Dottikon ES : Condensed Annual Report 2018/19

2018/19 Condensed Annual Report Your Specialist for Hazardous Reactions.

3 DOTTIKON ES

Condensed Annual Report 2018/19

Content

Summary/Outlook	5
Group Financial Statements DOTTIKON ES Group	15
	Consolidated Income Statements	16
	Consolidated Balance Sheets	17
	Consolidated Cash Flow Statements	18
	Consolidated Statements of Changes in Equity	19
	Notes	20
Corporate Governance	31
Investor Relations	41

The Annual Report 2018/19 in English includes only condensed financial information.

The comprehensive Annual Report 2018/19 is available in German.

5 Summary/Outlook DOTTIKON ES Group

Condensed Annual Report 2018/19

Dear Shareholder,

Herewith we present to you DOTTIKON ES Group's Condensed Annual Report 2018/19 for the period from April 1, 2018, to March 31, 2019. Despite a clearly stronger second business half- year, net sales and net income for the full business year 2018/19 remained below the previous year's figures on the back of a weak first business half-year as a result of increased sourcing complexity, campaign interruptions, and the resulting production and delivery acceptance delays.

This year's Annual Report is dedicated to our new laboratory facility G017, which was officially inaugurated on May 10, 2019. It currently offers workplaces for 150 employees in the areas of routefinding, process design, chemical process and analytical method development, quality assurance, product safety, validation, registration, and quality control, with an option to expand to 200 workplaces with little time of preparation. This allows DOTTIKON ES to satisfy the risen market demand for services related to chemical process development and the manufacturing of active pharmaceutical ingredients.

Review

At CHF 147.7 million, net sales in the business year 2018/19 were 6.6 percent lower than in the previous year. Compared with the already strong second half of the previous business year, net sales for the second business half-year 2018/19 rose by 3.3 percent to CHF 91.1 million. The production output for the full business year - net sales plus inventory changes in semi-finished

6 Summary/Outlook DOTTIKON ES Group

Condensed Annual Report 2018/19

7 Summary/Outlook DOTTIKON ES Group

Condensed Annual Report 2018/19

and finished goods - declined by 1.6 percent compared to the previous year. The strong increase in semi-finished and finished goods by CHF 12.2 million reflects the high order volume for the ongoing business year 2019/20. Despite lower net sales, together with the more material-intensive product mix, this increase in inventory resulted in a CHF 3.6 million increase in material expenses compared to the previous year. The increase in personnel expenses of 3.2 percent was roughly at par with the 3.3 percent buildup in the average full-time equivalent employees to handle the strong increase in order volumes and rise in market demand in the second business half-year. In the reporting year, existing projects and customer relationships were further developed, while new projects were acquired and new customer relations were built. Overall, this contributed significantly to the broad-based growth in the second half of the business year 2018/19. In the reporting year, lower net sales, the increase in semi-finished and finished goods, the related increase in material expenses, and higher personnel expenses resulted in an EBITDA of CHF 39.9 million, 15.3 percent lower than in the previous year, and an EBITDA

KEY FIGURES, APRIL-MARCH

CHF million		2017/18A	2018/19	Changes
A Restated, see "Changes in
Net sales	158.2	147.7	-6.6%
Corporate Accounting Principles",
pages 20 and 21
EBITDA	47.1	39.9	-15.3%
		EBITDA margin (in % of net sales)	29.7%	27.0%
		EBIT	30.8	20.2	-34.5%
		EBIT margin (in % of net sales)	19.5%	13.6%
		Net income	25.8	16.3	-37.1%
		Net income margin (in % of net sales)	16.3%	11.0%
		Cash flow from operating activities	39.2	38.2	-2.6%
		Employees (FTE, annual average)	573	592	3.3%

margin of 27.0 percent (previous year: 29.7 percent). When looking at the second business

half-year alone, EBITDA was CHF 30.1 million (previous year: CHF 27.2 million), thus 10.8 percent above the previous-year period. The EBIDTA margin for this period was 33.0 percent (previous year: 30.8 percent). Depreciation and amortization for the full business year 2018/19 stood at CHF 19.7 million, thus 21.2 percent above the previous-year figure, mainly due to an impairment of CHF 4 million. Performed planning for a new chemical multipurpose plant in the business year 2018/19 was partially impaired due to challenging subsoil foundation properties that forced a redimensioning of the project. In the reporting year, higher depreciation and amortization resulted in an EBIT of CHF 20.2 million and a net income of CHF 16.3 million, 34.5 percent and 37.1 percent below the previous year's results, respectively. The EBIT margin stood at 13.6 percent (previous year: 19.5 percent), the net income margin at 11.0 percent (previous year: 16.3 percent). In the second business half-year and excluding the impairment, the EBIT margin was 23.9 percent (previous year: 22.0 percent) and the net income margin was 19.2 percent (previous year: 18.5 percent), which illustrates the accelerated momentum of the second business half-year.

Despite a significant increase in cash outflows from investments in additional development and production capacities by around 37 percent to CHF 48.8 million, cash and cash equivalents only decreased by CHF 10.7 million to CHF 43.8 million thanks to strong cash flow from operating activities of CHF 38.2 million (previous year: CHF 39.2 million). The equity ratio remains around 80 percent.

8 Summary/Outlook DOTTIKON ES Group

Condensed Annual Report 2018/19

9 Summary/Outlook DOTTIKON ES Group

Condensed Annual Report 2018/19

Assessment of situation

Geopolitical risks with the key players United States, Russia, and China remain present and unpredictable. This intensifies the potential for economic and fiscal, but also military conflicts. Global economic risks persist and have increased due to record global debt and a slowdown of the economic momentum. Demographic developments, the accelerated market approval for generics, biosimilars, and novel drugs, the attempt by the US government to reduce drug prices, and the steep rise in drug demand in China, combined with inexpensive capital, are key volume growth and innovation drivers in the pharmaceutical market.

The demographic developments continue to ensure further long-term volume growth. Global life expectancy continues to rise, even though it has started to lose momentum in industrialized nations where life expectancy is already at high levels. The aging population, and hence the demand for drugs, continue to rise.

Due to state-imposed efforts to boost generics and cut health care costs, the global volume share of generics for prescription and over-the-counter drugs has increased to around 90 per- cent, but given the lower prices, they only account for 40 percent of global sales. The sales share of patent-protected drugs remains at around 60 percent, and with annual growth rates of 4 to 7 percent in the coming years, it is set to outgrow the generics share, where growth is expected at 2 to 5 percent. Contrary to the tactics adopted by the rest of the world, the United States have so far tried to curb the rising health care costs by stepping up the economic competition. Pharmaceutical companies tried to combat the pressure from rebates by continually increasing their list prices. This has focused public attention on the steep increase in drug list prices and animated politicians to step up for drug price regulation. At this point, the overall impact of these measures is not clear yet.

Innovation of biopharmaceutical companies remains high. In 2018, the FDA approved a record 59 novel drugs. At roughly three-quarters, the share of small molecules was comparable to the previous year. On average, the FDA is expected to approve more than 50 novel drugs annually over the coming 5 years. Small and medium-sized biotech companies account for a significant percentage of innovation, and they increasingly introduce their products into the market by themselves. Large pharmaceutical companies are facing lower returns on their research and development expenses due to a lack of in-house innovation.

For the years ahead, expected annual growth rates for the global pharmaceutical market stand at 3 to 6 percent, slightly below the growth rates seen over the last few years. More than 50 percent of global growth is linked to the 3 main indication areas oncology, diabetes, and auto­ immune diseases. The main growth markets will be the United States and the currently second- largest pharma market China, followed by the most important European nations Germany, Italy, France, Great Britain, and Spain. In China, economic growth over the past few years and the improved health care system have given more Chinese patients access to drugs.

Due to a still promising pharmaceutical market for innovative drugs, low interest rates, and a lack of investment alternatives, financing in the biotech sector remains favorable. Many bio- techs have taken advantage of the favorable financing environment and have raised enough money to finance their main activities for a few years. A radical financial market correction, how- ever, could have a significant detrimental impact on the currently intact environment. In less favorable financing conditions, biotechs will reduce their expenses and focus their resources on the most promising product candidates.

The trend to repatriate drug substance and drug product manufacturing from Asia to the West continues, mainly driven by concerns regarding supply, quality, intellectual property, intensified