3  Financial risk management

Monitoring of financial risk is part of the Board’s ongoing risk assessment process. Other than short term forward currency contracts, the Group does not use financial derivates, and it is the Group’s policy not to undertake any trading in financial instruments.

The main financial risks arising from the Group’s operations are foreign exchange risk, interest rate risk, and credit risk.

Foreign exchange risk
The Group has transactional currency exposures as the majority of the Group’s revenues, and certain expenditures, are in currencies other than the functional currency of the Group, mainly Euros and US dollars. The Group’s bank borrowings are also denominated in Euros, other than a small Sterling overdraft.

The Group finances the majority of its activities in Europe and the US in the local currency, out of revenue receipts, excess currency receipts are then translated into Sterling either at the spot rate or through forward contracts. At 30 June 2009, the Group had no such forward contracts outstanding (2008: sell €500,000 and $1,000,000 into Sterling).

At 30 June 2009, if the Euro had strengthened/weakened by 5% against Sterling, with all other variables held constant, loss after tax would have been £1,008,000/(£1,079,000) (2008: profit after tax £1,029,000/(£1,077,000)) higher/lower. The impact on total equity would have been £2,686,000/(£2,548,000) (2008: £2,365,000/(£2,343,000) higher/lower. The impact on loss after tax is mainly as a result of the difference arising on the translation of the intra‑group loan balance with Sinclair Pharma France. The impact of a 5% movement in the US dollar against Sterling would be minimal.

Credit risk
Credit risk is managed on a group basis. The Group is exposed to credit risk through pre‑wholesalers and marketing partners, such that if one or more of them is affected by financial difficulty, it could materially and adversely affect the Group’s financial results. Concentration of credit risk in relation to trade receivables is analysed in note 18.

The Directors do not believe that the Group is exposed to concentrations of credit risk on other classes of financial instruments, and in particular in relation to cash and cash equivalents as these assets are held by the same institutions that the Group’s borrowings are with and all balances can be set off against one another.

Cash flow and interest rate risk
The Group does not have significant interest‑bearing assets and therefore the Group’s income and operating cash flows are substantially independent of changes in market interest rates.

The Group’s interest rate risk arises from short and long‑term borrowings. Borrowings at variable rates expose the Group to cash flow interest rate risk. At 30 June 2009, if interest rates on floating borrowing rates had been 0.5% higher/lower with all other variables held constant, loss after tax would have been £19,000 (2008: profit after tax £17,000) higher/lower.

The Group does not currently enter into interest rate swaps or other derivative transactions to manage interest rate risk.

Price risk
The Group is not exposed to commodity or other market price risk.