013 had continued to work in the business. We all remember her fondly, acknowledge her contribution to the building of Ashfield, and offer Chris our sympathy and support.

As I mentioned last year, the importance of culture is increasingly being focused upon in governance thinking. In my view, no matter how many governance rules or guidelines we create, they are only as good as the culture the Board and management fosters and the example they set. Many of us have seen examples of companies where all the governance boxes are ticked but improper or irresponsible behaviours have still occurred. The Board can influence culture in many ways: its CEO selection and succession oversight is the most obvious. But through its work and through its Committees, the Board also demonstrates what its expectations are, and what it believes to be important. We believe we reinforce a strong ethical culture in UDG Healthcare, and in 2016/2017 a new sub-Committee was formed, the Quality and Compliance Committee. Comprising mainly executives, I also sit on this Committee to emphasise the Board’s commitment to ensuring quality and compliance; key attributes in any healthcare business.

Not content to foster and encourage a positive and ethical culture, the Board will review with interest an employee survey which has just been completed for any negative cultural indicators and seek to work with management to address these in the year ahead.

Having undertaken an independent external review of the Board last year, we carried out our Board evaluation internally this year, but used external consultants to do a detailed review of our Remuneration Committee. The outcome of these evaluations was positive, with some further areas for improvement identified.

Outlook

The pharmaceutical and biotech sectors which we serve are quite dynamic at present, driven by scientific advances, strong funding to support further research and development and consequent commercial launches. Notwithstanding this, several of the major companies face cost pressures as patents expire and more biosimilar products are approved and become accepted. We believe we are well positioned to benefit from these trends, with the capability of providing broad services to emerging companies and cost-effective solutions to major players. Based on this, we continue to invest heavily in facilities and IT infrastructure to ensure we have the capacity and platforms to capitalise on the opportunities that we expect will present themselves.

While making these investments, we enter fiscal 2018 with a good pipeline and an expectation of continued good organic growth, supplemented by the impact of the acquisitions made in the second half of fiscal 2017. Our balance sheet remains strong and we have the capacity and ambition to continue to build our services and scale significantly.

I’d like to take this opportunity on behalf of shareholders and the Board to thank our executive team and all our 9,176 employees worldwide for their hard work and dedication in 2017, and offer them our encouragement and support for 2018.

Peter Gray
Chairman