Delivering through a coherent, consistent strategy
I am pleased to report that in 2018 we made continued progress in the delivery of our strategic priorities and this was a contributing factor to the good financial results and solid growth achieved during the year. As a Group we continue to improve, transform and grow our broad suite of client services, and deliver sustainable long-term returns for our shareholders.
We delivered net revenue growth of 10% and operating profit growth of 14%, which contributed to adjusted diluted (EPS) growth of 24%, or 22% on a constant currency basis. This exceeded the top end of our 2018 guidance range of between 18% and 21%.
Ashfield Communications & Advisory, including the contribution from acquisitions, was the main driver of growth delivering 44% operating profit growth. Sharp delivered a particularly strong underlying performance, especially in the US to deliver operating profit growth of 11%. Offsetting this, the performance of Ashfield Commercial & Clinical was more challenging during the second half of the year and the ramp up of activity with some clients in Sharp Europe was slower than anticipated.
We continued to make good progress from a corporate development perspective completing the acquisitions of Create NYC, an innovative, disruptive communications agency, and SmartAnalyst, a strategic commercialisation consulting and analytics business, in July 2018. Both acquisitions meet our acquisition criteria – strong strategic and cultural fit; delivery of our target financial hurdle rates; and the expansion of our current capabilities.
Global Market Trends
As growth in the global healthcare market continues to accelerate, the main tenet of our strategy continues to focus on capitalising on the increasing trend among pharmaceutical, biotech and medtech companies to outsource specialist and non-core activities. We are increasingly well-positioned to do this with an expanding and agile portfolio of businesses that are closely aligned to our client’s needs. This strategy is supported by a sustained increase in FDA product approvals, the continued shift towards the launch of more complex specialty medicines and the significant growth from rare and orphan drugs.
Our latest acquisitions mean that 53% of our revenue is now generated in the US. This brings UDG Healthcare increased opportunity to execute our strategy of capturing market-leading positions in the world’s largest pharmaceutical market.
Delivering our Strategy
In August 2018, we completed the disposal of Aquilant to H2 Equity Partners. Aquilant represented approximately 4% of the Group’s operating profits at the time of disposal. The disposal of Aquilant is the final step in our journey to exit the supply chain service businesses, following the disposal of our United Drug Supply chain and MASTA businesses in 2016. The proceeds from the transaction will be used to fund the continued development of our two global growth platforms – Ashfield and Sharp. I would like to acknowledge the Aquilant employees and thank them for their commitment. Aquilant is a great fit for H2 Partners and I wish the business and employees well for the future.
We remain ambitious to continue the strong growth and development of the Group following the considerable expansion in recent years, both organically and inorganically. As a result, the Group has implemented a restructuring of its internal operating structures, with a view to achieving greater flexibility, accountability and performance across the Group. Furthermore, it will enable us to capitalise and take further advantage of growing market opportunities in an evolving and highly dynamic healthcare industry.
Aligned with this programme, we have evaluated the strategic growth opportunities for the STEM Healthcare business model and launched an expansion programme, called STEM aXcellerate. STEM Healthcare has considerable capacity to continue to grow its core pharmaceutical base, and in tandem expand into other related and unpenetrated healthcare sectors which also offer significant growth potential. We are confident that STEM aXcellerate offers the potential for attractive financial returns over the medium and longer term.
Ashfield continued its transformation from a tactical provider of field-based sales representatives, to a business where nearly two-thirds of its offering is strategically focused and delivers a full suite of end-toend advisory, communication, commercial and clinical services to the global healthcare industry.
Ashfield Communications & Advisory
Communications: During the year, our focus has been on growing our capabilities to enable us to work with clients across different geographies and increasing collaboration between our network of agencies. We have developed a global network of talent driven by a “science first” perspective which is supplemented by strong creative and digital expertise.
In July 2018, we acquired Create NYC which adds innovative, creative services to Ashfield Communications. This is a unique, disruptive model which gives its clients high-impact, on-demand flexible marketing support with a flat fee structure. This approach complements the more traditional agency model. The acquisition of Create NYC is in line with our strategy to expand into areas of differentiated but aligned adjacencies to Ashfield’s core scientific communication capabilities.
Advisory: The continued development of Ashfield’s Advisory pillar remains a key element of our strategy. Building on the strong progress last year, our two acquisitions in 2017, STEM Healthcare and Vynamic, continued to perform very strongly in 2018 delivering good underlying growth.
Furthermore, the acquisition in July 2018 of SmartAnalyst further expands Ashfield’s Advisory capabilities. SmartAnalyst is a US-based strategic consulting and analytics business focused on the pharmaceutical and biotech sector. This acquisition adds new capabilities in strategic consulting and the high-growth area of Health Economics and Real World Evidence. SmartAnalyst also provides Ashfield with access to therapeutic franchise development decision-makers, as well as infrastructure in India. Ashfield will provide leverage and opportunities to grow SmartAnalyst’s customer base outside the US through Ashfield’s global business footprint.
Ashfield Commercial & Clinical
Commercial & Clinical: The business experienced a challenging year, but our strategy remains unwavering, with service development and differentiation being a core focus for us in 2018 and beyond.
During the year, Ashfield Commercial & Clinical launched new innovative services such as the Ashfield Solution which adds data and analytical insights to the core field-based representative offering. We also launched Virtual Medical Science Liaison’s and enhanced our multi-channel contact centre capabilities. The Clinical business has continued to see an increase in the number of Patient Support Programmes being launched on behalf of clients and we have rolled out Salesforce’s Health Cloud – a customer relationship technology platform that enables our clinical educators to put patients at the centre of care with real time, up-to-date comprehensive patient information.
Overall we remain confident in our Ashfield strategy and believe that current market dynamics, such as the growth in specialty medicines and rise in the demand for more sophisticated multi-channel capabilities, will help drive growth over the medium term.
2018 marked the tenth anniversary of our acquisition of Sharp packaging US in Allentown and Conshohocken, Pennsylvania. Since 2008, consistent growth has led to a near doubling of available capacity, a doubling of the workforce and a greater than seven-fold increase in operating profit. Sharp US has been an extremely successful acquisition for us and continues to make a strong contribution to the success of UDG Healthcare today.
To further develop the capacity and efficiency of the business, we continued Sharp’s capital investment programme in 2018. Three of Sharp’s eight facilities were refurbished during the year providing it with an excellent platform for future growth and offering clients an integrated clinical development, packaging and distribution service.
Sharp US: While Sharp US had a challenging start to 2018, the business performed exceptionally well in the second half of the year and continues to gain momentum. We will continue to closely align Sharp US’s expansion with current and emerging market opportunities, as well as developing improved operational integration with our strategic client partners. The business’ strategic investments in serialisation technologies have also contributed to the positive momentum in the business.
Sharp Europe: The business experienced a slower than anticipated on-boarding of new clients which impacted its financial results during the year. We continue to execute our strategy to focus on targeting and developing new strategic partnerships with clients in the growing biotech market.
Sharp Clinical: In 2018 Sharp Clinical successfully completed phase one of its expansion project in the US by relocating the global logistics business to the newly renovated facility at Bethlehem. This project was delivered on-time and on-budget without a single missed shipment to patients or disruption to our client operations. Phase two of the Bethlehem expansion is scheduled for completion in early 2019.
The second significant investment in Sharp Clinical during 2018 was the construction and fit out of our state-of-the-art manufacturing and packaging facility in Wales, UK. The site was fully operational in November 2018 for packaging and logistics services with analytical, manufacturing and IRT services to follow in 2020. Both investments will allow Sharp Clinical to continue with its clinical supply chain optimisation strategy by offering Chief Executive’s Review (continued) UDG Healthcare plc 9 Annual Report and Accounts 2018 end-to-end services, formulation to logistics, all within one facility in both the US and Europe.
Overall I am confident that the improved pipeline of business and increased capital investments leave Sharp well-positioned to generate strong underlying operating profit growth in the medium term.
Underpinning everything we do is our breadth and depth of expertise, our successful long-term client partnerships and the unique infrastructure we own and operate. Technology is playing an ever-more important role in the delivery of innovative support and sustainable solutions to our clients.
During the year, we continued with our Future Fit programme of investment and the implementation of Oracle finance and Workday HR systems. We also began strategic investments in more front-end client-facing technology such as the aforementioned Health Cloud, and the Avature recruitment platform and we are investing in support technologies such as the Concur expense system and various elements to increase IT security. These technologies offer our clients faster, cheaper and safer streamlined business solutions.
These ongoing investments also future-proof the fabric of the organisation and establish a solid foundation for the integration of newly-acquired businesses and the long-term growth of the Group.
We have a diverse, engaged and energetic group of employees in UDG Healthcare. Their hard work and dedication has helped to deliver another year of continued progress for the Group and I am very grateful for their commitment.
During the year we launched the CEO Awards which celebrated those in the organisation who truly live our values in their everyday work. I am very proud of this CEO recognition programme as it is our people who bring our values to life and ensure we continue to improve, transform and grow as we enter 2019. We also ran two very successful leadership and management development programmes called Inspire and Drive with over 1,000 employees participating.
Like every organisation of our size, there were a number of management changes during the year and my confidence in the leadership team continues to strengthen. As previously announced, Nigel Clerkin succeeded Alan Ralph as Chief Financial Officer. I would like to take the opportunity to sincerely thank Alan for his 20 years of dedication and commitment to UDG. On behalf of the Group we wish Alan, Nikki and their family all the very best for the future.
As mentioned earlier, during the year we carried out a review of our Ashfield business structure. As a consequence, Rob Wood was appointed Head of Ashfield Advisory Services & Divisional Business Development. Doug Burcin was appointed Head of Ashfield Communications and Julian Tompkins was appointed Head of Ashfield Commercial & Clinical.
In 2018 we made solid progress in the execution of our strategy. We have continued to invest in talent, infrastructure and additional capabilities that are attractive to our global clients as we continue to deliver on our impressive growth record. Looking ahead to 2019, I believe UDG Healthcare is well positioned to exploit the robust market opportunity within the sectors we operate in. We will continue to drive underlying organic growth and supplement it with acquisitions that will transform our breadth of services and geographic diversity. We will also continue to invest in our talent, systems and infrastructure, to ensure we have the right platform for continued future growth. Thank you once again for your support in 2018.