22 June 2016
Immunodiagnostic Systems Holdings plc
Final Results
Financial summary
· Revenue of £38.3m (2015: £45.4m) showed a 15.6%
decline based on actual exchange rates. Excluding the acquisition of Diametra and at constant exchange rates the decline was
18.4%.
· Automated revenues are 48% of overall revenues
at £18.3m (2015: £22.0m), a decline of £3.7m, or 16.7%. We are continuing to lose automated 25-OH Vitamin D business as the
larger laboratories migrate test volumes previously run on the IDS iSYS analyser to high-throughput analysers.
· Manual assay revenues are 33% of overall
revenues at £12.7m (2015: £15.4m), a decline of £2.7m or 17.8%. Excluding the impact of the Diametra acquisition, legacy IDS
manual assay revenues were £9.8m (2015: £13.9m). The decrease is largely due to test volumes continuing to be lost to automated
solutions offered by IDS and others, coupled with weaknesses in the sales process.
· Non-cash impacting exceptional impairment charge
of £38.2m recognised to write down intangible assets and goodwill to their recoverable amount.
· Adjusted* EBIT of £0.5m (2015: £4.2m) before
exceptional items, yielded a 1.2% margin. Statutory EBIT was -£36.8m (2015: £3.3m), impacted by an exceptional asset impairment
charge of £38.2m.
· Adjusted* basic EPS of 4.7p (2015: 11.1p);
statutory basic EPS of -109.7p (2015: 8.1p).
· Proposed dividend of 1.2p per share (2015:
3.0p), which amounts to 26% of Adjusted* basic EPS.
· Net cash flow from operations of £8.2m (2015:
£8.8m).
· Free cash** flow of £3.2m (2015:
£2.6m).
· Closing cash and cash equivalents of £26.6m (31
March 2015: £23.7m), an increase of 12.2%.
Operational summary
· Paul Martin joined as Group Finance Director on
4 January 2016.
· 1 new endocrinology assay (Salivary Cortisol)
launched in Europe in FY 2016, compared to the 6 - 8 forecasted.
· Project launched to consolidate automated
product development and production into our Liege site which, once completed, will reduce costs by £0.5m per year.
· Implementation of a CRM system to support target
qualification and generation of an opportunity pipeline.
· Telesales to research institutions launched,
generating £80,000 in sales - we expect this revenue to accelerate in FY 2017.
· 4 marketing campaigns launched, generating
£200,000 in sales.
· Total gross direct instrument placements of 31
(2015: 54) with 12 net direct returns (2015: 14 net placements).
· Achieved Operating cost* reduction of £2.2m, or
10%.
* Before exceptional costs of £37.3m (2015: £1.0m).
** Net cash-flow from operating activities less capital expenditure of £5.0m (2015:
£6.1m).
Patricio Lacalle, CEO of IDS, commented:
"IDS is going through a profound and exciting transformation process. As we continue to lose
commodity business to the big players we are building and expanding our speciality portfolio. It is taking longer than expected,
but it is happening continuously and we are gaining momentum in the change process. Our teams understand the necessity for change
across all functions and the need to adapt our cost structures. We strive towards actively engaging our internal talents as well
as complementing our skills with talent from the outside."
For further information:
Immunodiagnostic Systems Holdings
plc Tel:
+44 (0) 191 5190660
Patricio Lacalle, Chief Executive Officer
Paul Martin, Group Finance Director
Peel Hunt
LLP
Tel: +44 (0) 207 418 8900
James Steel
Oliver Jackson
About Immunodiagnostic Systems Holdings PLC
A specialist in endocrinology testing, IDS is an in-vitro diagnostic solution provider to the
clinical laboratory market. IDS develops, manufactures and markets innovative immunoassays and automated immunoanalyser
technologies to provide improved diagnostic outcomes for patients. IDS's immunoassay portfolio is a combination of an
endocrinology speciality testing menu and assay panels in complimentary fields.
IDS was founded in 1977 and trades on the Alternative Investment Market (AIM; trading symbol IDH)
of the London Stock Exchange. It is a global company headquartered in the UK with around 315 employees worldwide. IDS's products
are developed and manufactured at its facilities in Europe.
IDS serves its customers through regional offices in Europe, U.S.A and Brazil and works with a
network of distributors to serve customers throughout the rest of the world.
Chairman's statement
"At Berkshire full reporting means giving you the information which we would wish you to give to
us if our positions were reversed." Warren Buffett
1. Introduction
For IDS FY 2016 was a year of transition; we made many changes to the Group's operations, however
these changes have not yet impacted the financial results.
The main reason is that they were predominantly implemented towards the end of the fiscal
year. Patricio Lacalle joined as CEO on 1 April 2015 and Paul Martin completed the Executive Team as
Group Finance Director only effective 4 January 2016.
The second reason why the actions initiated during the fiscal year did not show results yet is the
long-term nature of our business: the development process for an automated assay lasts 15-18 months, and the time between an
analyser placed at a prospective client for evaluation in a trial and a first order for assays is regularly 6-12
months.
The most important KPIs for IDS are as follows:
a) In terms of financials, reported revenues decreased by 15.6% to £38.3m. On a
like-for-like basis, excluding the contribution from Diametra and at constant exchange rates, the revenue decline was
18.4%.
Adjusted EBIT dropped to £0.5m from £4.2m, resulting in an operating
margin of 1.2% (FY 2015: 9.4%).
b) Most importantly the development process did not deliver results in FY 2016: we had
targeted 6-8 new assay launches in Europe, but only delivered one, Salivary Cortisol, which was launched towards the end of the
fiscal year.
c) The sales process did not deliver tangible results, either; in FY 2016 we saw a
total of 12 net returns in our direct sales territories, down from 14 net placements in FY 2015 and 35 net placements in FY 2014.
Gross placements in the year were 31 (2015: 54), which is a rate of less than two gross placements per sales representative per
year - far below the levels achieved by peers in our industry. We need significant improvements here.
As a result of the poor financial performance we are required to book an asset impairment charge
of £38.2m. The details of this are set out in the Financial Review.
These developments triggered a decrease in the share price which dropped from £2.95 on 31 March
2015 to £2.25 at the end of FY 2016, by 24%.
2. Board matters
During FY 2016 we completed the restructuring of the Board, in line with my statement in the FY
2015 Annual Report. The aim of these changes is to strengthen both the business sense as well as the culture of ownership at
Board level.
2.1 Non-executive level
Changes at a non-executive level in the year were:
a) Eddie Blair stepped down as a Non-Executive member of the Board at the last AGM
after eight years of service. Eddie had brought the scientific perspective to the Board and we would like to thank him for his
many years of dedication to the Company.
b) Effective 15 June 2015, Peter Williamson joined the Board as a Non-executive
member. With many years' experience in the Private Equity industry he brings a strong business sense to the Group, specifically
including many successful restructuring projects. Given the adjustment required to cost base as a result of the lower level of
business, we are glad to have his experience within the Group.
c) Effective 1 November Dr Peter Kaspar joined the Board as a
Non-Executive member. He has been in management positions in the IVD industry for many years with a focus on R&D, but always
retaining a general management perspective. During his short time at IDS, he has familiarised himself in detail with the issues
we need to address in our development process, and has been able to give valuable recommendations as how to improve
it.
2.2 Executive level
Patricio Lacalle started as CEO on 1 April 2015, thus FY 2016 encompasses his first 12 months of
service. During this period he has been able to make an assessment of the situation, define first action steps, and initiate them
- the latter more towards the end of the year. He will report on progress made in his operational review.
On 4 January 2016 Paul Martin joined as Group Finance Director. He has many years of experience in
financial functions within various businesses undergoing restructuring. Thus his first assignment at IDS was to head the project
"Fit for Success" which will review and adjust the cost base of IDS.
2.3 Summary
With the changes described above, the restructuring of the Board has been completed. Over the year
the Board discussions have changed significantly, the focus is now on the topics which constitute the key levers to improve the
future value of the business. Discussions evolve around factual material presented by the Executives, and we talk with
intellectual honesty about the weaknesses and deficiencies we have to tackle in order to become a good, and eventually great,
company again.
I personally believe that a mutual understanding of the issues we are facing is required to define
and implement the necessary changes for IDS. With this Board team IDS has laid the foundations for a process which achieves this
goal.
3. The way forward for IDS
In last year's statement I noted that IDS will need changes in the following areas to become
successful again:
a) Differentiated strategy: IDS has recognised that it is
active in three different businesses - and each requires a distinctive strategy to succeed. They are automated IVD, manual IVD
and the licensing/technology business. These business units should be managed by business unit heads, with responsibility for
their business units only, who will be focused on driving their business unit performance irrespective of the performance of
other areas of the business.
b) Focus on four KPIs in the core automated IVD business. The pillars of the strategy
in this business unit are:
· Larger menu - this refers to the innovation
process;
· Larger installed base - this refers to the sales
process;
· Cost discipline - a focus on effectiveness;
and
· Acquisitions and other deals to accelerate the
build-up of critical mass.
c) Culture: the company needs to strengthen some aspects of its culture, in particular its
business sense, a bias to action and its ambition.
Below I would like to elaborate on these points.
4. Differentiated strategy
An overview of the financial information relating to the three business units in which IDS
operates is:
|
Automated IVD
|
Manual IVD
|
Licensing & Technology
|
Total
|
Revenues FY 2016
|
£18m
|
£13m
|
£7m
|
£38m
|
Revenues FY 2015
|
£22m
|
£15m
|
£8m
|
£45m
|
Profitability
|
Negative
|
High
|
Very High
|
Low
|
4.1 Automated IVD business
4.1.1 Business description
The automated IVD business is comprised of the sale or placement of our IDS-iSYS instrument, in
addition to selling automated assays and consumables for use in these instruments.
4.1.2 Revenue model
The typical revenue model in a country where we have a direct sales organisation is to place an
instrument for free with the customer, against a contract to buy a certain amount of assays and consumables for a period of
several years. In territories where we utilise a distribution network, we sell the instruments to distributors. This approach is
industry standard.
4.1.3 Key success factors
Key success factors in the automated IVD business vary depending on the part of the market a
company is positioned in. Based on market data for 2014 IDS is a tiny niche player:
a) Size of the global IVD
market
c. $9bn
b) Thereof
automated
c. $7bn
c) IDS automated IVD
revenues
c. $27m
d) IDS market share
overall
c. 0.4%
IDS is a marginal player in the overall market, thus strategically this forces us to specialise.
In the IVD market, the way for smaller competitors to specialise is by indication areas, each of which require special clinical
know-how, have dedicated opinion leaders and where part of the market is concentrated on specialised labs.
The core indication area of IDS is endocrinology. Market and market share data for this area are
set out below. Please note that we have excluded 25-OH Vitamin D from the market definition as it has outgrown the specialty
endocrinology niche and is now serving several indication areas.
|
FY 2016
|
FY 2015
|
a) Size of global market for endocrinology markers:
|
$1,764m
|
$1,538m
|
b) Thereof automated:
|
$340m
|
$332m
|
c) IDS automated endocrinology revenues:
|
$15.2m
|
$14.7m
|
d) IDS market share in endocrinology:
|
4.5%
|
4.4%
|
The IDS revenues above are achieved with our "endocrinology excellence menu", i.e. all assays
excluding 25-OH Vitamin D (but including 1,25 Vitamin D). Thus in endocrinology we are a player who is recognised by market
participants as relevant and significant. This allows us to build up key opinion leaders who reinforce our position.
Strategically we have taken a decision to secure this core competence by committing resources to
this franchise. New assays will address niche needs, but we believe that it is important that IDS continues to be perceived as
the opinion leader and partner of competence in the field of endocrinology.
In the field of endocrinology our main competitor is DiaSorin.
4.1.4 Competition and competitive advantage
Our competitors in the automated IVD business fall into two categories:
a) Four major suppliers of high-performance closed-system analysers for central labs,
i.e. Roche, Siemens, Abbott and Beckman Coulter. We refer to them collectively as the "4 workhorse suppliers" as the instrument
they place in a laboratory is high-performance and tends to be used as the "workhorse", processing 60 - 80% of total test
volumes.
b) Approximately six specialists supplying low and medium performance closed-system
analysers for specialised niche indication areas, e.g. Phadia for allergy or DiaSorin and Biomerieux for immunology, Euroimmun
and Bio-Rad in autoimmunity. IDS is the smallest by a wide margin.
4.1.5 Profitability
Gross margins in this business are high, slightly above the level of gross margins available in
the manual IVD business, but this gross margin is required to cover the depreciation of the systems which tend to be placed for
free with labs. At this stage of our business development operating costs are also very high as we have decided to invest in an
infrastructure to grow this business further:
a) We place analysers with customers for free, so they have "razors", so we can then
sell them "razorblades", i.e. automated assays and other consumables. IDS retains ownership of the analyser, thus bear the
depreciation costs of the instruments.
b) Nearly all of the R&D spend incurred by IDS relates to analyser development and
assay automation.
c) We maintain a technical service/field service organisation, comprising around 40
employees, (over 10% of our workforce) to support customer's queries relating to iSYS analysers and automated assays.
Thus EBIT margins in our automated business are estimated to be negative at this stage. As stated
in last year's Chairman's statement, to reach break-even at the EBIT level in this business we estimate we will need a critical
mass amounting to annualised revenues of at least £30m to £50m. This will require both an acceleration of our pace of internal
innovation as well as acquisitions to boost our product offering.
4.1.6 Key events in FY 2016
In our core franchise of clinical automated endocrinology ("endocrinology excellence menu",
excluding 25-OH Vitamin D) we achieved a revenue growth of 3.1% in FY 2016 - after an increase of 13.7% in FY 2015. This loss of
momentum in growth is really disappointing, as this is the area where we have a competitive advantage. According to our
assessment the reasons for this low growth rate are of lack of hunting mentality in the sales organisation in combination with a
lack of new product introductions. Patricio elaborates on these points in his operational review.
4.2 Manual IVD business
4.2.1 Business description
In this business segment we sell manual assays, radio immunoassays ("RIA") and ELISA kits ("EIA")
to labs which do not have the size to warrant the placement of a closed automated system. Thus volumes per assay are smaller and
revenues per customer lower.
In the manual assay world there are two types of uses:
a) Clinical use. Here assays are used to test humans for all sorts of screening and
diagnostic questions. All assays need regulatory approval.
b) Research use only ("RUO"). In this application assays are used for scientific
experiments or in conjunction with clinical tests of therapeutics. No regulatory approval is required.
The present business of IDS is substantially all related to clinical use. This will be the area we
will continue to focus on as the required regulatory approvals limit the number of competitors.
4.2.2 Revenue model
The revenue in this business is straightforward: we sell assays and ancillaries for
cash.
4.2.3 Key success factors
To effectively serve the market for clinical use a company needs a cost-efficient sales process to
address the many small customers efficiently. Such a sales process would normally be comprised of:
a) Outbound telesales for new lead identification, qualification and tele-appointment.
At times outbound telesales may also be able to generate direct sales, but this is more the exception than the rule.
b) A few sales reps calling on key accounts and qualified leads, plus pursuing
tele-appointments arranged by the outbound telesales team.
c) An inside sales team plus a transactional website for the cost-efficient handling
of repeat orders.
In last year's report I told you that IDS had decided to stop direct sales calls to customers in
this segment, but had not built up an alternative channel to market. We have not tried to protect and develop our manual
business, but have focused on converting it to automation whenever we had an automated alternative. As a result this business had
been shrinking at a rate of 24% per annum in the five years to March 2016.
4.2.4 Competition and competitive advantage
IDS is a small player when compared to a large field of small to medium size competitors in the
manual business.
The clinical field of the manual assay business include significant specialised competitors like
IBL, Euroimmun or Orgentech/Werfen Group or generalists, for example DRG, Diasource.
4.2.5 Profitability
Gross margins in this business are slightly lower than in the automated part of the IVD business.
At this stage operating costs for this business are relatively moderate - in my opinion too low to keep
the business sustainable. Thus current profitability is high, but we will have to invest more into sales
and marketing resources in the future, to stop the revenue erosion.
4.2.6 Key events in FY 2016
In FY 2016 the manual IVD business at IDS shrank at a rate of 17.8%. The legacy IDS business
declined 29.3% year-on-year, while revenues from the acquired Diametra business were largely constant (on a full-year equivalent
basis).
On the operational side we have established outbound telesales functions in our three regional
sales offices. These teams have been able to reactivate a number of dormant customers.
We have not yet been able to build up an integrated sales process with our sales reps and have not
established a transactional website.
4.3 Licensing and Technology
4.3.1 Business description
The licensing and technology part of our business deals with supplying proprietary antibodies and
assays with unique characteristics and IDS analyser technology on an OEM basis to third parties.
In FY 2016 the majority of revenues within this segment were accounted for by supplying antibodies
and assays to a few customers. On the analyser side we have published that we are developing an adapted version of our ISYS for
Stago to use in their core business of coagulation. We believe there is more potential for similar deals monetizing our analyser
technology.
4.3.2 Revenue model
The revenue models in these segments are made up as follows:
a) In assay technology: predominantly royalties plus goods delivered.
b) In analyser technology: milestones at defined stages of development, (sometimes)
royalties and a margin on hardware and consumables revenues.
There is a risk over the short to medium term that this income stream is eroded or removed if a
key partner no longer requires access to the licensed intellectual property.
4.3.3 Key success factors
Key success factors going forward in this business are maintenance of the technological lead which
induces our clients to license the respective technologies from us. This requires that we continue to spend on R&D at the
rate we have in the past.
4.3.4 Profitability
Because of the weight of IP-related income streams gross margin in these activities is
high.
4.3.5 Competition and competitive advantage
Our competitive advantage is based on the ability to adapt our existing instrument platform
flexibly. Thus we can provide customers with an instrument without long development cycles and the associated significant
development costs.
4.3.6 Key events in FY 2016
Revenues in this business declined to £7.3m (2015: £8.0m), and gross margin remained at a high
level.
More importantly we changed the way the business is managed: in the middle of the year we started
a project to systematically identify and qualify leads which are then pursued in discussions with senior management at the target
customers. This process has generated several leads which are presently in different stages of the partnering process.
Subsequent to year end we were informed by a large customer that they have
decided to in-source the service we have provided in the past. Thus we are expecting revenues in this
segment in FY 2017 and beyond to be significantly below FY 2016. As we are losing royalty income the associated loss will be
disproportionately stronger.
5. Key Performance Indicators ("KPIs") in the automated IVD business
As mentioned above, our core business of automated IVD is rather straightforward and requires
concentration on a few KPIs. I would like to discuss these below.
5.1 New assay launches
The assay menu of IDS is sub-critical in size. It is comprised of
Regulatory approval
|
Assays end of
FY 2016
|
Assays end of
FY 2015
|
a) Assays with the CE mark
|
15
|
14
|
b) Assays with FDA approval
|
9
|
8
|
It is hard to convince an efficiently run laboratory to install an additional analyser in order to
run such a small number of assays. Critical mass to have an attractive business case for laboratories requires a menu of 25 to 30
automated assays. Thus the rate of new assay introductions is one of the primary KPIs to monitor in this business.
Below please find the number of new assay introductions in the last six fiscal years.
|
New assay launches
|
2016
|
1
|
2015
|
2
|
2014
|
0
|
2013
|
2
|
2012
|
2
|
2011
|
2
|
|
|
As mentioned in my introduction, we completely missed our goal to accelerate assay launches. The
main reasons are a lack of decisions taken and weaknesses in the development and upscaling process. This process is presently
being completely overhauled. Thus we hope to be able to report a clear improvement in the next year. More details on our assay
launch performance will be given in the operational review.
5.2 Net new placements
Our revenue model in the automated IVD business is based on an installed base with each installed
device generating recurring revenues. In order to reach critical mass in the automated IVD business we have to increase the
number of installations. The KPI used for this goal has been net new placements of IDS-iSYS machines in the territories we serve
directly. Below is the number of net new placements with direct customers in the last six
years.
|
Direct customers - Net new placements/(returns)
|
2016
|
-12
|
2015
|
14
|
2014
|
35
|
2013
|
88
|
2012
|
87
|
2011
|
88
|
As you can see performance has continued to decline, and for the first time the total number of
machines operational in our direct sales markets decreased.
Our diagnosis for this unsatisfactory development is weakness at all stages of the sales process,
coupled with the sub-scale assay menu described earlier. We will tackle these weaknesses during 2017 one-by-one. Rather than
promising yet another unrealistic number, we can only state that we are expecting a clear improvement over 2016.
5.3 Cost effectiveness
The IVD business is exposed to pricing pressure: annual price erosion in most assays is in the 1 -
3% p.a. range, in our main product automated 25OH Vitamin D erosion is even higher. In order to cope with this pressure any
market participant has to increase the cost effectiveness of his organization.
The KPI most commonly used - and in fact most relevant - is revenue per employee. The graph below
shows the evolution of revenues per employee at IDS and three peers in the diagnostics segment (DiaSorin, Qiagen and Pulsion).
The first two are active in the IVD, Pulsion is active in in-vivo diagnostics, but we wanted to add a peer with comparable size
to deflect the "scale" argument as an explanation of headcount productivity.
Revenue per employee
|
2016
£000
|
2015
£000
|
IDS
|
117
|
135
|
DiaSorin
|
219
|
202
|
Qiagen
|
184
|
202
|
Pulsion
|
n/a*
|
262
|
*Pulsion has no published numbers for 2016.
As you can see this metric has deteriorated once more during FY 2016. The main reason is that
there was no effort undertaken to set up any structural cost-saving projects before Patricio joined. As we are a medtech
organisation with long-term decision-making by clients and regulatory surveillance, we took some time to define a sensible first
efficiency project.
The project to identify these savings has been nearly completed. We have identified savings at a
run-rate of around GBP £2.5m - £3.0m per annum. The current planning for execution of the required actions is for 90% of the
savings to be fully implemented by the end of calendar 2016, thus the full impact should be realized during the year ended March
2018. Related one-off restructuring costs are estimated to be in the region of £2.0m.
5.4 Acquisitions and partnerships deals
In last year's Chairman's statement I noted that in order to reach the critical size required in
the automated IVD business, we needed to undertake a number of acquisitions. This was the main rationale for acquiring Diametra
in 2014. Yet the acquisition of a company with a good manual assay portfolio does not give us direct access to an automated menu
- the manual portfolio would still have to be automated. Additionally any future acquisition would add the complexity of another
company with a full infrastructure, e.g. yet another plant.
In the course of 2016 we have therefore shifted our focus to seeking partnering deals with
companies who have a strong position and expertise in an indication area of interest to us. The goal is that we enter a
collaboration to jointly automate the assays needed for a meaningful panel. The partner would contribute the assay and clinical
know-how while IDS would contribute the instrumentation know-how.
At this point in time we are negotiating with 2-3 prospective partners. We hope to be able to
announce the signing of one or several deals with this profile during the first half of FY 2017.
6. Culture
In last year's Chairman's statement I stated that we would have to evolve the culture of IDS to
meet the challenges of the competitive market we are operating in. Specifically I mentioned that we needed to
strengthen:
a) Business sense;
b) Getting things done in short timelines - with no excuses for delays; and
c) Ambition - striving to be the best in the sector - benchmarked against industry
leaders.
This cultural change is indeed at the core of our restructuring - it is not about a "chirurgical
operation" taking out some bad tissue selectively or fixing a defined set of processes. We have to get the Company to evolve from
a science-driven culture to a fully-fledged business culture, in a matter of one to two years. That is a difficult task handed to
the Executive team. Patricio and his colleagues are working on numerous fronts to implement this change. Please refer to
Patricio's operational review for an update on what we initiated and what we achieved - and where we still have to tackle
cultural issues.
7. Dividend
In the last Annual Report we stated that our dividend policy will be to pay out 25-30% of adjusted
basic EPS as dividends. In addition the Board will also consider buying back shares whenever we feel that the market price is
below the intrinsic value of the Company. This may happen when investors price the Company's stock on current earnings and
earnings momentum, but not on its inherent value after completion of the restructuring. And we have to admit that we have
probably disappointed a significant share of our investors given the low visibility of change in the financial
results.
Adjusted basic EPS in FY 2016 was 4.7p (FY 2015: 11.1p). The Board proposes a dividend of 1.2p
(2015: 3.0p) - implying a payout ratio of 26%.
At the AGM we will propose to give the Board authority to renew the authorisation to buy back up
to 2,250,000 shares of the company, i.e. ca. 7.6% of the share capital. At the present share price of ca. 132.5p this would imply
an amount of £3.0m.
8. Employees
Whilst FY 2016 was not successful in financial terms it required a lot of work and adjustment from
our staff. I believe that the vast majority of our staff understands why we have to make adjustments to our headcount, and in
many instances require the remaining staff to adjust the scope of their work. We continue to have many employees who are willing
to get out of the habit of doing things the way they have been done in the past and to face the challenges of becoming a leaner,
yet more proactive company in the market.
I would therefore like to thank all of our staff for their effort and commitment in the last year.
We will continue to need you and your commitment to make IDS a company which will be a stronger and more successful competitor
going forward.
9. Outlook
FY 2016 was a year of transition: we continued to suffer from the downward momentum in the
underlying business, but laid the foundations for a recovery - though these are not yet visible in the numbers.
During FY 2017 we will continue to make many changes in the organisation. We also expect that
during the year you will see a slowdown in the downward momentum as the first actions undertaken become effective.
I remain confident that IDS has a good future: the automated part of the IDS business is a
razor/razorblade-type business with recurring revenues at a very predictable rate. In nearly 40 years of business life I have
come across several of these businesses - and they have always been businesses with outstanding profitability and returns to
shareholders. At IDS this core strength of the business model is currently superseded by operational problems. But with the team
that is emerging I am sure that IDS is a raw diamond waiting to be polished.
Dr Burkhard Wittek
Non-executive Chairman
Operational Review
Business overview
The main product which caused the decline in revenues was 25-OH Vitamin D. This marker is
represented in both our automated as well as in our manual business segment and represents 26% (2015: 34%) of our total revenue.
We expect the decline to continue as manual applications are increasingly being automated. Being a high volume marker, 25-OH will
be run by an increasing portion of labs on one of the big workhorses.
By the term "workhorse" I refer to the analyser at the core of a lab which has the highest
efficiency. Most labs will run 60-80% of their volumes on this workhorse, with the remainder being split among smaller analysers
for specialty applications such as allergy or endocrinology. These workhorses tend to be manufactured by the four largest
suppliers of IVD which jointly account for 50-60% of the global market. All suppliers of workhorses now offer an automated 25-OH
Vitamin D assay.
We operate in three business segments: Automated IVD, Manual IVD and Licensing & Technology.
The results they have produced are shown below:
|
2016
£000
|
2016
%
|
2015
£000
|
2015
%
|
%
change
|
25-OH vitamin D
|
7,232
|
19%
|
9,887
|
22%
|
-27%
|
Other specialty
|
10,076
|
26%
|
9,774
|
22%
|
3%
|
Instrument sales
|
983
|
3%
|
2,293
|
5%
|
-57%
|
Total automated
|
18,291
|
48%
|
21,954
|
48%
|
-17%
|
25-OH vitamin D
|
2,867
|
7%
|
5,416
|
12%
|
-47%
|
Other specialty
|
6,933
|
18%
|
8,441
|
19%
|
-18%
|
Diametra
|
2,876
|
7%
|
1,561
|
3%
|
84%
|
Total manual
|
12,676
|
33%
|
15,418
|
34%
|
-18%
|
Licensing and Technology
|
7,338
|
19%
|
7,990
|
18%
|
-8%
|
Total revenue
|
38,305
|
|
45,362
|
|
-16%
|
1. Automated IVD
Business segment results
In FY 2016, this business segment represents 48% (2015: 48%) of the total revenue, and has seen a
year on year decline of 16.7% (2015: 8.1%). Automated IVD is comprised of 25-OH Vitamin D, Specialties and Instrument
sales.
Within this segment, 25-OH Vitamin D sales have declined by 27% (2015: 25% decline), Speciality
sales have grown by 3% (2015: 14% growth) and Instrument sales have declined by 57% (2015: 12% growth).
Whereas the drivers of the decline of 25-OH Vitamin D have been described previously, the slow
growth in specialties is owed to a loss of market share in 1.25 Dihydroxy Vitamin D. We were facing strong competition in the
market in most of our sales territories, especially in the US where we have not yet launched the fully automated
version.
The sharp decline in instrument sales is mainly due to a large distribution order during FY 2015
which was not repeated in FY 2016.
1.1. Key success factors
1.2.1 Increased reagent portfolio
At the beginning and well into the fiscal year we were expecting to launch 6-10 new assays before
March 2016. As explained in the Chairman's statement, disappointingly we only managed to launch one. As a result of not meeting
our (admittedly ambitious) goal, it brought a number of deficiencies into the open. Reasons for the delays range from unexpected
maintenance projects within the existing portfolio, to changes in priority, trouble shooting and shortages in
resources.
As a consequence we introduced three changes. Firstly, we have increased the resources in our
automated assay R&D department, where we were running too low on resources to both maintain and grow our product portfolio.
This process is on-going.
Secondly, we have started to concentrate all our automated assay activities to our location in
Liege, Belgium. This eliminates the frictions and inefficiencies inherent when processes cover several sites. Thirdly, we
introduced a review process whereby the top three projects get all the resources necessary to drive completion and to avoid any
more delays.
During April 2016 we achieved the European launch of the first assay in our automated fertility
panel, 17-OH Progesterone. This assay stands as a positive example which has demonstrated our capability to launch an assay with
an end to end development timeframe of 15 months. In addition there are a further four automated assays at an advanced
development phase, which we aim to release during FY 2017. A number of these new automated assays arise as a result of the
automation of manual tests acquired with the purchase of Diametra in September 2014.
1.2.2 Instrument placements
Direct instruments are those sold or placed with IDS customers in the US, Europe and Brazil where
the Group is present with its direct sales organisation. Gross direct instrument placements were 31 (2015: 54) with 43
instruments returned in the year (2015: 40), meaning net direct instrument returns were 12 (2015: net placements of 14). The
total installed iSYS base with direct customers is 300 at 31 March 2016 (2015: 312).
Machines sold to partners and distributors during the year were 35 (2015: 49).
|
2016 Total
|
2015 Total
|
Direct - gross placements
|
31
|
54
|
Direct - returns
|
(43)
|
(40)
|
Direct - net (returns)/placements
|
(12)
|
14
|
Direct - installed base to date
|
300
|
312
|
Sales to partners and distributors
|
35
|
49
|
The region contributing most to the significant decline in the net placements/returns metric was
the US business, where only six machines were placed (2015: 18) but 26 machines were returned (2015: 15). We expect this negative
trend to slow down as we receive additional FDA clearance for new products and as a result of improving our sales process. Our
European business continued to perform positively, though slower than in the previous year, with net placements of seven machines
(2015: nine).
Average revenue per direct instrument ("ARPI") was £48,000 per annum (calculated on a rolling
12-month basis) (2015: £55,000). The decline in ARPI was due to the continued returns of high throughput 25-OH Vitamin D only
instruments being returned in the period, and our new instrument placements being at a lower ARPI than historic
levels.
1.2.3 Sales process
Our business up until 2013 benefited from a very good 25-OH Vitamin D product, with little
competition, in a growing market. Hence it used to be a relatively easy sale.
Since 2014, the workhorse suppliers have launched comparable Vitamin D products. As a result IDS
has been very vulnerable, especially where we had only one product running on any placed analyser. Thus the challenge in the
sales process is to identify the sales opportunity in each lab which is not covered by a workhorse. This is why our specialty
offering is so important; it gives us the required USP with laboratories. Our sales process today requires a meticulous effort to
detail the laboratory's consumption and the potential for the IDS product portfolio.
In July 2015 we introduced a CRM system, and since have looked at performance criteria such as
target profiling, target identification, target qualification, opportunity management, visits per week and customer interaction
quality. We realised that our performance has been poor along each step of the sales process and that we are far from being a
well-oiled sales machine.
It is now our objective to significantly improve that process along each step. We have established
the relevant metrics and are finalising the management structures. In addition, we have reviewed our sales bonus incentive and
clearly shifted the focus towards gaining new business.
2. Manual IVD
2.1. Business segment results
In FY 2016, this business segment represents 33% (2015: 34%) of total revenue and has seen a year
on year decline of 18% (2015: decline of 22%). The legacy IDS business (excluding Diametra) represents 26% (2015: 31%) of total
revenue and has seen a year-on-year decline of 29% (2015: decline of 30%).
Within this segment, 25-OH Vitamin D continued to decline, because of automation, by 47% (2015:
decline of 36%). Specialties declined by 18% (2015: decline of 25%). In specialties, we observed a significant reduction of 1.25
Dihydroxy Vitamin D, however as outlined under Automated IVD, due to competition we were not able to convert the loss in the
Manual IVD into higher market share in Automated IVD.
In FY 2015 IDS acquired Diametra and in FY 2016 we have started to capitalise on synergies in
sales and distribution channels and we have begun to automate products out of the Diametra portfolio.
2.2. Sales process as a key success factor
Manual IVD is sold to routine or research laboratories. In both cases the volumes are relatively
small compared to automated
assays. This requires an efficient sales process, in particular covering lead generation, lead
qualification, opportunity management as well as tele-appointment and tele-sales. We have established two
teams in Europe and one in the US with promising initial success, both generating sales or sales leads for the reps.
In markets without the infrastructure needed for automated solutions and low labour cost, manual
IVD often is the method of choice. In these countries, IDS mostly operates with distribution partners. After being vacant for
over one year, we have recently filled the position of Distribution Manager, clearly an area I should have addressed right at the
beginning. We also commenced the recruitment process for a business unit manager, to spearhead the turnaround of the manual
business.
3. Licencing & Technology
3.1. Business segment results
In FY 2016, the Licencing & Technology represented 19% (2015: 18%) of the total revenue and
declined 8% year-on-year (2015: decline of 7%).
3.2. Key success factors
The technology offering drives our ability to licence to other parties. At IDS a licence could be
either based on assay or instrument technologies. We are increasingly moving to sell services, hardware and consumables from our
random access instrument technology division to other companies on a non-exclusive basis, even if they are in a similar assay
indication field. We do not see a competitive conflict, as the laboratory partner will make a decision based more on the assay
portfolio rather than the instrumentation the assay runs on. Over the last nine months we have received positive feedback and
have entered negotiations with a number of interested parties.
Improved workflow continues to be one of the drivers for efficiency and quality in the laboratory
market. IDS is the only company in the market offering random access system solutions with the experience of an IVD
company.
We are therefore in the process of identifying a suitable candidate to
fulfil the role of promoting IDS as a system partner and lead our instrumentation unit.
4. Cost
We contained expenses in FY 2016, opex declined by £2.2m or 10%. This cost saving was mainly
achieved through cost efficiencies, and not as a result of structural changes to our business.
In the last quarter of the year we launched a cost project called "fit for success" to review all
costs in the business, and make the required structural changes to the cost base. More details on this project are provided in
Paul's financial review.
5. iSYS 2
During the year the group completed the development of the iSYS 2 machine. However, as noted
earlier, there have been a significant number of returns of the iSYS machine. The group is putting in place sales initiatives to
place or sell this backlog of iSYS machines. Once this backlog is substantially cleared, we will move to launch the iSYS 2
machine with its key feature being connectivity to tracks.
6. Culture
One of our biggest challenges is to re-orientate the culture within IDS to be more commercially
focused, results-based and action-driven. This is vital for us to succeed in the competitive market in which we
operate.
I have spent considerable time with the various organisational units in IDS. At all levels and in
each location, the revenue decline over the last two years has been felt as a shock after many years of strong growth. I
understand that the actions required in order to adjust our cost base to become leaner and more effective are often deemed to be
unpleasant. Equally in each of the locations I have visited, I have spoken to well-trained colleagues and I have seen a wealth of
competence in all of our departments and functional areas.
Now, as we are rebuilding our business, together we have to look forward, make use of all our
existing talent and competences, and pull together. We will need to focus on our key strategies, challenge each other and drive
ourselves and our colleagues to accomplish results. We have to do that energetically, with a sense of urgency, perseverance and
the self confidence that we will succeed as an individual and as a team.
Should we be able to achieve this turnaround in culture, then I am confident an improvement in
operational and financial performance will follow.
Patricio Lacalle
Chief Executive
Financial Review
Overview
From a financial perspective, the year ending 31 March 2016 was another disappointing year for the
Group. Pre-exceptional earnings before interest and tax ("EBIT") for the year ended 31 March 2016 were £0.5m (2015: £4.2m), a
reduction of £3.7m. This was driven by a decline in Group revenue to £38.3m (2015: £45.4m), coupled with a drop in gross margin
to 58.6% (2015: 62.5%), offset by a reduction in operating costs to £18.6m (2015: 20.8m). Despite these poor results, the cash
and cash equivalents balance increased to £26.6m (2015: £23.7m).
Summary Profit & Loss
Year ended 31 March
|
2016
£000
|
2015
£000
|
%
Change
|
Revenue
|
38,305
|
45,362
|
(15.6)
|
Gross profit
|
22,465
|
28,331
|
(20.7)
|
Gross margin
|
58.6%
|
62.5%
|
(6.2)
|
Sales & marketing
|
(9,106)
|
(9,922)
|
(8.2)
|
Research & development
|
(1,032)
|
(1,627)
|
(36.6)
|
General & administrative expenses
|
(8,462)
|
(9,236)
|
(8.4)
|
Total operating costs
|
(18,600)
|
(20,785)
|
(10.5)
|
Depreciation and amortisation
|
(3,399)
|
(3,298)
|
3.1
|
Underlying EBIT
|
466
|
4,248
|
(89.0)
|
Exceptional items
|
(37,266)
|
(983)
|
|
Statutory EBIT
|
(36,800)
|
3,265
|
|
Reclassification of costs
As noted in the Half Yearly Report, to ensure that the Group's financial performance can be more
easily benchmarked with its peer group, a reclassification has been made to classify exchange gains and losses from
Administrative expenses to Finance Income/Expense. These exchange gains and losses relate to the retranslation of intercompany
funding and cash balances and therefore are more appropriately classified in Finance Income/Expense. The Board believes this will
give users of the accounts greater visibility of the components of Administrative expenses, improving the comparability from
period-to-period.
The effect of this adjustment to the previously reported 2015 accounts was to increase finance
income by £0.7m and increase administrative costs by £0.7m. The change does not impact the overall group profit before tax or the
net cash flow. More details of the impact can be seen in Note 1 in the accounts.
Revenue
Group revenue of £38.3m (2015: £45.4m) decreased by £7.1m, or 15.6%. On a like-for-like basis -
excluding the contribution from Diametra and at constant exchange rates, the decline amounted to £8.1m, or 18.4%.
Revenue by geography
|
|
|
|
|
|
|
|
|
2016
£000
|
2015
£000
|
Change
|
Change at constant FX
|
2016
£000
|
2015
£000
|
Change
|
Change at constant FX
|
|
US
|
13,852
|
16,208
|
(14.5%)
|
(20.7%)
|
13,852
|
16,208
|
(14.5%)
|
(20.7%)
|
|
Europe
|
18,326
|
20,987
|
(12.7%)
|
(6.4%)
|
16,514
|
20,813
|
(20.7%)
|
(15.0%)
|
|
Rest of World
|
6,127
|
8,167
|
(25.0%)
|
(22.5%)
|
5,063
|
6,780
|
(25.3%)
|
(23.7%)
|
|
Group revenue
|
38,305
|
45,362
|
(15.6%)
|
(14.4%)
|
35,429
|
43,801
|
(19.1%)
|
(18.4%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Group's US revenues declined compared to the prior year by 14.5%, or 20.7% at constant
exchange rates. This was driven by significant declines in the manual and automated business, offset by a low level of growth in
licensing and technology income. In Europe, we saw a decline in revenues of 12.7%, or 6.4% at constant exchange rates. Excluding
the Diametra acquisition, revenues declined 20.7%, or 15.0% at a constant exchange rate. In the rest of the world, revenues
declined by 25.0%, or 22.5% at constant exchange rates. Manual and automated revenues fell across all regions, mainly due to the
significant declines in 25-OH Vitamin D revenues set out in the Operational Review.
Gross profit and gross margin
Gross profit in the year was £22.5m (2015: £28.3m), a decline of £5.8m. Gross margin reduced to
58.6% (2015: 62.5%).
This is largely due to the fixed nature of a portion of the Group's production costs in the short
run. In the medium to long term we target a gross margin of around 60%.
Operating costs
The Group's total operating costs are comprised of:
|
|
|
|
Gross
£000
|
Costs capitalised £000
|
Net
£000
|
Gross
£000
|
Costs capitalised £000
|
Net
£000
|
Sales & marketing
|
(9,106)
|
-
|
(9,106)
|
(9,922)
|
-
|
(9,922)
|
Research & development
|
(3,998)
|
2,966
|
(1,032)
|
(4,258)
|
2,631
|
(1,627)
|
General & administrative expenses
|
(8,767)
|
305
|
(8,462)
|
(9,681)
|
445
|
(9,236)
|
Operating costs (pre-exceptional)
|
(21,871)
|
3,271
|
(18,600)
|
(23,861)
|
3,076
|
(20,785)
|
Operating costs decreased by 10.5% to £18.6m (2015: £20.8m).
The Group capitalized a number of product development projects during the year, encompassing
instrument and new assay developments. The costs capitalised within other administrative expenses relate to the implementation of
a new ERP system for the Group.
Costs are capitalised once all the recognition criteria of IAS 38 Intangible Assets are met. The
total amount of costs capitalised increased from £3.1m in 2015 to £3.3m in 2016. We review these developments on a periodic basis
throughout the financial year and the costs are impaired if a development no longer meets the required criteria.
Operating costs, before the capitalisation of internal development costs, decreased by 8.3% to
£21.9m (2015: £23.9m).
Despite the reduction in revenue, the Group has continued to invest in R&D activities, as new
products are urgently required to drive future revenue growth. Gross R&D spend (i.e. pre-capitalisation) of £4.0m (2015:
£4.3m) amounted to 10.4% (2015: 9.4%) of revenue.
Payroll costs
Payroll costs are £16.1m (2015: £17.0m), a decline of 5.2%. This is reflected by the reduction in
full-time equivalent staff to 315 (2015: 346) at year end. The majority of the headcount drop took place in the production and
administrative areas of the business, while the headcount in assay R&D increased slightly.
Cost focus
As set out earlier, cost control is one of the four pillars of the Group's strategy.
We will continue to invest in:
a) Our ability to expand our assay menu through research and development activities;
and
b) Strengthening the quantity and quality of our sales team.
Therefore, while the Group will continue to strive for operational efficiency in these areas, they
will be ring-fenced from any significant cost reduction projects.
Focusing on the remaining areas of the business, we are in the process of identifying areas where
costs can be reduced. Generically, initiatives include reducing our operational capacity to meet the reduced level of demand,
consolidating and simplifying our management structure, and internally benchmarking the various functions of the business across
regions to identify best practice.
The first project, initiated in January 2016, was the consolidation of automated production and
R&D activities to our site in Liege. This will reduce operating costs by around £0.5m per year and, by simplifying the
geographical footprint and management structure of the automated business, should drive improvements in our R&D and
production processes. The consolidation of operations will be completed by December 2016.
A number of other projects to reduce costs have been identified, ranging from easily won cost
efficiency savings to more involved structural reorganisations. Over the course of FY 2017, the intention is to identify and
action a further £2.0m-£2.5m per annum in operational cost savings, with related one off restructuring costs estimated in the
region of £2.0m.
Finance expense
Net finance expense was £0.2m (2015: income of £0.8m). Included within net finance expense is
foreign exchange loss of £0.3m (2015: gain of £0.7m).
Exceptional items
The Group incurred a number of exceptional items during the current and previous financial
year:
Year ended 31 March
|
2016
£000
|
2015
£000
|
Transaction costs
|
-
|
(561)
|
Restructuring costs
|
(362)
|
(422)
|
Repayable grant release
|
1,323
|
-
|
Impairment of goodwill, intangible assets and tangible fixed assets
|
(38,227)
|
-
|
Total exceptional costs
|
(37,266)
|
(983)
|
In the year-ended 31 March 2016 the Group consolidated automated product development and
production into our Liege site. The resulting restructuring costs, comprising redundancy costs and an onerous lease provision in
our Boldon location, amounted to £0.4m.
Additionally we released a historical repayable grant amounting to £1.3m related to a research
grant, upon obtaining written confirmation from the grantor that no further amounts would be repayable.
In the year-ended 31 March 2015 there were £0.6m of transaction costs incurred in relation to the
acquisition of Diametra and an aborted transaction. Additionally, £0.4m restructuring costs were incurred relating to senior
management changes.
Asset impairment review
In accordance with IAS 36, we annually review the goodwill and indefinite-lived intangible assets
for impairment. Additionally, impairment reviews may occur if there are any triggering events or changes in circumstances which
may indicate that the carrying amount of goodwill is not recoverable. For the purposes of this goodwill impairment review, the
Board considers it currently has one single cash generating unit ("CGU"), being the entirety of the IDS business. The Group
performed an impairment review at 31 January 2016, and then updated this review at 31 March 2016 (the valuation date).
As a result of this review, the recoverable value of the IDS CGU was below the carrying value of
the Group's assets. This has resulted in an impairment charge of £38.2m being recognised in the 2016 accounts, along with the
reversal of a deferred tax liability on the assets impaired of £4.1m, leading to a reduction in net
assets of £34.1m. In accordance with IAS 36, this impairment was allocated firstly against goodwill and
then the remainder was allocated to the other assets in the Group on a pro-rata basis, unless it was clear an individual asset
was not impaired.
As a result, the asset write down has been allocated as follows:
|
|
|
Balance before
write down
|
Impact of write down
|
Balance
after
write down
|
Goodwill
|
16,496
|
(16,496)
|
-
|
Other intangible assets
|
13,065
|
(13,065)
|
-
|
Capitalised internal costs
|
17,650
|
(8,439)
|
9,211
|
Plant and equipment
|
9,856
|
(227)
|
9,629
|
Deferred tax liability
|
(5,100)
|
4,099
|
(1,001)
|
Total
|
|
34,128
|
|
These adjustments did not impact the Group's cash flow or cash on hand at 31 March 2016. Details
of this impairment calculation are provided in Note 14 to the accounts.
Taxation
The tax credit of £4.9m (2015: charge of £1.7m) gives a full year effective rate of 13.1% (2015:
42.0%). It comprises a current tax credit of £0.4m and a deferred tax credit of £4.5m. The current tax credit was impacted by a
prior year credit of £0.7m arising largely from UK Patent Box relief claims. The deferred tax credit has arisen mainly due to the
write off of assets explained earlier, which led to the release of a deferred tax liability amounting to £4.1m.
Earnings per share
Adjusted earnings per share is calculated using profit after tax adjusted to exclude the after tax
effect of exceptional items. Adjusted basic earnings per share is 4.7p (2015: 11.1p).
Basic loss per share is 109.7p, (2015: earning per share of 8.1p), the abnormal result being
mainly driven by the significant non-cash impacting asset impairment charge explained earlier.
Balance sheet
The Group's shareholders' funds at 31 March 2016 were £51.6m (2015: £80.4m).
The fixed assets of the Group consist primarily of property (2016: £1.9m, 2015: £1.9m), IDS-iSYS
instruments (2016: £4.1m, 2015: £5.1m) and other tangible fixed assets (2016: £3.6m, 2015: £3.3m), goodwill (2016: £nil, 2015:
£15.3m), capitalised development costs (2016: £9.2m, 2015: £15.1m) and other intangible fixed assets (2016: £nil, 2015: £15.5m).
As at 31 March 2016, the Group had cash and cash equivalents of £26.6m (2015: £23.7m).
Cash flow
IDS generated cash flows from operations of £8.1m (2015: £10.1m). Free cash flow for the year was
£3.2m (2015: £2.6m).
Foreign exchange
In the period, 50% of the Group's revenues were denominated in Euros, 40% US Dollars, 9% Sterling
and 1% other currencies. The average exchange rates used to translate revenue in the year were:
Average exchange rates
|
2016
|
2015
|
Weakening/ (strengthening) against Sterling
%
|
Sterling: US Dollar
|
1.51
|
1.62
|
(7.2)
|
Sterling: Euro
|
1.37
|
1.27
|
8.3
|
The impact of the movement in exchange rate changes on the results for the year was to decrease
reported revenue by £0.5m compared to the rates used in 2015.
Dividend
The Board is proposing a dividend for the year of 1.2p (2015: 3.0p) subject to the approval of
shareholders at the Annual General Meeting on 28 July 2016. If approved, the dividend will be paid on 19 August 2016 to
shareholders on the register at the close of business on 22 July 2016.
Paul Martin
Group Finance Director
Consolidated income statement for the year ended 31 March 2016
|
Notes
|
2016
£000
|
2016
£000
|
2015
£000
|
2015
£000
|
Revenue
|
1
|
|
38,305
|
|
45,362
|
Cost of sales
|
|
|
(15,840)
|
|
(17,031)
|
Gross profit
|
|
|
22,465
|
|
28,331
|
Sales and marketing
|
|
|
(9,106)
|
|
(9,922)
|
Research and development
|
|
|
(1,032)
|
|
(1,627)
|
General and administrative expenses
|
|
|
(8,462)
|
|
(9,236)
|
Operating costs pre-exceptional items
|
|
|
(18,600)
|
|
(20,785)
|
Exceptional items
|
|
|
|
|
|
Transaction costs
|
|
|
-
|
|
(561)
|
Restructuring costs
|
|
|
(362)
|
|
(422)
|
Repayable grant release
|
|
|
1,323
|
|
-
|
Impairment of goodwill and other intangibles
|
|
|
(38,227)
|
|
-
|
Total exceptional items
|
|
|
(37,266)
|
|
(983)
|
|
|
|
(55,866)
|
|
(21,768)
|
Depreciation and amortisation
|
|
|
(3,399)
|
|
(3,298)
|
(Loss)/profit from operations
|
2
|
|
(36,800)
|
|
3,265
|
Finance income
|
|
|
169
|
|
846
|
|
|
|
(36,631)
|
|
4,111
|
Finance costs
|
|
|
(392)
|
|
(58)
|
(Loss)/profit before tax
|
|
|
(37,023)
|
|
4,053
|
Income tax income/(expense)
|
3
|
|
4,853
|
|
(1,701)
|
(Loss)/profit for the year attributable to owners of the parent
|
|
|
(32,170)
|
|
2,352
|
|
|
|
|
|
|
Earnings/(loss) per share
|
|
|
|
|
|
From continuing operations
|
|
|
|
|
|
Adjusted basic
|
4
|
|
4.7p
|
|
11.1p
|
Adjusted diluted
|
4
|
|
4.7p
|
|
11.0p
|
Basic
|
4
|
|
(109.7p)
|
|
8.1p
|
Diluted
|
4
|
|
(109.7p)
|
|
8.0p
|
Consolidated statement of comprehensive income for the year ended 31 March 2016
|
2016
£000
|
2015
£000
|
(Loss)/profit for the year
|
(32,170)
|
2,352
|
Other comprehensive income to be reclassified to profit or loss in subsequent
periods
|
|
|
Currency translation differences
|
3,741
|
(5,905)
|
|
|
|
Other comprehensive income to be reclassified to profit or loss in subsequent periods,
before tax
|
3,741
|
(5,905)
|
Tax relating to other comprehensive income to be reclassified to profit or loss in
subsequent periods
|
-
|
-
|
|
|
|
Other comprehensive income not to be reclassified to profit or loss in subsequent
periods
|
|
|
Remeasurement of defined benefit plan
|
102
|
(108)
|
Other comprehensive income not to be reclassified to profit or loss in subsequent periods,
before tax
|
102
|
(108)
|
Tax relating to other comprehensive income not to be reclassified to profit or loss in
subsequent periods
|
(34)
|
36
|
Other comprehensive income, net of tax
|
3,809
|
(5,977)
|
Total comprehensive loss for the year attributable to owners of the parent
|
(28,361)
|
(3,625)
|
Consolidated balance sheet 31 March 2016
|
Notes
|
2016
£000
|
2015
£000
|
Assets
|
|
|
|
Non-current assets
|
|
|
|
Property, plant and equipment
|
|
9,629
|
10,264
|
Goodwill
|
5
|
-
|
15,326
|
Other intangible assets
|
|
9,211
|
30,574
|
Investments
|
|
-
|
-
|
Deferred tax assets
|
|
26
|
115
|
Other non-current assets
|
|
294
|
273
|
|
|
19,160
|
56,552
|
Current assets
|
|
|
|
Inventories
|
|
7,509
|
6,805
|
Trade and other receivables
|
|
6,956
|
7,414
|
Income tax receivable
|
|
2,161
|
2,600
|
Cash and cash equivalents
|
|
26,554
|
23,730
|
|
|
43,180
|
40,549
|
Total assets
|
|
62,340
|
97,101
|
|
|
|
|
Liabilities
|
|
|
|
Current liabilities
|
|
|
|
Short-term borrowings
|
|
-
|
252
|
Short-term portion of long-term borrowings
|
|
89
|
110
|
Trade and other payables
|
|
6,287
|
5,632
|
Income tax payable
|
|
3
|
971
|
Provisions
|
|
54
|
82
|
Deferred income
|
|
119
|
147
|
|
|
6,552
|
7,194
|
Net current assets
|
|
36,628
|
33,355
|
|
|
|
|
Non-current liabilities
|
|
|
|
Long-term portion of long-term borrowings
|
|
1,220
|
1,238
|
Repayable grants
|
|
-
|
1,357
|
Provisions
|
|
1,419
|
1,135
|
Deferred tax liabilities
|
|
1,551
|
5,769
|
|
|
4,190
|
9,499
|
Total liabilities
|
|
10,742
|
16,693
|
Net assets
|
|
51,598
|
80,408
|
|
|
|
|
Called up share capital
|
|
588
|
584
|
Share premium account
|
|
32,263
|
31,857
|
Other reserves
|
|
2,460
|
(1,281)
|
Retained earnings
|
|
16,287
|
49,248
|
Equity attributable to owners of the parent
|
|
51,598
|
80,408
|
Consolidated statement of cash flows for the year ended 31 March 2016
|
Notes
|
2016
£000
|
2015
£000
|
Operating activities
|
|
|
|
Cash generated from operations
|
|
8,101
|
10,109
|
Cash outflow related to exceptional costs
|
|
(8)
|
(1,168)
|
Income taxes received/(paid)
|
|
95
|
(161)
|
Net cash from operating activities
|
|
8,188
|
8,780
|
|
|
|
|
Investing activities
|
|
|
|
Acquisition of subsidiary (net of cash acquired)
|
|
-
|
(2,540)
|
Purchases of other intangible assets
|
|
(3,388)
|
(3,587)
|
Purchases of property, plant and equipment
|
|
(1,795)
|
(2,872)
|
Disposals of property, plant and equipment
|
|
188
|
229
|
Interest received
|
|
169
|
158
|
Net cash used by investing activities
|
|
(4,826)
|
(8,612)
|
|
|
|
|
Financing activities
|
|
|
|
Proceeds from issue of shares for cash
|
|
410
|
49
|
Repayments of borrowings
|
|
(410)
|
(116)
|
Interest paid
|
|
(109)
|
(58)
|
Dividends paid
|
|
(876)
|
(2,479)
|
Net cash used by financing activities
|
|
(985)
|
(2,604)
|
Net increase/(decrease) in cash and cash equivalents
|
|
2,377
|
(2,436)
|
Effect of exchange rate differences
|
|
447
|
(524)
|
Cash and cash equivalents at beginning of year
|
|
23,730
|
26,690
|
Cash and cash equivalents at end of year
|
|
26,554
|
23,730
|
Consolidated statement of changes in equity for the year ended 31 March 2016
|
Share
capital
£000
|
Share
premium
account
£000
|
Other
reserves
£000
|
Retained
earnings
£000
|
Total
£000
|
At 1 April 2014
|
583
|
31,809
|
4,624
|
49,570
|
86,586
|
Profit for the year
|
-
|
-
|
-
|
2,352
|
2,352
|
Other comprehensive income
|
|
|
|
|
|
Foreign exchange translation differences on foreign currency net investment in
subsidiaries
|
-
|
-
|
(5,905)
|
-
|
(5,905)
|
Remeasurement of defined benefit plan
|
-
|
-
|
-
|
(108)
|
(108)
|
Tax effect on remeasurement of defined benefit plan
|
-
|
-
|
-
|
36
|
36
|
Total comprehensive income
|
-
|
-
|
(5,905)
|
2,280
|
(3,625)
|
Transactions with owners
|
|
|
|
|
|
Share based payments
|
-
|
-
|
-
|
(71)
|
(71)
|
Tax benefit on exercise of share options
|
-
|
-
|
-
|
(52)
|
(52)
|
Dividends paid
|
-
|
-
|
-
|
(2,479)
|
(2,479)
|
Shares issued in the year
|
1
|
48
|
-
|
-
|
49
|
At 31 March 2015
|
584
|
31,857
|
(1,281)
|
49,248
|
80,408
|
|
|
|
|
|
|
At 1 April 2015
|
584
|
31,857
|
(1,281)
|
49,248
|
80,408
|
Loss for the year
|
-
|
-
|
-
|
(32,170)
|
(32,170)
|
Other comprehensive income
|
|
|
|
|
|
Foreign exchange translation differences on foreign currency net investment in
subsidiaries
|
-
|
-
|
3,741
|
-
|
3,741
|
Remeasurement of defined benefit plan
|
-
|
-
|
-
|
102
|
102
|
Tax effect on remeasurement of defined benefit plan
|
-
|
-
|
-
|
(34)
|
(34)
|
Total comprehensive income/(loss)
|
-
|
-
|
3,741
|
(32,102)
|
(28,361)
|
Transactions with owners
|
|
|
|
|
|
Share based payments
|
-
|
-
|
-
|
21
|
21
|
Tax recognised on share based payments
|
-
|
-
|
-
|
(4)
|
(4)
|
Dividends paid
|
-
|
-
|
-
|
(876)
|
(876)
|
Shares issued in the year
|
4
|
406
|
-
|
-
|
410
|
At 31 March 2016
|
588
|
32,263
|
2,460
|
16,287
|
51,598
|
Notes to the consolidated financial statements for the year ended 31 March 2016
1. Segmental information
The Group applies IFRS 8 Operating Segments. IFRS 8 provides segmental information for the Group
on the basis of information reported internally to the chief operating decision-maker for decision-making purposes. The Group
considers that the role of chief operating decision-maker is performed by the Board of Directors.
Following a significant restructuring of the Group that began in 2013/14 the business was directed
and monitored on a functional basis.
Analysis of revenue is prepared and monitored on a geographical basis due to the organisation of
the sales teams as well as by product type. However, earnings on a geographical basis are not considered the most appropriate
measure of performance given the differing nature of operations across the different territories.
No further detailed segmental information is provided in this note, as there is only one operating
segment. While the key decision makers review revenue based on the segments shown in the Operational Review, as a result of the
structure of the business and the financial systems in place, operating profit cannot be determined for these revenue segments.
Therefore the key decision makers only review the operating profit performance of the business as a whole.
All earnings, balance sheet and cash flow information received and reviewed by the Board of
Directors is prepared at a Group level. The Group determined that it had one operating segment as defined under IFRS 8, being the
whole of the Group.
Revenues from customers located in individual countries are as follows:
|
2016
£000
|
2015
£000
|
UK (country of domicile)
|
1,443
|
1,801
|
US
|
13,917
|
16,256
|
Germany
|
5,809
|
6,582
|
France
|
3,743
|
5,693
|
Other
|
13,393
|
15,030
|
Total revenues
|
38,305
|
45,362
|
Non-current assets, excluding deferred tax and goodwill located in individual countries is as
follows:
|
2016
£000
|
2015
£000
|
UK (country of domicile)
|
9,417
|
11,182
|
France
|
3,046
|
8,835
|
Belgium
|
2,341
|
9,783
|
US
|
2,054
|
2,773
|
Germany
|
2,106
|
2,257
|
Other
|
170
|
6,281
|
Total
|
19,134
|
41,111
|
Revenue from one significant OEM customer amounted to £4,676,000 (2015: £4,042,000), arising from
royalties payable.
2. (Loss)/profit from operations
(Loss)/Profit from operations is stated after charging/(crediting):
|
2016
£000
|
2015
£000
|
Amortisation of government grants re fixed assets
|
-
|
(16)
|
Exceptional items
|
|
|
Impairment of goodwill
|
16,496
|
-
|
Impairment of other intangible assets
|
21,504
|
-
|
Impairment of owned plant, property and equipment
|
227
|
-
|
Release of repayable grant
|
(1,323)
|
-
|
Amortisation of other intangible assets
|
4,565
|
4,439
|
Loss on disposal of other intangible assets
|
-
|
17
|
Loss on disposal of owned plant, property and equipment
|
157
|
219
|
Depreciation of owned plant, property and equipment
|
2,307
|
2,400
|
Depreciation of assets held under finance leases
|
111
|
65
|
Operating lease costs
|
920
|
892
|
Share-based payments
|
21
|
76
|
Other staff costs
|
16,072
|
16,950
|
Cost of inventories recognised as an expense
|
4,916
|
4,703
|
Write downs of inventories recognised as an expense
|
1,033
|
1,303
|
Net loss/(gain) on foreign currency translation
|
283
|
(688)
|
Auditor's remuneration (see below)
|
189
|
183
|
Amounts payable to Ernst & Young LLP and their associates in respect of both audit and
non-audit services:
|
2016
£000
|
2015
£000
|
Audit services
|
|
|
- statutory audit of parent and consolidated accounts
|
187
|
162
|
Other services relating to taxation
|
|
|
- compliance services
|
2
|
21
|
|
189
|
183
|
In 2015/16 the Group were notified that repayable grant monies received in relation to the
development of certain automated immunoassays, were no longer repayable. This resulted in the release of a £1.3m repayable grants
balance.
In 2015/16 the goodwill impairment exercise indicated that the carrying value of the one Group CGU
was in excess of the recoverable amount, requiring an impairment to the carrying value of goodwill (£16.5m), intangible assets
relating to iSYS machine development and intellectual property rights (£21.5m) and currently unplaced iSYS machines
(£0.2m).
In 2015/16 the Group announced its intention to transfer the activities related to automated assay
production from the Boldon, UK site to Liege, Belgium. This resulted in a £0.4m charge relating to staff redundancy and for the
onerous portion of future lease payments.
In 2014/15 the Group undertook a significant restructuring with a number of senior management
changes as well as the relocation of the US sales office. This led to an exceptional restructuring charge of £0.4m being incurred
in 2015 (which included a £147,000 credit re reversal of share option charge on employees leaving as part of the
restructuring).
In 2014/15 there were £0.6m of exceptional transaction costs incurred including £0.2m in relation
to the acquisition of Diametra in September 2014.
3. Taxation on ordinary activities
a) Analysis of credit in the year
|
2016
£000
|
2015
£000
|
Current tax:
|
|
|
UK Corporation tax based on the results for the year at 20% (2015: 21%)
|
(171)
|
859
|
Over provision in prior year
|
(654)
|
(137)
|
Foreign tax on income
|
427
|
(449)
|
Total current tax (credit)/charge
|
(398)
|
273
|
Deferred tax:
|
|
|
Excess of taxation allowances over depreciation on fixed assets
|
(5,203)
|
(548)
|
Other
|
960
|
(35)
|
Tax losses carried forward
|
(171)
|
2,039
|
Deferred tax on share-based payments charge
|
9
|
22
|
Over provision in prior year
|
(50)
|
(50)
|
Total deferred tax (credit)/charge
|
(4,455)
|
1,428
|
Tax (credit)/charge on loss/profit on ordinary activities
|
(4,853)
|
1,701
|
"Other" relates to short-term timing differences primarily on the impairment of intangible assets
and release of the repayable grant.
In addition, total current and deferred tax of £38,000 has been charged to equity in respect of
items credited/charged directly to equity (2015: £16,000 charged to equity).
b) Factors affecting tax charge
The tax assessed for the period is lower (2015: higher) than the standard rate of corporation tax
in the UK, 20% (2015: 21%). The differences are explained below.
|
2016
£000
|
2015
£000
|
(Loss)/profit on ordinary activities before taxation
|
(37,023)
|
4,053
|
(Loss)/profit on ordinary activities by rate of tax in the UK of 20% (2015:
21%)
|
(7,405)
|
851
|
Expenses not deductible for tax purposes
|
106
|
361
|
Income not taxable
|
(294)
|
(119)
|
Additional relief for R&D expenditure
|
(399)
|
(1,285)
|
Foreign profits taxable at different rates
|
(2,344)
|
(51)
|
Goodwill and intangibles written off
|
5,404
|
-
|
UK Patent Box relief
|
(328)
|
-
|
Losses carried forward
|
1,368
|
2,107
|
Losses brought forward utilised
|
(380)
|
-
|
Employee Share award
|
9
|
-
|
Effect of change in tax rate on deferred tax balances
|
(140)
|
(17)
|
Other temporary differences not recognised
|
254
|
-
|
Exchange differences on deferred tax
|
-
|
41
|
Tax in respect of prior periods
|
(704)
|
(187)
|
Total tax (credit)/charge at an effective rate of 13.1% (2015: 42.0%)
|
(4,853)
|
1,701
|
4. Earnings per Ordinary share
Basic earnings per share is calculated by dividing the earnings attributable to holders of
Ordinary shares by the weighted average number of Ordinary shares outstanding during the year.
For diluted earnings per share, the weighted average number of Ordinary shares in issue is
adjusted to assume conversion of all dilutive potential Ordinary shares. The Group has dilutive potential Ordinary shares
relating to contingently issuable shares under the Group's share option scheme. At 31 March 2016, the performance criteria for
the vesting of certain awards under the option scheme had been met and consequently the shares in question are included in the
diluted EPS calculation.
The calculations of earnings per share are based on the following profits and numbers of
shares.
|
2016
£000
|
2015
£000
|
(Loss)/Profit on ordinary activities after tax
|
(32,170)
|
2,352
|
Weighted average number of shares:
|
No.
|
No.
|
For basic earnings per share
|
29,331,842
|
29,193,569
|
Effect of dilutive potential Ordinary shares:
|
|
|
-Share options
|
5,334
|
235,365
|
For diluted earnings per share
|
29,337,176
|
29,428,934
|
Basic earnings per share
|
(109.7)p
|
8.1p
|
Diluted earnings per share
|
(109.7)p
|
8.0p
|
|
2016
£000
|
2015
£000
|
(Loss)/profit on ordinary activities after tax as reported
|
(32,170)
|
2,352
|
Exceptional items after tax
|
33,555
|
874
|
Profit on ordinary activities after tax as adjusted
|
1,385
|
3,226
|
Adjusted basic earnings per share
|
4.7p
|
11.1p
|
Adjusted diluted earnings per share
|
4.7p
|
11.0p
|
5. Goodwill
|
£000
|
Cost
|
|
At 1 April 2014
|
16,983
|
Arising on acquisition of subsidiary
|
1,250
|
Exchange differences
|
(1,940)
|
At 31 March 2015
|
16,293
|
Exchange differences
|
1,170
|
At 31 March 2016
|
17,463
|
|
|
Amortisation
|
|
At 1 April 2014
|
967
|
Charge for the year
|
-
|
At 31 March 2015
|
967
|
Charge for the year
|
-
|
Impairment
|
16,496
|
At 31 March 2016
|
17,463
|
|
|
Net book value
|
|
At 31 March 2016
|
-
|
At 31 March 2015
|
15,326
|
At 1 April 2014
|
16,016
|
Consistent with the year ended 31 March 2015, during the year ended 2016, the business was
directed and monitored on a functional basis. The Board monitored the business at a Group level and IDS recognised only one
operating segment. As a consequence of this, there were no smaller CGUs which were identifiable and for which goodwill was
monitored for internal management purposes. Since goodwill was monitored at a Group level, goodwill was allocated to a single
CGU, being the entirety of the Group, and was tested for impairment at this overall Group level.
An impairment arises when the recoverable amount of the CGU is less than the carrying value of the
CGU. The recoverable amount is the higher of the fair value less costs to dispose and the value in use.
At 31 January 2016, the Group performed its annual impairment test. At that date, the fair value
less costs to dispose was in excess of the value in use, but lower than the carrying value, thus indicating impairment. The fair
value less costs to sell was determined using the share price at 31 January of 227.5p per share.
Management continued to monitor indicators of impairment, and due to the reduction in the share
price between 31 January 2016 and the balance sheet date, management re-performed this impairment test at the balance sheet date.
At that date, the fair value less costs to sell was still in excess of the value in use, but lower than the carrying value. The
fair value less costs to sell was determined using the share price at 25 April 2016 (the date of the Trading Update) as
management believe that the market price reflected all information known at the balance sheet date. As the valuation of the Group
is based on share price, which is quoted in an active market, this is considered to be a level 1 fair value measurement. Using
this share price of 167.5p, the fair value less costs to sell was £47.8m. This resulted in an impairment charge of £38.2m
allocated first to goodwill and then otherwise as disclosed in note 4. The impairment charge net of the tax impact is
£34,128,000.
As at 17 June 2016, the share price was 132.5p.
Using current forecasts (developed post year end) the value in use was calculated to be c.£45m
below the carrying value. The key assumptions were:
· Specific forecasts for 2016/17 - 2020/21 then a
terminal value using a growth rate of 2% (2015: 1.8%)
· Long-term EBIT margin of 3% (2015:
15%)
· Discount rate of 11% (2015: 11%)
Goodwill has therefore been fully impaired.
Extract from Annual Report and Financial Statements
The financial information set out above does not constitute the Group's statutory financial
statements for the years ended 31 March 2016 or 2015 but is derived from those financial statements. Statutory financial
statements for 2015 have been delivered to the registrar of companies, and those for 2016 will be delivered in due course. The
auditors have reported on those financial statements; their reports were (i) unqualified, (ii) did not include a reference to any
matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006. The annual report and financial statements for the year ended
31 March 2016 will be posted to shareholders in July 2016. This final results announcement and results for the year ended 31
March 2016 were approved by the Board of Directors on 21 June 2016 and are audited.
Basis of preparation
The final results announcement has been prepared under historical cost convention on a going
concern basis and in accordance with the recognition and measurement principles of International Reporting Standards and IFRIC
interpretations as adopted by the EU ("IFRS").
The final results announcement has been prepared on the basis of the same accounting policies as
published in the audited financial statements of the Group for the year ended 31 March 2015, with the exception of the
presentation item detailed in the following paragraph, and the accounting policies adopted in the audited financial statements of
the Group for the year ended 31 March 2016.
The classification of foreign exchange gains and losses has been amended, to move them from
Administrative expenses to Finance
Income/Expense. These exchange gains and losses relate to the retranslation of intercompany
funding and cash balances and are
therefore more appropriately classified in Finance Income/Expense. This change further enhances
the ability to compare to peer
group companies and reduces the variability of general and administrative expenses allowing a more
meaningful comparison to prior periods. The impact on the results for the year ending 31 March 2016 is to reduce general and
administrative expenses by £283,000, increase profit from operations (EBIT) by £283,000 and increase finance costs by £283,000.
The impact on results for the year ending 31 March 2015 is to increase general and administrative expenses by £688,000, reduce
profit from operations (EBIT) by £688,000 and increase finance income by £688,000. This had no effect on profit before tax,
earnings per share or net assets of the Group. The cash flows for the year ending 31 March 2015 have been restated to exclude
unrealised foreign exchange gains and losses. Cash generated from operations and net decrease in cash and cash equivalents have
decreased by £688,000 with a corresponding reduction in the effect of exchange rate differences.
Annual report
The annual report will be sent to shareholders shortly and will also be available at the
registered office of Immunodiagnostic Systems Holdings PLC at: 10 Didcot Way, Boldon Business Park, Boldon, Tyne & Wear NE35
9PD. It will be made available on the Company's website at: www.idsplc.com.