Vectura Group plc - Preliminary Results

 

Sustained strong business performance with opportunity to accelerate strategy following proposed Skyepharma merger

 

Chippenham, UK - 26 May 2016: Vectura Group plc (LSE: VEC) ("Vectura"), a leading independent inhaled device, formulation and development company focusing on the development of pharmaceutical therapies for airways diseases, today announces its preliminary results for the year ended 31 March 2016.

 

Financial Highlights

 

Significant strong financial performance with further transition of revenues to recurring royalties from recently launched products

 

·      Revenues up 24% to £72.0m (2014/15: £58.0m)

o  Strong growth in royalty revenues, up 56% to £39.2m

o  Strong growth in royalties from recently launched inhaled products, up 104% to £25.5m from £12.5m

·      EBITDA(1) up 43% to £23.2m (2014/15: £16.2m)

·      Profit after tax up 35% to £5.0m (2014/15: £3.7m)

·      Basic EPS up 33% to 1.2p (2014/15: 0.9p)

·      Robust balance sheet with cash and cash equivalents of £99.8m (2015: £90.0m)

 

[1] Earnings before investment income, finance gains / (costs), tax, depreciation, amortisation, share-based compensation and adjusted for non-recurring expenditure items

 

Operational Highlights

 

Good progress is being made across our proprietary and partnered programmes

 

·      Important progress has been made with VR315 US, our partnered programme with Hikma Pharmaceuticals PLC ("Hikma"), for a generic version of GSK's Advair^® Diskus^® with $15m milestones received ($10m post period). Following submission and post-period acceptance of the file, FDA action is now expected in May 2017.

·      Vectura is also making good progress with its smart nebulisation programmes.

o  Recruitment into the Phase III study of the lead wholly-owned asset VR475 EU (FAVOLIR^®), for the treatment of severe adult asthma is progressing well and results are anticipated in mid-2018.

o  In addition, the most advanced smart nebuliser partnered programme, VR876 (using FOX^®), being developed as a nebulised version of a currently marketed drug for the treatment of serious lung disease, achieved a further development milestone. Regulatory action is expected in the coming months.

·      Vectura's collaboration with Novartis continues to develop well.

o  The recently published FLAME trial data provide further clinical evidence to support use of Ultibro^® Breezhaler^® and show that this product is superior to Seretide, the current standard of care in reducing exacerbations in the treatment of COPD patients.

o  Seebri™ Neohaler^® and Utibron™ Neohaler^® were approved by the FDA in October 2015 and it is expected that the launch of these products in the US will take place in the second half of 2016. 

o  This franchise is being strengthened further with the Phase III development of QVM149, a new triple therapy for asthma, with first regulatory filings anticipated in 2018.

 

 

James Ward-Lilley, Chief Executive Officer of Vectura:

 

"I am pleased to report Vectura's continued strong financial and operational performance for the twelve months ended 31 March 2016. Of particular note is the transition of the business to a position where the majority of overall royalty revenues arise from recently launched inhaled products.

 

We have also made good progress with our pipeline programmes, in particular the VR315 submission in the US and our own VR475 Phase III study in Europe.

 

One of the most important developments for the year is the proposed merger of Vectura and Skyepharma PLC. The addition of Skyepharma's pMDI technology will allow the Enlarged Group to access the inhaled product market in its entirety. Vectura's existing DPI capabilities and smart nebulisation technologies do not address the 38% of the global inhalation market which is served by pMDI products and the enhanced cash flow of the Enlarged Group will better position it to consider attractive strategic opportunities which may emerge in the future. We now expect to complete the proposed merger on 10 June 2016.

 

As part of the proposed merger with Skyepharma we have announced a number of changes to the Board. Following completion of the proposed merger Andrew Oakley, Chief Financial Officer, will leave Vectura. On behalf of the Board I would like to thank Andrew for his support and contribution to the business since he joined the Company and wish him well for the future. Andrew Derodra will become Chief Financial Officer of the Enlarged Group and we look forward to welcoming him along with Frank Condella and Thomas Werner to the Board following completion of the transaction. In addition to these changes and as part of the merger agreement, Dr John Brown, Non-Executive Director and Senior Independent Director, will stand down from the Board within one month after completion of the proposed merger. John has played an outstanding role as a member of the Vectura Board for many years and has the sincere gratitude of the Board and my own best wishes for the future."

 

James Ward-Lilley, Chief Executive Officer, Andrew J Oakley, Chief Financial Officer and Trevor Phillips, Chief Operations Officer will host an analyst briefing today at 9.00am BST at the offices of Citigate Dewe Rogerson, 3 London Wall Buildings, London Wall, London, EC2M 5SY. A live webcast of the meeting, with the presentation slides, will be available on Vectura's website: http://www.vectura.com/investors/presentations-webcasts/. For further details please contact Marine Perrier at Citigate Dewe Rogerson on 0207 282 1068 or by email: marine.perrier@citigatedr.co.uk 

 

 

Operational Review

 

Partnered marketed products and pipeline programmes

 

Novartis

Ultibro^® Breezhaler^® (indacaterol/glycopyrronium bromide, QVA149) a first-in-class once-daily fixed dose dual bronchodilator, long-acting beta2-adrenergic agonist (LABA)/long-acting muscarinic antagonist (LAMA), achieved total net sales of $286m within our full financial year[2]. The product has been approved for use in over 80 countries (including Japan and countries in the EU). In November, Novartis announced positive first results from the Phase III FLAME study showing superiority of Ultibro^® Breezhaler^® over Seretide^® in reducing exacerbations in patients with chronic obstructive pulmonary disease (COPD) - the full study results have subsequently been published in the New England Journal of Medicine[3] and these data were also presented at the 2016 Annual Meeting of American Thoracic Society (ATS) in May.

 

[2] Q2 - Q4 2015 and Q1 2016; as reported by Novartis

[3] Wedzicha JA, Banerji D, Chapman KR, et al. Indacaterol/Glycopyrronium Versus Salmeterol/Fluticasone for COPD Exacerbations. New England Journal of Medicine. 2016. Available at: www.nejm.org/doi/full/10.1056/NEJMoa1516385

 

Seebri^® Breezhaler^® (glycopyrronium bromide, NVA237) a once-daily fixed dose inhaled long-acting muscarinic antagonist (LAMA), achieved total net sales of $148m within our full financial year2. The product is approved for use in over 90 countries (including Japan and countries in the EU).

 

In October 2015, Novartis received US FDA approval for the new dual combination bronchodilator Utibron™ Neohaler^® (formerly QVA149) and the stand-alone monotherapy Seebri™ Neohaler^® (formerly NVA237) for patients with COPD. This approval triggered a $22.5m milestone payment from Novartis to Vectura and it is expected that the launch of these products in the US will take place in the second half of 2016.

 

QVM149 (indacaterol/glycopyrronium bromide/mometasone furoate) a new inhaled once-daily combination triple therapy for asthma comprising a LABA/LAMA and inhaled corticosteroid (ICS). In June 2015 Novartis announced it had initiated the first Phase III trial of a new inhaled dry powder triple therapy for patients with moderate to severe uncontrolled asthma on standard ICS/LABA medication, which triggered a milestone payment to Vectura of $3.75m. The first regulatory filings of QVM149 are planned for 2018. Vectura is eligible to receive development, filing and approval milestones plus royalties on product sales in the event of a successful product launch.

 

Ultibro^®, Seebri^®, Breezhaler^® and Neohaler^® are registered trademarks of Novartis AG. Utibron™ is a trade mark of Novartis AG.

 

Wholly owned pipeline programmes

VR475 (FAVOLIR®) our drug/device combination using the AKITA^® JET smart nebuliser technology delivering nebulised budesonide for the treatment of severe uncontrolled asthmatics. Recruitment in to the Phase III study is underway and progressing well and the majority of study sites have initiated and to date over 200 patients have entered the study. Phase III study results are anticipated in mid-2018.

 

VR647 (SCIPE) our second drug/device combination using the AKITA^® JET smart nebuliser technology as a maintenance treatment for paediatric asthma. We had a successful pre-IND meeting with the FDA in June 2015 and it agreed with our intent to rely on the 505(b)(2) pathway for the development programme with the aim of filing a New Drug Application (NDA). IND filing is anticipated in mid-2016. A CMC supply chain for sterile product is required by the US market and this is being established. Once in place, a Phase I study will be conducted to support initiation of Phase III in mid-2018 with filing anticipated in mid-2020.

 

Partnered pipeline programmes

VR315 US (fluticasone propionate/salmeterol), our partnered programme with Hikma for a generic version of Advair^® Diskus^® for the treatment of asthma and COPD. Vectura received cash milestones of $5m triggered by the successful achievement of important development milestones. In January we confirmed that our partner on this programme (and VR506) was Hikma Pharmaceuticals PLC ("Hikma").

 

Post-period event related to VR315 US

In April 2016, the ANDA was accepted for filing by US FDA and Vectura recognised a milestone payment of $10m. The FDA has provided Hikma with a GDUFA goal date of 10 May 2017. Vectura will receive an $11m payment on approval of the file plus royalties from all sales of VR315 in the US upon successful launch of this product.

 

VR876 EU, is being developed by an undisclosed partner as a nebulised version of a currently marketed drug for the treatment of serious lung disease. This product uses Vectura's smart nebuliser FOX^® device. In October 2015 we achieved a development milestone triggering a cash milestone payment of €5m (circa. £3.6m) to Vectura. Regulatory action is expected in 2016.

 

VR942 Global, our co-development with UCB of a biologic for uncontrolled asthma with one of Vectura's proprietary DPI devices continued to make progress. This is a novel dry powder product concept utilising Vectura's large molecule formulation expertise combined with inhaled device technology. Following the successful completion of a number of pre-clinical studies, enrolment commenced into a Phase I clinical study in healthy volunteers and patients with asthma. Phase I enabling pre-clinical studies are ongoing to enable initiation of Phase II studies in 2017.

 

VR632 EU, a second inhaled generic combination therapy for asthma and COPD delivered using one of Vectura's proprietary DPI devices and formulation technology and partnered with Sandoz. In October, a cash milestone of €0.75m payable to Vectura was triggered by the successful achievement of a development milestone.

 

VR465 Global, an inhaled, anti-RSV Nanobody (ALX-0171) in development with Ablynx. In December Ablynx confirmed it had completed enrolment of the first-in-infant Phase I/IIa safety study and extended the study to include younger infants using Vectura's FOX^® device.

 

Post-period event related to VR465 Global

In May 2016 Ablynx reported positive top line Phase I/IIa study results for VR465 in infants hospitalised with RSV infection. The study met its primary endpoint demonstrating safety and tolerability and Ablynx confirmed these results strongly support advancing the programme into a Phase II efficacy study in infants.

 

Kinnovata update

Our joint venture, Kinnovata, established to create low cost DPI products for the domestic Chinese market, has made good progress during the year. We expect the final capitalisation of the joint venture to be concluded within the next few weeks with the relevant assets being contributed to the business by Vectura and its partners. This will trigger the recognition of an exceptional non-cash gain to Vectura as we recognise our share of Kinnovata's net assets.

 

Corporate governance

There have been a number of changes to the Board over the year.

·      Dr Per-Olof Andersson was appointed a Non-Executive Director of the Board with effect from 1 April 2015

·      At the end of June 2015 Dr Chris Blackwell stepped down as Chief Executive and the appointment of James Ward-Lilley as Chief Executive Officer was announced.

·      Trevor Phillips, Chief Operating Officer, acted as Interim Chief Executive Officer in the period between Chris' departure and James' arrival

·      James joined Vectura at the end of September 2015

 

Delivering our strategy

Following a strong year in 2014/15 when Vectura achieved its maiden profit, the Group has continued to perform well against its key financial and business targets. It has also made considerable progress across its pipeline. Alongside these achievements it has been a year of leadership transition with the appointment of James Ward-Lilley as Vectura's new Chief Executive Officer. On 16 March 2016, we announced the proposed merger with Skyepharma which is expected to complete on 10 June 2016. This proposed transaction will combine the complementary Vectura and Skyepharma businesses to create an industry-leading airways-related diseases company.

 

Reporting calendar

Subject to completion of the proposed merger with Skyepharma, Vectura intends to change its financial year end from 31 March to 31 December. This is in line with the financial reporting of other FTSE 250 companies, our partners and our peer group. Further details on the financial calendar will be announced after the proposed Skyepharma merger has closed.

 

Outlook

Vectura has a clearly defined strategy. We have made good progress across the business including our financial performance, strong development on our pipeline, product portfolio and new leadership. The completion of the proposed merger with Skyepharma will further enhance Vectura's prospects by allowing us to accelerate the delivery of the Company's strategic objectives and deliver further value to our enlarged group of stakeholders.

 

On a standalone basis:

·      We anticipate that total royalty income, although driven by the growth of recently launched inhaled products, will be impacted by the loss of patent for ADVATE^® which took place at the end of January 2016 (c.£13m in FY 2015/16).

·      With the VR315 FDA action date set at May 2017 we now expect disclosed milestones for FY 2016/17 to be lower than those in FY 2014/15.

·      There have been a significant number of leads that have converted into feasibility studies across both our smart nebuliser and DPI platforms which could potentially have a positive impact on revenues and the possibility of additional upside if converted into deals. However the size, value and timing of these potential deals are uncertain.

 

Merger announcement - proposed merger of Vectura and Skyepharma announced 16 March 2016

Full details of the merger can be found in the Rule 2.7 announcement and Prospectus, which can be accessed at www.vectura.com

 

The Vectura Board and the Skyepharma Board both believe this is a compelling transaction that will combine the complementary Vectura and Skyepharma businesses to create an industry-leading, airways-related company. Bringing together the two companies' complementary inhaled formulation, development, regulatory and device expertise (dry powder inhalers (DPI), pressurised metered dose inhalers (pMDI) and smart nebulisers) provides a series of enhanced platforms to accelerate growth in the inhaled respiratory market, along with providing shareholders with a broader product and development portfolio.

 

- Ends -

 

 

Enquiries

Vectura Group plc	+44 (0)1249 667700
Andrew J Oakley, Chief Financial Officer
Karl Keegan, Chief Corporate Development Officer
Fleur Wood, Director - Investor Relations & Corporate Communications
Citigate Dewe Rogerson	+44 (0)20 7638 9571
David Dible / Mark Swallow

 

 

About Vectura

Vectura is an independent pharmaceutical product development company that focuses on the development of inhaled pharmaceutical therapies for the treatment of diseases that affect or can be treated with drugs that act on the airways (airways diseases), incorporating inhaled device formulation and clinical development. This segment of the pharmaceutical market includes significant indications such as asthma and COPD, in addition to a wide range of other indications including cystic fibrosis, pulmonary fibrosis and other diseases of the lung.

 

Vectura has eight^(*) products marketed by partners with growing global royalty streams and a portfolio of drugs in clinical development, a number of which have been licensed to major pharmaceutical companies. Vectura has development collaborations and license agreements with several global pharmaceutical and biotechnology companies, including Hikma (through its wholly-owned subsidiary, West-Ward Pharmaceuticals), Novartis, Sandoz, Baxter, GSK, UCB, Ablynx, Grifols, Janssen and Tianjin KingYork Group Company.

 

^(*)Advate^® came off patent at the end of January 2016. Vectura does not expect to receive any material royalties from that product during its financial year ending 31 March 2017, or thereafter.

 

For further information, please visit Vectura's website at www.vectura.com.

 

Forward-looking statements

This press release contains forward-looking statements, including statements about the discovery, development and commercialisation of products. Various risks may cause Vectura's actual results to differ materially from those expressed or implied by the forward-looking statements, including: adverse results in clinical development programmes; failure to obtain patent protection for inventions; commercial limitations imposed by patents owned or controlled by third parties; dependence upon strategic alliance partners to develop and commercialise products and services; difficulties or delays in obtaining regulatory approvals to market products and services resulting from development efforts; the requirement for substantial funding to conduct research and development and to expand commercialisation activities; and product initiatives by competitors. As a result of these factors, prospective investors are cautioned not to rely on any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

 

Financial Review

 

Financial highlights    

Underlying performance has continued to be strong and we are pleased to report a 24% increase in revenues to £72.0m, driven by significant organic growth in royalty streams derived from recently launched products, augmented by a number of development milestones in respect of partnered programmes. Growing and sustainable royalty revenues have contributed positively to the Group's cash position, with current year net cash inflows from operating activities of £32.9m (2015: £8.0m).

 

Revenue growth of 24% coupled with a measured 17% increase in operating expenditures as we continue to invest in growth, translated to a 43% increase in EBITDA¹ to £23.2m. Overall research and development expenditure for the financial year was at the lower end of our guidance range as we maintained our disciplined approach to capital investment; ensuring that research and development investment is matched to growth in overall revenues.

 

Revenue

Vectura categorises revenues into five streams: royalties, product licensing, technology licensing, development services and device sales. In FY 2015/16, we have continued to see strong growth in our royalty revenue stream which accounted for 54% of total revenue (2014/15: 43%).

 

Royalties

Royalty revenue of £39.2m has increased by 56% year-on-year; this increase has been driven by a sustained increase in the overall underlying sales of the recently launched products marketed by our partners Novartis and GSK.

 

Net sales of Ultibro^® Breezhaler^®, as reported by Novartis, have grown by 83% to $286m for the twelve-month period ended 31 March 2016. In light of the strong growth in Ultibro^® Breezhaler^® net sales, royalty revenue from Novartis for sales of Seebri^® Breezhaler^® and Ultibro^® Breezhaler^® has increased to £10.9m during the year (2014/15: £8.5m). During the year, Novartis announced US FDA approval of Utibron^TM Neohaler^® and Seebri^TM Neohaler^® and once launched, these products will generate a new royalty stream for Vectura.

 

We have also benefited from a marked increase in royalty revenue from GlaxoSmithKline (GSK) for sales of Relvar^®/Breo^® Ellipta^® and Anoro^® Ellipta^®, and Incruse^® Ellipta^®. GSK reported net sales of £466m these three products, upon which Vectura earned a royalty of £13m (2014/15: £3.8m). Under the terms of our agreement with GSK, the maximum royalties payable to Vectura for sales of these products is £13m in any one calendar year.

 

GSK and Vectura are parties to a patent licence and option-to-license agreement encompassing a number of Vectura patent families relating to various formulation technologies relevant to GSK's Breo^® Ellipta^®/ Relvar^® Ellipta^®, Anoro^® Ellipta^® and Incruse^® Ellipta^® products. A number of these patents expire in 2016, leading to the potential for the licence agreement to expire in July 2016. Before 31 July 2016, GSK has the option to extend the term of the agreement by licensing additional patent families. Vectura possesses material evidence to suggest that certain of our patents are applicable to these products and our guidance assumes the continuation of the option-to-license agreement beyond July 2016.

 

Other royalty revenue is mainly derived from the two products licensed to Baxter. During the year the patent for ADVATE^® expired and as such as we will only earn future royalties on sales of product manufactured before 31 January 2016. Based on information received from Baxter, we would expect to receive some royalty income from sales of ADVATE^® throughout the forthcoming financial year from the remaining ADVATE^® royalty bearing batches. Underlying sales of ADVATE^® during the year under review are broadly comparable with the prior year on a constant currency basis and combined with the impact of a favourable foreign exchange movement royalty revenue earned from Baxter from sales of ADVATE^® has increased to £12.7m (2014/15: £11.8m). Adept^® contributed royalty revenues of £0.5m during the year (2014/15: £0.4m).

 

Product licensing

FY 2015/16 has been a year of excellent progress across our existing partnerships, very much influenced by the receipt of the approval milestones for Seebri^TM Neohaler^® and Utibron^TM Neohaler^®. These two milestones, totalling $22.5m (£14.7m) comprise 70% of total product licensing revenue. A further milestone of $3.75m (£2.5m) was earned from Novartis upon the enrolment of the first patients into a Phase III clinical trial for QVM149, a new inhaled triple therapy for patients with moderate to severe asthma uncontrolled by standard ICS/LABA medication.

 

In addition, we have seen significant progress in respect of our VR315 US programme. During the year, additional milestone payments totalling $5m (£3.4m) were recognised in respect of this programme which is partnered with Hikma. Post year end, we announced a further milestone of $10m earned upon FDA acceptance of an ANDA filing by our partner. Vectura is eligible to receive a further milestone payment $11m upon approval by the FDA and we will receive a royalty on all sales of VR315 in the US.

 

In October 2015, we announced the receipt of a development milestone associated with VR632 in the EU which is partnered with Sandoz. Vectura will receive a royalty from all sales of VR632 in Europe in the event of successful launches.

 

Technology licensing     

Technology licensing revenues of £3.4m (2014/15: £6.6m) primarily relates to an important development milestone of €5.0m (£3.6m) achieved in respect of our partnered programme for VR876 in Europe. Vectura recognised net revenue of £2.9m in respect of this milestone.

 

Development services

Development service revenues of £4.7m were recognised during FY 2015/16 (2014/15: £3.9m). This increase is the result of higher demand for these specialist services from Vectura's existing partners, and in particular our collaboration on VR096 with Janssen Biotech.

 

 

 

Device sales

Device sales of £3.7m (2014/15: £2.5m), mainly relate to sales of Vectura's GyroHaler^® device which support the continued roll out and growth of AirFluSal^® Forspiro^® in a number of European and Rest of the World territories.

 

Research and development expenses

Total investment in research and development (R&D) was £42.1m, representing a 17% increase on the previous year (2014/15: £36.1m).

 

During the year, we continued to prioritise our investment in R&D to ensure that our investment is measured, controlled, supportive of our strategic objectives, and aligned to revenue growth. Accordingly, we continued to progress two of our most advanced programmes, VR475 EU and VR876 and total external expenditure on these programmes was £4.7m during the year. We have continued to develop VR942 in collaboration with our partner UCB and external expenditure on this programme has increased compared to the prior year.

 

R&D spend in FY 2015/16 was lower than our original guidance due to our commitment to align increases in expenditure with revenue growth.

 

We will continue to undertake clinical activities in respect of VR475 in Europe, VR647 in the US and VR942 in collaboration with UCB. Given these investments we expect R&D expenditure for FY2016/17 to be at the higher end of our previously disclosed guidance (£40-52m). However assuming the proposed merger with Skyepharma completes, we will conduct a full review of all on-going programmes to align our R&D investment with the strategic priorities and the financial platform of the combined group.

 

Other administrative expenses

Other administrative expenses have increased from £4.5m to £4.8m, mainly due to the increase scale of the Group as we continued to expand.

 

Amortisation of intangible assets

The amortisation charge for the full year 2015/16 was £18.8m compared to a charge of £20.9m in the prior year. The full year charge related to the Activaero acquisition was £14.2m and the remaining charge relates primarily to the amortisation of the ADVATE^® intangible asset associated with the Innovata acquisition. The amortisation charge for the 2016/17 financial year will be substantially higher if the proposed merger with Skyepharma is completed.

 

Share-based compensation

The share-based compensation charge for the year was £2.5m compared to a £1.1m in the prior year. This increase is due to a one-off share award that was made to James Ward-Lilley upon appointment as Chief Executive Officer; further details of this award will be provided in the Remuneration report in the Annual Report.

 

Non-recurring expenditure

Not included in the calculation of EBITDA is non-recurring expenditure associated with the proposed merger with Skyepharma. Total non-recurring expenditure for the year was £5.6m and legal and professional costs of approximately £6.0m will be recognised in the 2016/17 financial year. This does not include any costs associated with integration or the delivery of synergy benefits that are expected to arise as a result of the transaction.

 

Loss before tax

Loss before tax of £1.9m has decreased by £4.3m during the year (2014/15: £6.2m loss). This movement is driven by a sustained increase in revenues, coupled with measured investment in R&D and supplemented by a non-recurring investment income receipt of £2.4m relating to the sale of Vectura's shareholding in ProFibrix B.V.

 

Taxation

The total taxation credit of £6.9m (2014/15: £9.9m) comprises R&D tax credits of £2.0m and non-cash taxation credits of £4.9m relating to movement in deferred taxation liabilities and assets within the Group.

 

Profit after tax

Profit after tax of £5.0m has increased by £1.3m compared to the prior year (2014/15: £3.7m profit). This movement is the result of a significant reduction in loss before tax, offset by a reduction in the tax credit for the year.

 

Translation Reserve

The assets and liabilities, including goodwill, acquired from Activaero are denominated in euros and therefore, in accordance with accounting standards, the Group has recognised a net foreign exchange gain of £5.4m (2014/15: £11.4m loss) within reserves as a result of the movement in the exchange rate between 31 March 2015 and 31 March 2016. In future periods, the movement in this reserve will be dependent upon the £/€ exchange rate at the relevant balance sheet dates.

 

Property, plant and equipment

Vectura has invested £1.4m in its inhaled product manufacturing capabilities during the year (2015: £1.4m) and this capital investment has supported the transition of manufacturing activities previously performed at our Gemünden site to our other sites in Germany and the UK.

 

Deferred income

Deferred income relates to milestones payments received but not yet recognised as revenue. Of the £1.8m on the balance sheet, £0.8m will be recognised as revenue during 2016/17 and £1.0m which relates to the VR315 (AirFluSal^® Forspiro^®) RoW deal with Sandoz, will be recognised as revenue in later periods.

 

Foreign exchange rates

The following foreign exchange rates were used during the year:

 

Average rates	2015/16	2014/15
£/$	1.51	1.61
£/€	1.37	1.27
Period end rates
£/$	1.44	1.48
£/€	1.27	1.37

 

Cash Flow

Vectura continues to maintain a strong cash position with cash and cash equivalents at 31 March 2016 of £99.8m (2015: £90.0m). Vectura achieved a net cash inflow of £32.9m from operating activities (2015: £8.0m), which is reflective of growing and sustainable cash receipts from royalty revenue of our inhaled products and a continued focus on cost control throughout the business.

 

During the year, Vectura made the final consideration payment of €35m to the former shareholders of Activaero. There are no additional payments to be made in respect of this acquisition.

By order of the Board,

 

 

Andrew J Oakley

Chief Financial Officer

 

 

 

 

INDEPENDENT AUDITORS' REPORT TO THE SHAREHOLDERS OF VECTURA GROUP PLC ON THE PRELIMINARY ANNOUNCEMENT OF VECTURA GROUP PLC

 

We confirm that we have issued an unqualified opinion on the full financial statements of Vectura Group plc.

 

Our audit report on the full financial statements sets out the following risks of material misstatement which had the greatest effect on our audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team, together with how our audit responded to those risks.

 

Risk	How the scope of our audit responded to the risk
Goodwill and intangible asset impairment   The carrying value of goodwill (31 March 2016: £57.4 million; 31 March 2015: £56.8 million) and intangible assets (31 March 2016: £92.2 million; 31 March 2015: £104.3 million) relies on assumptions and judgements made by management concerning the estimated future cash flows from a combination of early and late stage research & development programmes, future royalty receipts and regulatory milestones; associated discount rates; and clinical commercial risk and market growth rates. Management have performed an impairment review under IAS 36.   See note 7 in the preliminary announcement and 1 and 9 to the financial statements where the key assumptions used in their impairment model have been disclosed.	We assessed and challenged management's assumptions used in their impairment model for goodwill and intangible assets, including:   ·     The cash flow projections by discussing with senior operational management and considering the consistency of the forecasts with clinical and licensing partner data and contractual agreements; ·     Discount rates by engaging our valuation specialists to independently recalculate the group's WACC and then performing an assessment of the risk adjustments applied by management; and ·     Sensitivity analysis of management's forecasts including assessing the impact of applying further sensitivities.
Revenue recognition   The Group's two principal revenue streams are licence milestones and royalty income: ·      Recognition of revenue on product and technology licence milestones (31 March 2016: £24.4 million; 31 March 2015: £26.4 million) can be subjective and management exercises judgement in determining whether the Group has fulfilled all of its performance obligations, such as a regulatory approval or transfer of intellectual property, under that contract and therefore the relevant period over which to recognise revenue. This is a material judgement that impacts the financial statements; and ·      Royalty income (31 March 2016: £39.2 million; 31 March 2015: £25.2 million) is recognised over the course of the year based on information provided to Vectura by its partners, upon which it relies. As Vectura does not have direct visibility over the level of product sales being made (upon which royalties are earned) there is a material risk surrounding the completeness of this revenue stream.   See notes 3 in the preliminary announcement and 1 and 2 to the financial statements where the key assumptions in relation to revenue recognition have been disclosed.	We reviewed the key contracts for the Group and management's calculations for each milestone to assess consistency with the Group's accounting policies and compliance with IAS 18 'Revenue'. We challenged management's assumptions through discussions with the development team and review of supporting documentation such as licence agreements and regulatory announcements to assess whether the period of recognition for each milestone was appropriate.   Our audit work focussed on the completeness of royalty income and involved: determining completeness of royalty statements; reviewing press releases and third party publications about the related royalty streams; evaluating the design & implementation of controls employed by management to challenge the completeness of sales amounts reported by their partners and used to calculate royalties; and analysing royalties received year-on-year and investigating unusual variances.

 

 

 

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.

 

Our liability for this report and for our full audit report on the financial statements is to the Company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.

 

 

 

Deloitte LLP

Chartered Accountants and Statutory Auditor

 

 

 

 

 

Consolidated income statement

for the year ended 31 March 2016

 

	Note	2016 £m	2015 £m
Revenue	3	72.0	58.0
Cost of sales		(3.3)	(2.4)
Gross profit		68.7	55.6
Research and development expenses		(42.1)	(36.1)
Other administrative expenses		(4.8)	(4.5)
Non-recurring transaction costs	14	(5.6)	-
Amortisation of intangible assets		(18.8)	(20.9)
Share-based compensation		(2.5)	(1.1)
Total administrative expenses		(31.7)	(26.5)
Operating loss		(5.1)	(7.0)
Presented as:
EBITDA(1)		23.2	16.2
Non-recurring transaction costs		(5.6)	-
Amortisation of intangible assets		(18.8)	(20.9)
Depreciation of assets		(1.4)	(1.2)
Share-based compensation		(2.5)	(1.1)
Operating loss		(5.1)	(7.0)
Investment income	4	2.7	0.5
Finance gains/(costs)	4	1.1	1.7
Share of result of joint venture		(0.6)	(1.4)
Loss before taxation		(1.9)	(6.2)
Taxation	5	6.9	9.9
Profit after taxation attributable to equity holders of the Company		5.0	3.7
Earnings/(loss) per ordinary share: basic	6	1.2p	0.9p
Earnings/(loss) per ordinary share: diluted	6	1.2p	0.9p
Adjusted earnings (EBITDA)(1) per ordinary share: basic	6	5.7p	4.0p
Adjusted earnings (EBITDA)(1) per ordinary share: diluted	6	5.6p	3.9p

 (1)  Earnings before investment income, finance gains/(costs), tax, depreciation, amortisation, share-based compensation and adjusted for
non-recurring items.

All results are derived from continuing activities.

 

 

 

Consolidated statement of comprehensive income

for the year ended 31 March 2016

 

	Note	2016 £m	2015 £m
Profit after taxation attributable to equity holders of the Company		5.0	3.7
Other comprehensive income/(loss):
Items that may be subsequently reclassified through the income statement
Foreign currency translation gains/(losses) for foreign operations		5.4	(11.4)
Other comprehensive income/(expense)		5.4	(11.4)
Total comprehensive income/(loss) attributable to equity holders of the Company		10.4	(7.7)

 

 

 

Balance sheet

at 31 March 2016

 

	Note	2016 £m	2015  £m
Assets
Goodwill	7	57.4	56.8
Intangible assets		92.2	104.3
Property, plant and equipment		11.6	11.5
Investment in joint venture		1.2	1.7
Other receivables		0.4	0.4
Non-current assets		162.8	174.7
Inventories		0.7	0.9
Trade and other receivables	8	22.2	27.9
Cash and cash equivalents		99.8	90.0
		122.7	118.8
Non-current assets held for sale	14	0.3	-
Current assets		123.0	118.8
Total assets		285.8	293.5
Liabilities
Trade and other payables	9	(26.4)	(20.6)
Deferred income	10	(0.8)	(0.2)
Deferred consideration		-	(25.6)
Current liabilities		(27.2)	(46.4)
Deferred income	10	(1.0)	(1.5)
Deferred tax liabilities		(20.4)	(23.7)
Non-current liabilities		(21.4)	(25.2)
Total liabilities		(48.6)	(71.6)
Net assets		237.2	221.9
Equity
Share capital	11	0.1	0.1
Share premium		101.6	99.2
Special reserve		8.2	8.2
Other reserve		124.9	124.9
Share-based compensation reserve		17.4	14.9
Translation reserve		(7.6)	(13.0)
Retained loss		(7.4)	(12.4)
Total equity		237.2	221.9

 

 

 

Cash flow statement

for the year ended 31 March 2016

 

	2016 £m	2015 £m
Operating loss	(5.1)	(7.0)
Depreciation and amortisation	20.2	22.1
Share-based compensation	2.5	1.1
Non-recurring transaction costs paid	2.1	-
Decrease in inventories	0.2	0.1
Decrease/(increase) in trade and other receivables	7.0	(14.2)
Increase in payables	4.0	0.6
Increase/(decrease) in deferred income	0.1	(0.1)
Exchange movements	1.6	1.8
Net cash inflow from operations	32.6	4.4
Research and development tax credits received	0.3	3.6
Net cash inflow from operating activities	32.9	8.0
Cash flows from investing activities
Interest received	0.3	0.4
Purchase of property, plant and equipment	(1.5)	(1.4)
Disposal of investments	2.4	-
Acquisition of Activaero GmbH(1)	(24.6)	(0.5)
Non-recurring transaction costs paid	(2.1)	-
Net cash outflow from investing activities	(25.5)	(1.5)
Net cash inflow before financing activities	7.4	6.5
Cash flows from financing activities
Proceeds from issue of ordinary shares	2.4	1.8
Net cash inflow from financing activities	2.4	1.8
Increase in cash and cash equivalents	9.8	8.3
Cash and cash equivalents at beginning of period	90.0	81.7
Cash and cash equivalents at end of period	99.8	90.0

(1)   The final element of the consideration for the acquisition of Activaero GmbH, being the non-contingent deferred consideration was paid in August 2015. No further payments are due to be made in respect of this acquisition.

 

 

 

Statement of changes in equity

for the year ended 31 March 2016

 

	Share capital £m	Share premium £m	Special reserve £m	Other reserve £m	Share-based compensation £m	Translation reserve £m	Retained loss £m	Total equity £m
At 1 April 2014	0.1	97.4	8.2	124.9	13.8	(1.6)	(16.1)	226.7
Profit for the year	-	-	-	-	-	-	3.7	3.7
Other comprehensive loss	-	-	-	-	-	(11.4)	-	(11.4)
Total comprehensive loss	-	-	-	-	-	(11.4)	3.7	(7.7)
Share-based compensation	-	-	-	-	1.1	-	-	1.1
Exercise of share options	-	1.8	-	-	-	-	-	1.8
At 31 March 2015	0.1	99.2	8.2	124.9	14.9	(13.0)	(12.4)	221.9
Profit for the year	-	-	-	-	-	-	5.0	5.0
Other comprehensive loss	-	-	-	-	-	5.4	-	5.4
Total comprehensive income	-	-	-	-	-	5.4	5.0	10.4
Share-based compensation	-	-	-	-	2.5	-	-	2.5
Exercise of share options	-	2.4	-	-	-	-	-	2.4
At 31 March 2016	0.1	101.6	8.2	124.9	17.4	(7.6)	(7.4)	237.2

 

 

 

Notes to the financial statements

for the year ended 31 March 2016

 

1. Basis of preparation

The financial information included in this statement does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information has been extracted without material adjustment from the consolidated financial statements of Vectura Group plc for the year ended 31 March 2016, which have been audited. The auditor has made reports in respect of the statutory consolidated accounts for the years ended 31 March 2016 and 31 March 2015. Their reports were (i) unqualified, (ii) did not include reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006.

Whilst the information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards (IFRS), this announcement does not itself contain sufficient information to comply with IFRS.

Statutory accounts for the financial year ended 31 March 2015 have been delivered to the Registrar
of Companies, whereas those for the year ended 31 March 2016 will be delivered following the Annual
General Meeting.

The Group's Annual Report and Accounts will be made available to shareholders in May 2016 and will be available on our website www.vectura.com.

Risks and uncertainties

The key business risks facing Vectura on a stand-alone basis are consistent with those set out in the Annual Report and Accounts for the year ended 31 March 2015 and those to be included in the Annual Report and Accounts for the year ended 31 March 2016. There are a number of potential risks and uncertainties that could have a material impact on the Group's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results. Risks specific to the Group include intellectual property risk, late stage development risk, integration risk, counterparty risk, operational disruption risk, and financial risk. The Board has policies in place to mitigate these risks and uncertainties.

Going concern

The accounts have been prepared on the going concern basis. Although certain economic conditions may place pressures on customers and suppliers who may face liquidity issues, the Group's product diversity and customer and supplier base substantially mitigate these risks. In addition, the Group operates in the relatively defensive pharmaceutical industry which we expect to be less affected compared to other industries.

The Group made a profit after tax of £5.0m for the financial year ended 31 March 2016 (2014/15: £3.7m) and had £99.8m of cash and cash equivalents as at 31 March 2016 (2015: £90.0m). The Board operates an investment policy under which the primary objective is to invest in low-risk cash or cash equivalent investments to safeguard the principal. The Group's forecasts, taking into account likely revenue streams, show that the Group has sufficient funds to operate for the foreseeable future.

After reviewing the Group's forecasts and assessing the uncertain nature of some of the Group's forecast revenues, the Directors believe that the Group is adequately placed to manage its business and financing risks successfully. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report
and Accounts.

2. Accounting policies

The financial information has been prepared in accordance with accounting policies as set out in the previous financial statements and those signed today for the year ended 31 March 2016. The policies have been consistently applied to all periods presented. Full details of the Group's accounting policies can be found in the 2014/15 Annual Report, which is available on our website www.vectura.com.

 

 

 

3. Revenue

Revenue represents amounts invoiced to third parties, derived from the provision of licences and services that fall within the Group's sole principal activity, the research, development and commercialisation of novel therapeutic products and drug delivery systems for human use.

Revenue by category	2016 £m	2015 £m
Royalties	39.2	25.2
Product licensing	21.0	19.8
Technology licensing	3.4	6.6
Development services	4.7	3.9
Device sales	3.7	2.5
Total income	72.0	58.0

4. Investment income and finance gains/(costs)

	2016 £m	2015 £m
Investment income:
Income from sale of investments(1)	2.4	0.1
Interest receivable on bank deposits and similar income	0.3	0.4
Total investment income	2.7	0.5
Finance gains/(costs):
Foreign exchange gains/(losses)	1.6	1.8
Finance costs(2)	(0.5)	(0.1)
Total finance gains/(costs)	1.1	1.7

(1)            As announced on 1 May 2015, the Medicines Company received US FDA approval for RAPLIXA^TM and the RaplixaSpray device. This triggered a payment to Vectura as part of the deferred consideration arrangements related to the acquisition of ProFibrix BV by the Medicines Company in 2013.

(2)            Finance costs include arrangement fees relating to a Revolving Credit Facility (RCF) entered into during March 2016, and at the reporting date this facility remains undrawn.

5. Taxation

The major components of the income tax credit for the years ended 31 March 2016 and 31 March 2015 were
as follows:

	2016 £m	2015 £m
Research and development tax credits:
- current year	2.0	2.5
- in respect of prior years	-	0.6
Decrease in net deferred tax liability	4.9	6.8
Total	6.9	9.9

 

6. Earnings per ordinary share

The calculation of earnings per share is based on the following data:

	2016	2015
Profit after tax for the year (£m)	5.0	3.7
EBITDA(1) for the year (£m)	23.2	16.2
Weighted average number of ordinary shares - basic earnings per share (m)	405.8	401.6
Effect of dilutive potential ordinary shares (share options) (m)	9.6	10.0
Weighted average number of ordinary shares - diluted earnings per share (m)	415.4	411.6
Earnings per ordinary share
Basic	1.2p	0.9p
Diluted	1.2p	0.9p
EBITDA(1) per ordinary share
Basic	5.7p	4.0p
Diluted	5.6p	3.9p

(1)   Earnings before investment income, finance gains/(costs), tax, depreciation, amortisation, share-based compensation, and adjusted for non-recurring items.

 

7. Goodwill

Group	2016 £m	2015 £m
Cost:
At 1 April	56.8	57.8
Effect of movements in foreign exchange	0.6	(1.0)
At 31 March	57.4	56.8
Net book value:
At 1 April	56.8	57.8
At 31 March	57.4	56.8

The carrying value of goodwill is made up of balances arising on acquisition of the following companies:

Group	2016 £m	2015 £m
Co-ordinated Drug Development Limited (since renamed Vectura Limited)	1.5	1.5
Vectura Delivery Devices Limited	0.5	0.5
Innovata Limited	47.6	47.6
Activaero GmbH(1)	7.8	7.2
	57.4	56.8

Goodwill is allocated to cash-generating units (CGUs), which are tested for impairment on an annual basis, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are assessed using a value-in-use model. An impairment provision is recognised only if the goodwill carrying value exceeds this value in use.

The key assumptions for the value-in-use calculations are those regarding the discount rates, growth rates and expected changes to contribution during the period. The model has been based on the most recent cash flow forecasts prepared by management, which consist of detailed probability-weighted product-by-product analyses. These forecasts are based on development timings and specific projections for sales volumes over the likely period in which cash flows could be expected, being a period of up to fifteen years for impairment review purposes. No terminal values have been included in the cash flow forecasts. No general growth rates are assumed. The pre-tax discount rates used in the forecasts range from between 12.3% and 14.4%. Following the acquisition of Activaero GmbH in March 2014, and for the purpose of impairment testing of goodwill, the Group is split into two CGUs, being the Vectura CGU and the Activaero CGU.

 

7. Goodwill (continued)

Goodwill has been allocated to the following CGUs:

	2016 £m	2015 £m
Vectura CGU	49.6	49.6
Activaero CGU(1)	7.8	7.2
	57.4	56.8

⁽¹⁾     The underlying currency of the goodwill associated with the Activaero GmbH CGU is the Euro. The goodwill balance of €9.9m is translated into sterling at the prevailing exchange rate on the balance sheet date. Any foreign exchange gain or loss is taken to the translation reserve, as shown in the consolidated statement of comprehensive income. The movement of £0.6m shown in the table above relates solely to movements in the £/€ exchange rate between 31 March 2015 and 31 March 2016.

 

The Group has conducted a sensitivity analysis on the impairment test of each CGU's carrying value. In each case the valuations indicate sufficient headroom such that a reasonably possible change in a key assumption is unlikely to result in an impairment of the related goodwill.

Company	£m
Carrying amount:
At 31 March 2015 and 31 March 2016	2.0

The goodwill in the Company arose on the acquisition of the Centre for Drug Formulation Studies, an unincorporated entity, in 1999. Amortisation of £0.7m was applied prior to 1 April 2004. Goodwill in the Company is tested for impairment using the same discount rates and on the same basis as for the Group.

8. Trade and other receivables

	2016 £m	2015 £m
Trade receivables	1.6	16.2
Other receivables(1)	6.2	2.9
Prepayments and accrued income	13.6	8.3
VAT recoverable	0.8	0.5
	22.2	27.9

(1)   Includes research and development tax credits of £4.5m (2015: £2.8m).

The Directors consider that the carrying value of trade and other receivables approximates to their fair value.

9. Trade and other payables

	2016 £m	2015 £m
Amounts falling due within one year:
Trade payables	6.4	3.5
Other payables	1.4	1.0
Accruals	18.6	16.1
	26.4	20.6

The Directors consider that the carrying value of trade and other payables approximates to their fair value.

 

10. Deferred income

Deferred income relates to amounts received under product licensing agreements. Vectura continues to provide services to these licensing partners over a period of time. Milestone payments under these licensing agreements are therefore spread over future periods, and income is deferred as follows:

	2016 £m	2015 £m
Amounts due within one year	0.8	0.2
Amounts due in more than one year	1.0	1.5
	1.8	1.7

11. Equity

Share capital

	2016 £m	No. '000	2015 £m	No. '000
Allotted, called up and fully paid:
Ordinary shares of 0.025p each:
At 1 April	0.1	403,458	0.1	399,654
Issued on exercise of share options	-	2,962	-	3,062
Issued on exercise of Sharesave options	-	934	-	181
Issued on exercise of LTIP options	-	3,176	-	561
At 31 March	0.1	410,530	0.1	403,458
Redeemable preference shares of £1 each:
At 1 April and 31 March	-	34	-	34

Between 1 April 2015 and 31 March 2016 the Company issued 2,961,903 (2014/15: 3,062,229) ordinary shares of 0.025p each on the exercise of employee share options at a weighted average exercise price of 64.72p per share (2014/15: 56.38p).

Between 1 April 2015 and 31 March 2016 the Company issued 934,128 (2014/15: 180,691) ordinary shares of 0.025p each on the exercise of Sharesave options at a weighted average exercise price of 47.4p (2014/15: 64.25p) per share.

Between 1 April 2015 and 31 March 2016 the Company issued 3,175,633 (2014/15: 561,253) ordinary shares of 0.025p each on the exercise of LTIP nil-cost options.

12. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. There has been no material change in the type of related party transactions described in the last Annual Report and Accounts.

13. Business combinations

On 18 March 2014, the Group acquired 100% of the issued share capital and obtained control of Activaero GmbH ("Activaero"), a company focused on the development of products for the treatment of respiratory diseases.

The final element of consideration, being the deferred consideration of €35m, was paid August 2016.
The payment was translated into sterling at the prevailing £/€ exchange rate on the payment date and is shown as a cash outflow of £24.6m during the year ended 31 March 2016. No further payments are due to be made in respect of this acquisition.

In the prior year, an additional payment of €0.6m was made in respect of working capital items that were acquired during the transaction. This increased the Company's investment in the prior year. There have been no movements during the current year.

14. Post balance sheet events

Non-current assets held for sale

On 1 April 2016, the Group's building in Gemünden, Germany, was sold for gross proceeds of €370,000. The trade and activities previously conducted at this site are now undertaken at other Vectura sites.

Merger with Skyepharma PLC

On 16 May 2016, the Competition and Markets Authority (the "CMA") confirmed that the proposed recommended all share merger of Vectura Group plc and Skyepharma PLC (the "Merger") does not qualify for investigation under the Enterprise Act 2002. This confirmation satisfied the CMA clearance condition to the implementation of the proposed Merger (including the Scheme) as set out in the announcement of the proposed Merger released on 16 March 2016 and in Part 3 (Conditions to and Further Terms of the Merger) of the Scheme Document sent to Skyepharma's shareholders on 8 April 2016. As announced on 20 May 2016, it is now anticipated that the Scheme will become effective on 10 June 2016.

Upon completion of the merger, it is proposed that the enlarged Vectura Group will change its accounting reference date to the 31 December. This change would bring the Group's accounting reference date in line with its partners and peer group. The transaction will be accounted for in accordance with IFRS 3 in Vectura's consolidated balance sheet for the year ended 31 December.

Included within these financial statements are non-recurring costs of £5.6m relating to legal and professional fees for activities undertaken in support of the merger during the year ended 31 March 2016. Further legal and professional fees will be incurred during FY 2016/17, contingent upon completion of the transaction.

Directors' responsibility statement

The Directors' responsibility statement below has been prepared in connection with the Company's full Annual Report for the year ended 31 March 2016. Certain parts thereof are not included within this announcement. We confirm that to the best of our knowledge:

•    the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

•    the strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties which they face; and,

•    the annual report and financial statements, taken as whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

 

By order of the Board,

Andrew J Oakley

Director

25 May 2016