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Vectura Group plc: Interim Results

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Vectura Group plc

Vectura regaining momentum with continued inhaled revenue and adjusted EBITDA growth

Chippenham, UK - 11 September 2018: Vectura Group plc (LSE: VEC) ("Vectura" or "the Group") announces its unaudited Interim Results for the six months ended 30 June 2018 and reiterates its current guidance for the full year.

Financial & Operational Highlights

 H1 2018
£m
H1 2017
£m
% change
Revenue179.9 78.8 1.4%
  Inhaled64.7 60.4 7.1%
  Other (non-inhaled)15.2 18.4 (17.4%)
Gross profit52.6 50.4 4.4%
R&D expenditure(25.3)(31.4)19.4%
Operating loss(30.2)(41.3)26.9%
    
Basic loss per share (pence per share)(3.5)(5.6)37.5%
Adjusted EBITDA224.6 16.23 51.9%
Cash and cash equivalents83.9 90.5 (7.3%)

Financial

  • Total reported revenue for the period of £79.9m up 1.4% (+2.1% constant exchange rates (CER))
    • Inhaled portfolio revenue up 7.1%. Following H2 2017 de-stocking, flutiform® revenues to Vectura are normalising with revenue up 3.1% vs H1 and 6.1% vs H2 2017.
    • As expected, other (non-inhaled) portfolio revenues were down 17.4% due to non-recurrence of 2017 post patent royalties and lower product supply revenues.
  • Guidance for R&D costs of £55-65m for 2018 remains unchanged reflecting the Group’s refocussed portfolio prioritisation and initiatives to transform R&D productivity. R&D costs of £25.3m were 19.4% lower than H1 2017. The group anticipates a step up in phasing of R&D costs in H2 2018, principally related to VR475 and VR647.
  • Operating loss has reduced by £11.1m, mainly driven by a decrease of £8.1m of amortisation and lower R&D costs partially offset by exceptional items.
  • Adjusted EBITDA2 of £24.6m is up 51.9% vs H1 2017 benefiting from productivity initiatives, including good progress in procurement and supply chain, and R&D phasing, with operating margin before amortisation and exceptional items at 25.9%, vs 15.7% H1 2017.
  • Cash balance of £83.9m (December 2017: £103.7m) reflecting completion of share buyback programme, capital investment and annual cash flow phasing.

Operational

  • Vectura Enhanced Nebulised Technology
    • Phase II pharmacokinetic and mouthpiece usability studies for VR647 support the progression of a Phase III programme. VR475 Phase III programme on track with headline results expected in Q4 2018.
    • Progressing a series of new pipeline projects with significant potential future value.
  • Inhaled Generics
    • VR315: recruitment is progressing on a repeat clinical study, Hikma anticipates being able to submit data to FDA in 2019, potential launch in 2020.
    • VR632 was approved in Europe, with launches planned in 2019.
    • Device and formulation development with Open-Inhale-Close dry powder inhaler is continuing, with good progress being made in strategic partnering discussions.

                   


Commenting on the interim results, James Ward-Lilley, Chief Executive Officer of Vectura, said:
“Vectura is regaining momentum after a challenging 2017.  Inhaled in-market growth is continuing with flutiform® stock levels normalising resulting in total inhaled Vectura revenues increasing 7.1% vs H1 2017. Our refocussed pipeline is making progress with Phase II VR647 results a key highlight in H1 2018. We have identified and are progressing a series of new pipeline projects, and we look forward to the read-out of the VR475 Phase III adult asthma study later this year. With positive in-market momentum and additional pipeline catalysts, we look forward to delivering against our strategy in the second half of 2018 and we maintain our full-year guidance.”    

Analyst briefing

James Ward-Lilley, Chief Executive Officer, will present the Interim Results for analysts today at 9.30am BST. The presentation will be held at the offices of Numis Securities Ltd., 10 Paternoster Square, London, EC4M 7LT. There will be a simultaneous live conference call.
Dial-in details are:

Participant local dial-in: +44 (0)330 336 9105
Participant free phone dial-in: 0800 358 6377
Participant code:3269353 

A live webcast of the meeting and the presentation slides, will be available on Vectura’s website: https://www.vectura.com/investors/presentations-and-webcasts  

- Ends-

For more information, please contact:

Vectura Group plc  
David Ginivan – VP Corporate Communications
Julia Wilson – Director Investor Relations
 +44 (0)7471 352 720
 +44 (0)7818 430 877
Consilium Strategic Communications+44 (0)20 3709 5700
Mary-Jane Elliott / Jessica Hodgson / David Daley 

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.

About Vectura
Vectura is an industry-leading inhaled product formulation, device design and development business offering a uniquely integrated inhaled drug delivery platform. We develop inhalation products to help patients suffering from airways diseases.

Vectura has eight key inhaled, two non-inhaled and ten oral products marketed by partners with growing global royalty streams, and a diverse partnered portfolio of drugs in clinical development. Our partners include Hikma, Novartis, Sandoz, Mundipharma, Kyorin, Baxter, GSK, UCB, Ablynx, Bayer, Chiesi, Almirall, Janssen, Dynavax and Tianjin KingYork.

Vectura's strategy is to fully leverage its differentiated technology and skills, maximising value by enhancing the delivery and performance of inhaled products and through the development of high-quality generic alternatives to branded therapies.

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

1 In order to simplify how we present our portfolio of assets and ensure consistency with how we assess the performance of the Group internally, we have aggregated the performance of our inhaled assets, reported previously as eight products marketed by partners and other inhaled assets as “inhaled”. The eight products are flutiform®, Seebri® Breezhaler®, Ultibro® Breezhaler®, AirFluSal® Forspiro®, three GSK Ellipta® products and BreelibTM. The remaining assets were previously described as legacy “oral” and “non-inhaled” and are simply shown as “Other (non-inhaled)”.
2 Adjusted EBITDA is a non-GAAP measure which is calculated as operating loss, adding back amortisation and impairment, depreciation, share based payments and exceptional items.
3Adjusted EBITDA was reported as £18.9m in H1 2017 as it included the £2.7m one off R&D accrual release, which was separately disclosed.  In order to present adjusted EBITDA on a consistent basis with the Annual Report and Accounts 2017, management has excluded the one off R&D accrual release from adjusted EBITDA as an exceptional item


Operational Review:

Inhaled in-market products
Vectura’s inhalation portfolio revenues grew 7.1% for the six months ended 30 June 2018 v H1 2017, driven by the eight products marketed by partners. Inhaled product revenues now make up 81.0% of total Group revenues (H1 2017: 76.6%).

 H1 2018
£m
H1 2017
£m
% movement
flutiform®36.835.73.1%
Ultibro® and Seebri®8.58.06.3%
GSK Ellipta® portfolio8.87.222.2%
AirFluSal® Forspiro®4.52.0>100%
BreelibTM1.94.4(56.8%)
Other4.23.135.5%
Inhaled revenues64.760.47.1%
  • flutiform® (Mundipharma, Europe and Rest of world (excl. North America)/Kyorin, Japan)

In-market performance

  • flutiform® continues to perform well in the competitive asthma ICS-LABA market ex US. Total in-market sales4 were up 8.4% CER for H1 2018 vs H1 2017 with MAT (moving annual total) Q2 2018 in-market sales €212m up 10.1% CER vs MAT Q2 2017. As expected with an established product, growth rates are typically lower than in previous periods.
  • Despite a highly competitive genericised ICS-LABA European market,  flutiform® in-market sales grew 4% CER with MAT growth of 5.2% compared to the market which is declining, (-1.9% H1 2018 vs H1 2017 and -1.8% MAT CER) with flutiform® achieving a H1 2018 market value share of 3.7% in the European ICS-LABA market.
  • Kyorin continues to compete strongly in Japan and despite Q2 price reductions, in-market sales grew 14.1% CER (actual 5.5%) in H1 2018 compared to the market which is growing at 2.1% CER (actual -5.5%). flutiform® in Japan reached a market share of 14.7% in volume and 11.8% in value of the ICS-LABA market (up 1.6% and 1.2% respectively vs H1 2017) with Q2 price cuts reducing share growth in terms of value compared to volume.
  • Rest of world sales also continue to perform well with growth of 15.5% CER H1 2018 vs H1 2017.

Vectura flutiform® revenue

  • Vectura total revenues from flutiform® were up 3.1% H1 2018 vs H1 2017, with Japan royalty revenues impacted by adverse foreign currency and price reductions. As previously reported, product supply demand from Mundipharma has normalised. Revenue growth in the first half of 2018 vs the period of de-stocking in H2 2017 was up 6.1%.
  • flutiform® royalties were down by 15.6% driven by Japanese pricing and currency impact along with the continued shift of Vectura’s revenue from Mundipharma away from royalties. As total Mundipharma revenues grow, based on the capped nature of the Mundipharma agreement, almost all revenues are now derived from the supply chain. 
  • Supply chain revenues of £33.2m were up 3.1% vs H1 2017. Growth of 6.4% H1 2018 vs H2 2017 reflects the pickup in orders following the previously reported de-stocking in H2 2017.
  • Given the continued growth of in-market demand, planned launches of the flutiform® K-haler® in Europe in September 2018 and good visibility of firm forward orders for the remainder of 2018, the Group continues to be confident in the outlook for the product.

       
4In-market net sales are internal calculations using IQVIA Health (IMS) data based on sales to pharmacies and excluding certain minor countries which are not covered by IQVIA. In-market sales are not the same as sales to wholesalers on which royalties are payable to the Group. All percentages quoted are at constant currency rates.


  • Ultibro® Breezhaler®, Seebri® Breezhaler® Utibron™ Neohaler® Inhalation Powder and Seebri™ Neohaler® (Novartis/Sunovion, US)

In-market performance
Ultibro® Breezhaler® and Seebri® Breezhaler® continue to perform well in-market with Ultibro® Breezhaler® sales up 11.5% CER globally in H1 2018, 21.8% on an actual basis. (CER: EU +8.8% ROW +25.1%).

Novartis reported $299m H1 2018 sales for Ultibro® Breezhaler® and Seebri® Breezhaler® up 14% vs. H1 2017. H1 2018 sales reported by Novartis were flat vs H2 2017 following previously reported de-stocking, with Novartis noting a subsequent acceleration in reported sales in Q2 2018.

Vectura Ultibro® / Seebri® revenues
During the period, Vectura recognised £8.5m of total royalties for sales of these products, representing a 6.3% increase vs H1 2017. Royalties decreased by 8.6% in H1 2018  vs H2 2017 reflecting the de-stocking reported by Novartis together with a mix effect between  Ultibro® and Seebri® given Vectura receives slightly higher royalties on  Seebri®, which contributes a lower proportion of total earned revenue.
Sunovion Pharmaceuticals Inc. is continuing with US commercial support for UtibronTM Neohaler® and SeebriTM Neohaler®. Vectura revenues for the US remain minimal at this stage.

  • GSK Ellipta® products

GSK continues to report growing sales of its Ellipta® products. Accordingly, Vectura recorded royalties of £8.8m of the annual £9.0m maximum during the six-month period to 30 June 2018.
The technology licensed to GSK is covered by granted patents with an earliest expiry date for one of the granted patents in major markets of November 2019.
In July 2016, Vectura announced that it had initiated legal proceedings against GSK in the US following GSK's decision not to extend the term of its legacy agreement with Vectura beyond 31 July 2016, by licensing additional patent families. The court has scheduled a jury trial commencing in December 2018.
Following initiation of the US action, GSK commenced an action challenging the equivalent UK patents to which Vectura has counter sued for infringement. The outcome of this action is currently expected in Q1 2019.

  • AirFluSal® Forspiro® (Sandoz, EU & ROW)

AirFluSal® Forspiro® (fluticasone propionate, salmeterol combination DPI) continues to grow fast in the highly competitive commoditised European generic markets. In the period, Vectura recorded royalties of £1.6m up 45.5% vs H1 2017 and £0.5m device supply revenues. As part of a market agreement with Sandoz regarding revised territory rights, Vectura also recognised other licensing income of £2.4m during the period.

  • BreelibTM (Bayer, EU & ROW excluding US)

BreelibTM, the FOX® handheld smart nebuliser has been launched in Poland, Germany, Austria, Portugal and the UK in 2017 with additional launch roll-outs continuing.  Total revenues in H1 2018 comprising device supply of £0.6m and licensing – other revenues of £1.3m. Licensing – other revenues were down vs H1 2017 when the licence milestone of £4.2m was received recognising the first EU launch of the product.

Inhaled pipeline products

Vectura Enhanced Nebulised Therapies - Existing programmes

  • VR647 (Paediatric asthma US)

On 21st August, post period end, two positive studies were completed (Pharmacokinetic and Usability) supporting progression of a Phase III development programme.


  •  VR647 paediatric studies demonstrate:
    • Potential to achieve same lung deposition with lower delivered dose than marketed nebuliser delivery system without compromising exposure or safety
    • Potential inhalation time to be approximately half of that delivered with existing conventional nebulisers
    • Children >2 years of age are able to use the VR647 Inhalation System with a mouthpiece

Vectura believes VR647 will offer sufficient differentiation from existing nebulised budesonide therapies to support a reasonable pricing premium versus generic budesonide treatment. Phase III study initiation is planned in 2019 having completed end of phase II (EOP2) consultation with the FDA and the necessary Phase III pharmaceutical paediatric dose formulation and device manufacture. As previously indicated, the Group continue to explore partnering options for VR647.
                                                                                                                                                                            

  • VR475 (Severe adult asthma EU)

The VR475 programme addresses a significant market opportunity with high unmet medical need, subject to delivery of the study’s challenging exacerbations reduction primary endpoint. The Phase III study is progressing well with recruitment completed. Headline results are expected to be announced in Q4 2018.

Partnering options are being considered for the further development and commercialisation of this asset in the EU where the product-device combination would target approximately 1.5m severe persistent adult asthmatics not controlled on a high-dose ICS-LABA maintenance regimen.

Vectura Enhanced Nebulised Therapies: New programmes
The Group has identified and is progressing a series of new pipeline projects with potential significant future value. These assets are targeting niche or orphan disease segments in multi ($) billion markets with individual peak year sales potential of >$250m. These projects are targeting the inhaled management of a cardiopulmonary vascular disease, Cystic Fibrosis and infection in post-transplant immunocompromised patients.

Vectura is creating headroom within its existing R&D budget to cover the initial development of these therapies and the Board anticipates these new programmes will not impact current guidance for annual R&D expenditure. The programmes could come to market within eight years and all have potential for partnering within a 3-5 year period post initiation.

Inhaled generics

VR315 (Hikma, US)
Vectura has supported Hikma in submitting a full response to the non-clinical questions raised by the FDA in the complete response letter (CRL). Hikma anticipates being able to submit data from the clinical study to the FDA in 2019 to support the application, which the Group anticipates could allow for a launch in 2020.

As part of the licensing agreement with Hikma, Vectura has agreed an extension of the territory rights to MENA, providing Vectura with additional revenues upon commercialisation of the development product.

Open-Inhale-Close device related programmes

As previously announced, Vectura has received feedback from the FDA that its Open-Inhale-Close device could be considered for use in an AB-rated substitutable generic drug-device combination for the GSK Ellipta® portfolio. This is
a significant opportunity, with consensus analyst projections of global net sales of the Ellipta® products of approximately $3bn in the US by 2022. Device and formulation development with Vectura’s Open-Inhale-Close dry powder inhaler is continuing, with good progress being made in parallel with ongoing strategic partnering discussions.


VR632 (Sandoz, EU)
VR632 (budesonide/formoterol DPI), an analogue of Symbicort (COPD/asthma) partnered with Sandoz, was approved in Europe in May 2018, with launches planned through 2019. This approval triggered a £0.3m development milestone payment to the Group from Sandoz.

VR410 (Pulmatrix, US)
VR410 (branded generic tiotropium bromide) is a branded generic alternative to Spiriva® HandiHaler® in the US. The programme will deliver Pulmatrix’s PUR0200 formulation with a Vectura dry powder inhaler DPI device. Formulation and development work is on-going, with technical feasibility and commercial opportunity reviews to conclude in H2 2018.

Novel Formulation and Device Licence Partnerships

VR465 (Ablynx, a Sanofi Company)
Vectura continues to support the Ablynx ALX-0171 anti-RSV nanobody Phase II programme with its adapted handheld nebulised FOX® device. Top-line results for the RESPIRE study are expected in Q4 2018.

QVM149 (Novartis: Europe & ROW)
QVM149 (indacaterol/glycopyrronium bromide/mometasone furoate) is a once-daily fixed dose inhaled dual bronchodilator (LABA/LAMA) and anti-inflammatory (ICS) triple therapy for asthma being developed by Novartis. Novartis expects the Phase III study data readout and regulatory submission in 2019 with first-to-market potential in the EU as a triple asthma treatment delivered in a dry powder inhaler device.

Other (non-inhaled) portfolio
As expected, H1 2018 revenues of £15.2m from the other (non-inhaled) portfolio were down 17.4% vs H1 2017 as a result of the non-recurrence of ADVATE® and Xatral® royalties, following patent expiries in H1 2017, and lower Sular® and ZYFLO CR® product supply revenues offsetting growth in RAYOS®/LODOTRA®. Development services increased to £0.8m from £0.3m in H1 2017 as the transformation of our Lyon facility to a contract development and manufacturing organisation model (CDMO) gathers pace. There was a marked reduction in the rate of decline in H1 2018 revenues vs H2 2017 with revenues down 1.3%.

Summary outlook
With continuing inhaled in-market product growth and visibility of forward orders, the Board looks forward to strong reported performance in H2 2018, particularly given the weaker comparative 2017 period, and maintains its 2018 revenue growth expectations.

Anticipated Major News flow 2018 -2019

Potential generics licensing deal with Open-Inhaled-Close DeviceH2 2018
VR475 Phase III ResultsH2 2018
Ablynx ALX-0171 VR465: Phase II readoutH2 2018
GSK Ellipta® Portfolio LitigationH2 2018
VR315 repeat clinical study completion & CRL response2019
QVM149 Phase III results and regulatory submission2019



Financial Review:

Financial highlights

 H1 2018
£m
H1 2017
£m
% movement
Revenue79.9 78.8 1.4%
  Inhaled64.7 60.4 7.1%
  Other (non-inhaled)15.2 18.4 (17.4%)
Cost of sales(27.3)(28.4)3.9%
Gross profit52.6 50.4 4.4%
R&D expenditure(25.3)(31.4)19.4%
Other operating expenditure and income(6.6)(6.6)- 
Amortisation and impairment(45.2)(53.3)15.2%
Exceptional items(5.7)(0.4)**(>100%)
Operating loss(30.2)(41.3)26.9%
    
Basic loss per share (pence per share)(3.5)(5.6)37.5%
Adjusted EBITDA*24.6 16.2**51.9%
Cash and cash equivalents83.9 90.5 (7.3%)

*Adjusted EBITDA is a non-GAAP measure, which is calculated as operating loss, adding back amortisation and impairment, depreciation, share based payments and exceptional items. **Adjusted EBITDA was previously reported in H1 2017 as £18.9m as it included a £2.7m one off R&D accrual release. In order to present adjusted EBITDA on a consistent basis with the Annual Report and Accounts 2017, management has excluded the one off R&D accrual release from H1 2017 adjusted EBITDA as an exceptional item.

Revenue                                                                                                                                                 

Based on our partnered business model, Vectura has four primary ongoing revenue streams (with development and licensing milestones typically fluctuating to a greater degree due to the nature, timing and value of current and new agreements). A smaller fifth stream, share of net sales of EXPAREL®, relates to the terms of the sale of an injectable business in 2007.

 H1 2018
£m
H1 2017
£m
%
movement
1) Licensing - Royalties29.228.23.5%
2) Product and device supply38.039.4(3.6%)
3) Development - Milestones & other services5.63.464.7%
4) Licensing - Milestones & other3.74.4(15.9%)
5) Share of net sales of EXPAREL®3.43.4- 
 79.978.81.4%
    

Reported revenue for H1 2018 was 1.4% ahead of H1 2017 reflecting strong growth in revenues from the inhaled portfolio of 7.1% moderated by a 17.4% reduction in revenues from oral and non-inhaled products referred to as Other (non-inhaled) in the table above.

Growth of 7.1% from the inhaled portfolio is driven by the acceleration of royalties from the GSK Ellipta® products, growth in royalties from AirFluSal® Forspiro®, Seebri® and Ultibro® Breezhaler®, higher development revenues and flutiform® product supply revenues. In addition to royalties, £2.4m of other licence revenues from AirFluSal® Forspiro® were recognised in H1 2018. BreelibTM includes licence revenues of £1.3m, paid as a contractual milestone. This milestone is lower vs H1 2017 when the licence revenue of £4.2m was received recognising the first EU launch of the product.    

Most of the products comprising the oral and non-inhaled portfolio are in the mature to declining phase of their lifecycle. Therefore slowly reducing revenue from these products is expected. The decrease in revenues by 17.4% to £15.2m vs H1 2017 is attributed to the non-recurrence of ADVATE® and Xatral® royalties, following earlier patent expiries, and lower Sular® and ZYFLO CR® product supply revenues offsetting growth in RAYOS® / LODOTRA® royalties. 


Revenues by portfolio

 H1 2018
£m
H1 2017
£m
% movement
flutiform®36.835.73.1%
Ultibro® and Seebri®8.58.06.3%
GSK Ellipta® portfolio8.87.222.2%
AirFluSal® Forspiro®4.52.0>100%
BreelibTM1.94.4(56.8%)
Other4.23.135.5%
Inhaled 64.760.47.1%
RAYOS® / LODOTRA®4.83.923.1%
Requip®1.11.5(26.7%)
Sular®0.83.0(73.3%)
ZYFLO CR®0.41.1(63.6%)
Solaraze®1.01.3(23.1%)
EXPAREL®3.43.4- 
Other3.74.2(11.9%)
Total revenues79.978.81.4%

Licensing revenues - Royalties

 H1 2018
£m
H1 2017
£m
% movement
flutiform®2.73.2(15.6%)
Ultibro® and Seebri®8.58.06.3%
GSK Ellipta® portfolio8.87.222.2%
AirFluSal® Forspiro®1.61.145.5%
Inhaled21.619.510.8%
RAYOS® / LODOTRA®3.93.318.2%
Requip®1.11.5(26.7%)
Solaraze®1.01.3(23.1%)
Other products1.62.6(38.5%)
Total royalties29.228.23.5%
    

flutiform® royalties, as expected, declined as a result of lower Mundipharma revenues which, based on the terms of the agreement, are now almost all derived from product supply. This decline has been partially offset by growth in Kyorin royalties from Japan of 7.0% (CER +13.2%).  As reported previously, the Mundipharma agreement limits the aggregate amount of revenues that can be earned by Vectura for royalties and cost of product sales to 35% of Mundipharma’s net sales in the same period. Hence, as supply chain revenues increase, the value derived from royalties is reduced. The net effect of this is the effective royalty rate received from Mundipharma in both periods is a low single digit percentage. When combined with the gross margin generated by flutiform® product supply to Mundipharma, the Group in effect receives a double-digit to low-teens percentage of in-market sales, depending on the sales mix of countries.

Royalties recognised in respect of Ultibro® and Seebri® were £8.5m (+6.3%) (H1 2017: £8.0m). Novartis reported Ultibro® net sales of $222m in H1 2018, an increase of 17% (+7% on a constant currency basis) compared to H1 2017. Reported Seebri® net sales were $77m in H1 2018, a 7% increase on H1 2017 and a 1% decrease on a constant currency basis. As reported by Novartis, Ultibro® performance in H1 2017 was affected by de-stocking with Novartis noting an acceleration in reported sales in Q2 2018.

GSK have continued to report strong performance of their Ellipta® franchise (Breo®/Relvar® Ellipta®, Anoro® Ellipta®, Incruse® Ellipta® and Trelegy® Ellipta®). Under the terms of a legacy Skyepharma agreement with GSK, Vectura royalties earned on the sales of these products are capped at £9.0m per annum and therefore, with royalties of £8.8m earned in H1 2018 (H1 2017: £7.2m), only £0.2m of royalties remain to reach the cap in H2 2018. 

AirFluSal® Forspiro® continues to make a modest but growing contribution to inhaled royalties. Vectura recognised £1.6m of royalties in H1 2018 sales, a 45.5% increase from H1 2017 of £1.1m.

Despite strong RAYOS®/ LODOTRA® royalty growth of 18.2% to £3.9m (H1 2017: £3.3m), revenues from other non-inhaled products decreased due to continued decline seen with Solaraze® and Requip® as well as the non-recurrence of ADVATE® (H1: 2017: £0.8m) and Xatral® royalties (H1 2017: £0.6m) following prior year patent expiration. 

Product supply and device revenues

 H1 2018
£m
H1 2017
£m
% movement
flutiform®33.232.23.1%
Other1.41.216.7%
Inhaled34.633.43.6%
Sular®0.83.0(73.3%)
ZYFLO CR®0.41.1(63.6%)
Other products2.21.915.8%
Total product supply & device revenues38.039.4(3.6%)

Product supply and device revenues is Vectura’s largest revenue stream comprising 47.6% of overall revenues (H1 2017: 50.0%).

Revenue earned from the supply of flutiform® to Mundipharma and Kyorin was £33.2m in H1 2018 (H1 2017: £32.2m) up 3.1%. Comparing H1 2018 to H2 2017, revenue grew by 6.4% following normalisation of Mundipharma supply chain requirements. Based on the visibility of firm forward orders for the remainder of 2018, the Group expects an acceleration in comparative growth for H2 2018.

Other inhaled product supply revenues of £1.4m (H1 2017: £1.2m) include £0.5m (H1 2017: £0.9m) for the supply of the AirFluSal® Forspiro® GyroHaler® device to Sandoz and £0.6m (H1 2017: £0.2m) from the supply of BreelibTM  FOX® nebuliser devices to Bayer with the latter benefitting from a full six months of sales following the product launch in April 2017.

Revenues from other (non-inhaled) products were down 43.3% driven by the decline in Sular® and ZYFLO CR® in particular. Sular® revenues were down £2.2m having benefitted from unusual market demand in H1 2017 due to previous competitor supply issues.

Development - Milestones and services revenues  

Based on Vectura’s partnered business model, the Group continues to generate revenues charging directly for contracted development hours worked and the allocation of a portion of upfront and/or future development milestones. This is a well-established ongoing revenue stream with values fluctuating depending upon contractual terms and activity completed.

Development revenues were up at £5.6m (H1 2017: £3.4m) comprising of continued work on the breath-actuated version of flutiform® of £1.0m (H1 2017: £1.5m) and the receipt of a £0.3m milestone from Sandoz (H1 2017: £nil) attributed to reimbursement of historical development work performed for VR632. Development work related to the VR2081 and VR730 US generic development programmes generated £1.0m of revenues combined (H1 2017: £nil). £0.8m of deferred income for VR2076 has been released in H1 2018 (H1 2017: £0.5m) for past development work performed and following conclusion of negotiations with Mundipharma during 2018. In addition, these negotiations have also resulted in the release of £0.9m from the provision for Mundipharma to recover certain development costs from future royalties payable to Vectura. 

In order to mitigate the impact from products being in the mature to decline phase of their lifecycle, the Group’s oral tablet production facility in Lyon, France, is being transitioned from a contract manufacturing only organisation to a contract development and manufacturing (CDMO) model. It is therefore encouraging that development services revenues generated by the facility have increased to £0.8m from £0.3m in H1 2017.

Licensing - Milestones and other revenues
Based on Vectura’s partnered business models, the Group continues to generate revenue from licensing often through milestones, beyond established in-market royalties. This is a well-established ongoing revenue stream with value fluctuating depending on contractual terms and activity completed.

During the period, Vectura has recognised revenues of £2.4m from Sandoz owing to the return of licences granted by Vectura in August 2011 for various non-European territories where Sandoz no longer plans to launch AirFluSal® Forspiro®. 

Revenues also include a £1.3m milestone received on the anniversary of the first European launch of BreelibTM. In H1 2017, Vectura recognised a £4.2m milestone from this launch. Vectura is eligible to receive further annual milestones on the anniversary of this first launch on a decreasing scale, over five years, to the approximate total value of £3.8m (€4.25m).

Share of net sales of EXPAREL®
EXPAREL® is an injectable product for pain control. Pacira reported H1 2018 net sales of EXPAREL® of $154.5m, a 12.4% increase compared to H1 2017. Vectura’s share of net sales in H1 2018 was £3.4m with growth flat with H1 2017 due to the strengthening of the US dollar. 

As previously indicated, the Group receives a 3% share of Pacira’s cash receipts from net sales of EXPAREL® based on certain patents, which, for current reporting purposes we have forecasted would expire in September 2018. However an additional granted patent has been identified which we currently believe may extend this date and there are ongoing discussions with Pacira to clarify the position. The Group is eligible to receive a $32m sales milestone when twelve-month net sales of EXPAREL® reach $500m (on a cash received basis). This milestone is not patent dependent and consensus currently projects this sales level being achieved towards the end of 2022 or early 2023.

Cost of sales and product supply margins 
Cost of sales comprises the fully absorbed cost of generating product supply and devices revenues.

The cost of product supply of flutiform® is the primary driver of cost of sales, down £1.0m (4.8%) to £19.9m relating to the release of a supplier provision. Without this provision release, flutiform® cost of sales were flat as higher product supply volumes benefitted from operational efficiencies. The gross profit from flutiform® product supply was £13.3m (H1 2017: £11.3m) which equates to a gross margin of 40.1% (H1 2017: 35.1% gross margin). Excluding the provision release, the margin increased to 36.7%.

Cost of sales also comprises the cost of generating product supply revenues of oral tablets from the Group’s oral manufacturing facility in Lyon, France, of £5.2m (H1 2017: £5.8m). Although supply volumes were higher in H1 2018 vs H1 2017, cost of sales declined due to the sales mix, particularly Sular® volumes. The decline in cost of sales was lower than the reduction in related product supply revenues due to a largely fixed cost base and therefore the product supply margin declined to a loss in H1 2018 vs a small profit in H1 2017.

Research and development (“R&D”) expenses
Total R&D spend has reduced by 19.4% to £25.3m in H1 2018 as a result of the revised portfolio investment strategy, productivity initiatives and phasing of activity. Expenditure comprised £12.9m on Vectura enhanced assets (H1 2017: £17.3m) driven by the on-going Phase III trial for VR475 and costs associated with continued development of VR647; £4.8m on novel-patented molecule partnering projects (H1 2017: £9.2m) reducing compared to H1 2017 as a result of the portfolio re-prioritisation and decision to partner both VR942 and VR588; £5.9m on generic partnering projects (H1 2017: £3.7m); and £1.7m on oral projects (H1 2017: £1.2m). 

Based on the phasing of activity, particularly VR475 and VR647, the Group expects full year R&D spend to be within the guidance of £55m to £65m with R&D spend weighted to the second half of 2018.

Other operating expenditure and income
Other operating expenditure and income comprises the impact of a £1.3m non-cash charge for share-based compensation (H1 2017: £1.1m), corporate costs of £4.3m which are flat, selling and marketing costs of £1.5m which are 28.6% lower due to cost reduction initiatives and a lower R&D expenditure credit of £0.5m (H1 2017: £0.9m credit) due to lower qualifying R&D expenditure.

Amortisation and impairment of intangible assets

The amortisation charge of £45.2m is lower than the H1 2017 charge of £53.3m as the VR2076 intangible was impaired in H2 2017 and the VR876 intangible fully amortised in 2017.

Exceptional items
Exceptional items of £5.7m have been recognised in H1 2018 (H1 2017: £0.4m). This includes: £2.3m (H1 2017: £0.5m) from the progression of legal proceedings against GSK relating to enforcement of Vectura’s patents in respect of the Ellipta® products; £1.8m (H1 2017: £2.1m) from the final phase of integration initiatives post the Skyepharma merger; a £1.2m provision (H1 2017: £nil) for redundancy costs associated with the June 2018 decision to close the Group’s site in Gauting in Germany by June 2021; and £0.4m of final restructuring costs of the Group’s oral manufacturing facility required after the return of the facility to Vectura in July 2016 in a state which required significant improvement. The prior year also includes a one off R&D credit of £2.7m re-presented from net R&D expenses to reflect the Annual Report and Accounts 2017.

Adjusted EBITDA
Adjusted EBITDA is a non-IFRS measures which management use to assess the performance of the business.

Adjusted EBITDA in H1 2017 was previously reported as £18.9m as it included a £2.7m one off R&D accrual release. In order to present adjusted EBITDA on a consistent basis with the Annual Report and Accounts 2017, management has excluded the one off R&D accrual release from H1 2017 adjusted EBITDA as an exceptional item.

Adjusted EBITDA of £24.6m has increased compared to H1 2017 re-presented adjusted EBITDA of £16.2m (+51.9%).  This is the result of continued revenue growth, lower R&D expenditure and operational savings alongside the delivery of merger synergies. H1 2018 is the first period benefitting from the merger savings in full.

As shown in note 6 of the condensed consolidated financial statements, adjusted EBITDA is calculated by adjusting the statutory reported operating loss for non-cash items such as depreciation, amortisation and share-based compensation and for items that are exceptional in nature and do not represent the underlying trends of business performance. 

Movement in associates
The carrying value of the Group’s investments were written off during 2017. The £0.1m charge in H1 2018 relates to the provision of a receivable from the Group’s Chinese joint venture.

Net finance income/expense
Net finance income of £0.4m (H1 2017: £1.4m expense) arises from £0.5m of foreign exchange gains (H1 2017: £1.5m of foreign exchange losses) less a net interest cost of £0.1m (H1 2017: £0.1m of net interest income).

Loss before tax
The Group’s statutory loss before tax of £29.9m has reduced by 32.8% from £44.5m in H1 2017 due to continued revenue growth, lower R&D expenditure and lower amortisation charges.

Taxation
The Group's effective tax rate ("ETR") for H1 2018 is a 22% credit (H1 2017: 14% credit) on the Group’s loss before taxation which is higher than the normalised ETR.  The increase is driven by a one off initial partial recognition of a deferred tax asset on non-trade losses, and a one-off rate change from 33.33% to 25.0% on deferred tax in France following the substantive enactment of the staged reduction to the corporation tax rate. The Group expects the ETR credit to return to a low-teens percentage in future years.

A taxation credit of £6.5m (H1 2017: £6.4m credit) has been recognised in the condensed consolidated income statement, being the net effect of a current tax expense in the Group’s US and Swiss operations offset by deferred tax credits on the amortisation of acquisition accounting fair value adjustments and the initial recognition of a non-current deferred tax asset in respect of non-trade losses.

Loss after tax
Loss after tax was £23.4m, a reduction from H1 2017 loss of £38.1m.

Loss per share
Basic and diluted loss per share has reduced to 3.5 pence, reflecting continued revenue growth, lower R&D expenditure and lower amortisation charges, as noted above (H1 2017: 5.6 pence loss per share). 

Balance sheet

Goodwill
The movement of £0.2m in goodwill to £161.6m at 30 June 2018 (31 December 2017: £161.4m) relates to foreign exchange gains.

Intangible assets

The carrying value of intangible assets at 30 June 2018 of £291.6m (31 December 2017: £335.4m) has decreased by £43.8m during the period. This is due to amortisation of £45.2m, less £0.9m of foreign exchange gains and £0.3m related to investment in IT software.

Property, plant and equipment
The net book value of property, plant and equipment is £54.2m, £1.1m higher than at 31 December 2017 due to additions of £3.8m offset by depreciation of £2.6m, foreign exchange gains of £0.2m and £0.3m of other movements. 

£3.0m of the £3.8m capital investment in H1 2018 relates to assets under construction including £0.8m of manufacturing equipment at the Group’s oral manufacturing facility, £1.4m from progressing construction of equipment to support the manufacture of flutiform® actuators and £0.8m of laboratory equipment to support the Group’s pipeline programmes and product supply of the Gryohaler® and BreelibTM devices.  

Inventories
Over 90% of inventories of £24.9m at 30 June 2018 and £23.4m at 31 December 2017 relate to flutiform®. The increase of £1.5m in H1 2018 is due to product supply for flutiform® in H2 2018 and mitigation for a planned production shut down in October to install new equipment in Holmes Chapel.

Provisions
Total provisions have increased since 31 December 2017 by £5.2m to £10.6m (31 December 2017: £5.4m). Of the increase, £5.8m is a reclassification from other payables to provisions due to increased uncertainty as to the timing of settlement, less £0.9m released to the condensed consolidated income statement. Additionally, a provision for redundancy costs of £1.2m has also been recorded following the decision to close the Gauting site, and an opening provision of £1.1m relating to a flutiform® supplier has been released in the period.

Swiss defined benefit pension liability
The Swiss pension liability has decreased by £0.8m to £2.8m (31 December 2017 £3.6m), of which £0.5m is due to the actuarial estimate of curtailment gains and £0.3m for the actuarial gain from an increase in the Swiss discount rate as published by the Swiss Federation of Actuaries.

Liquidity
Vectura continues to maintain strong liquidity with cash and cash equivalents at 30 June 2018 of £83.9m (31 December 2017: £103.7m). The previously announced £15.0m share buyback programme completed in Q1 2018 with cash outflow of £13.8m occurring in H1 2018. 

Cash generated from operating activities was £5.5m in H1 2018 (H1 2017: £8.5m). The difference to Adjusted EBITDA of £24.6m is explained as:

 H1 2018
£m
Adjusted EBITDA24.6 
Exceptional items cash outflow not in adjusted EBITDA1(4.0)
GSK Ellipta – Q2 royalty – cash received in Q3 20182(5.1)
Other licensing – Sandoz3(2.4)
Other non-cash revenue and other income4(2.0)
Non-cash credits within expenses(1.4)
Release of flutiform® supplier provision(1.1)
Other working capital movements(3.1)
Cash generated from operating activities5.5 

1 Exceptional costs are mainly driven by cash outflow of £1.8m relating to GSK litigation costs and £2.1m of merger integration costs (including the R&D transformation initiative).
2 Owing to the contractual cap of £9.0m for GSK Ellipta® royalties being reached in Q3 2017, the cash received in H1 2018 is in respect of Q1 2018 royalties only, with Q2 2018 royalties received in Q3 2018.
3 Other licensing revenue comprises a £1.9m deferred income release and £0.4m billed in June and settled in July 2018.
4 Other non-cash revenue and other income includes releases from deferred income and other creditors of £1.5m and £0.5m of RDEC income for which the claim will be made to HMRC in 2019.

The Group made scheduled corporation tax payments relating to its US and Swiss operations of £5.0m (30 June 2017: £4.6m).

Net cash outflows from capex activities were £5.9m, £0.6m lower than H1 2017. The Group made a payment of £1.8m for a manufacturing line under construction at 31 December 2017 in respect of its oral tablet production facility and other payments of £4.1m for laboratory and flutiform® manufacturing equipment. 

The Group has access to a £50m multicurrency revolving credit facility with Barclays Bank PLC and HSBC Bank PLC. This facility expires in August 2021 and remains undrawn.

Risks and uncertainties
There has been no significant change to either the risk management and internal control processes and policies or the principal business risks and uncertainties compared to those set out on pages 48 to 54 of the Annual Report and Accounts 2017. The only exception is in respect of the principal risk titled “Brexit uncertainty” which has increased in H1 2018 due to a higher probability of the UK exiting the EU without a deal. The Group continues to monitor the impact of this risk, and has mitigation plans in place. The Group remains of the view that Brexit could result in an increased cost of operations for the Group and potential disruption to partner supply chains. Accordingly, the Group is continuing to review stock levels with its partners for both finished product and key components and planning appropriately.

The principal business risks and uncertainties affecting the Group are:

  • Supply chain disruption
  • Failure or delay in partnering VR647 and VR475. The clinical trial reads outs for VR475 are due in H2 2018
  • Failure to launch VR315 in a competitive timeframe
  • Failure by the Group’s partners to deliver on their development and/or commercialisation obligations. This may be caused by unsuccessful marketing strategies, deprioritisation of investment following restructuring or acquisition activity and failure to obtain appropriate market pricing.
  • Failure or delay in achieving development milestones required to advance the product pipeline
  • Changes in regulatory, operating or pricing environments (excluding Brexit)
  • Failure to attract or return talent / key personnel
  • Failure to protect intellectual property
  • Brexit uncertainty


Related-party transactions

During August 2018 the Group paid a final instalment of £150,000 to a German supplier on confirmation that a new Clickhaler® and Duohaler® cap filling and assembly line has received formal factory acceptance testing clearance and has been shipped to the Group’s Chinese associate. This payment represents the Group’s final contribution to the Chinese associate and will be presented in the associate’s line of the consolidated income statement in the annual accounts.

By order of the Board

James Ward-Lilley
Chief Executive Officer

10 September 2018


Condensed consolidated income statement
for the six months ended 30 June 2018

 

 
Note6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
(Re-presented*)
 (unaudited)
£m
Revenue279.9 78.8 
Cost of sales (27.3)(28.4)
  50/50. 
Gross profit 52.6 50.4 
    
Selling and marketing expenses (1.5)(2.1)
Research and development expenses3(25.3)(31.4)
Corporate and administrative expenses (5.6)(5.4)
Other income 0.5 0.9 
Operating profit before exceptional items and amortisation 20.7 12.4*
Amortisation (45.2)(53.3)
Exceptional items4(5.7)(0.4)*
Operating loss  (30.2)(41.3)
Movement in associates (0.1)(1.8)
Finance income 0.6 0.1 
Finance expenses (0.2)(1.5)
    
Loss before taxation (29.9)(44.5)
    
Net taxation credit56.5 6.4 
Loss after taxation  (23.4)(38.1)
    
Adjusted EBITDA624.6 16.2*
* Please refer to note 4 for an explanation of the re-presentation.   
Loss per share for the period    
Basic (3.5p)(5.6p)
Diluted (3.5p)(5.6p)

All results are attributable to shareholders of Vectura Group plc and are derived from continuing operations.

Adjusted EBITDA is a non-IFRS measure comprising operating loss, adding back amortisation, depreciation, share-based payments and exceptional items. Refer to note 6 “Adjusted EBITDA”.

During the period, the Group transitioned to IFRS 15 Revenue from contracts with customers. Owing to transitional relief available, the new standard has had no impact on reported revenues for the current period and the impact on the comparative period is not material, and therefore have not been restated. Refer to note 13.

The accompanying notes 1-15 form an integral part of these condensed consolidated financial statements.


Condensed consolidated statement of other comprehensive income
for the six months ended 30 June 2018

 6 months ended
30 June 2018
 (unaudited)
£m
6 months ended
30 June 2017
 (unaudited)
£m
Loss after taxation (23.4)(38.1)
Items that may be reclassified to the Income Statement:  
Exchange movements arising on consolidation (net of related taxation)0.6 9.1 
Items that will not be reclassified to the Income Statement:  
Actuarial gains on defined benefit pensions (net of related taxation)0.2 0.6 
Other comprehensive income0.8 9.7 
Total comprehensive loss(22.6)(28.4)

The accompanying notes 1-15 form an integral part of these condensed consolidated financial statements.


Condensed consolidated balance sheet
at 30 June 2018 

 Note30 June 2018
 (unaudited)
£m
31 December 2017
 (audited) (restated*)
£m
ASSETS   
Non-current assets   
Goodwill7161.6 161.4 
Intangible assets 7291.6 335.4 
Property, plant and equipment 54.2 53.1 
Deferred tax assets

 
 3.3 1.4 
Financial assets at amortised cost  6.3 6.0 
Total non-current assets 517.0 557.3 
    
Current assets   
Inventories 24.9 23.4 
Trade and other receivables 38.0 34.1 
Cash and cash equivalents 83.9 103.7 
Total current assets 146.8 161.2 
Total assets 663.8 718.5 
 

LIABILITIES
   
Current liabilities   
Trade and other payables (48.0)(56.5)
Corporation tax payable (8.2)(11.4)
Provisions8(1.0)(2.2)
Total current liabilities (57.2)(70.1)
    
Non-current liabilities   
Other non-current payables (3.8)(9.6)
Provisions8(9.6)(3.2)
Retirement obligations (2.8)(3.6)
Deferred taxation (46.0)(53.5)
Total non-current liabilities (62.2)(69.9)
Total liabilities (119.4)(140.0)
Net assets 544.4 578.5 
 

SHAREHOLDERS’ EQUITY
   
Share capital 0.2 0.2 
Share premium1061.6 61.5*
Other reserves10588.2 599.1*
Translation reserve 26.9 26.3 
Retained losses (132.5)(108.6)
Total shareholders’ equity   544.4 578.5 

* Restated amounts of £41.3m relate to the correction of pre-Skyepharma merger share premium and merger reserves recognised on the acquisition of Activaero in 2014.Refer to note 10.

The accompanying notes 1-15 form an integral part of these condensed consolidated financial statements. These condensed consolidated financial statements and accompanying notes were approved by the Board of Directors.


Condensed consolidated statement of changes in equity
for the six months ended 30 June 2018

   Other reserves    
 Share
capital
£m
Share
Premium
 £m
Merger
 £m
Own shares
£m
Share-based
payment
£m
Translation
reserve
£m
Retained
losses
£m
 Total
equity
£m
At 31 December 2017 as previously reported0.2102.8 551.9 (2.5)8.4 26.3(108.6) 578.5 
Share premium restatement*(41.3)41.3      
At 31 December 2017 restated0.261.5 593.2 (2.5)8.4 26.3(108.6) 578.5 
Loss for the period    (23.4) (23.4)
Other comprehensive income    0.60.2  0.8 
Total comprehensive income/(loss) for the period    0.6(23.2) (22.6)
          
IFRS 15 transition** (note 13)    0.3  0.3 
Share-based payments   1.9   1.9 
Share buyback programme (note 9)    (13.8) (13.8)
Employee share schemes0.1  0.4 (3.8)3.4  0.1 
Release of special reserves (8.2)  8.2   
Merger reserve release (1.2)  1.2   
At 30 June 2018 (unaudited)0.261.6 583.8 (2.1)6.5 26.9(132.5) 544.4 
          
At 31 December 2016 as previously reported0.2102.3 551.9 (0.7)5.8 41.4(23.7) 677.2 
Share premium restatement*(41.3)41.3      
At 31 December 2016 restated0.261.0 593.2 (0.7)5.8 41.4(23.7) 677.2 
Loss for the period    (38.1) (38.1)
Other comprehensive income    9.10.6  9.7 
Total comprehensive (loss) / income for the period    9.1(37.5) (28.4)
Share-based payments   2.0   2.0 
Exercise of vested share awards0.4      0.4 
At 30 June 2017 restated (unaudited)0.261.4 593.2 (0.7)7.8 50.5(61.2) 651.2 

* Restated amounts of £41.3m relate to the correction of pre-Skyepharma merger share premium and merger reserves recognised on the acquisition of Activaero in 2014 (refer to note 10).

** An adjustment of £0.3m to opening reserves has been recognised in line with the cumulative effect method on transition to IFRS 15. Refer to note 13.

The accompanying notes 1-15 form an integral part of these condensed consolidated financial statements.




Condensed consolidated cash flow statement
for the six months ended 30 June 2018

 Note6 months ended
30 June 2018
 (unaudited)
£m
6 months ended
30 June 2017
(Restated*)
 (unaudited)
£m
Cash flows from operating activities   
Cash generated from operations115.5 8.5*
Corporation tax paid (5.0)(4.6)
Net cash inflow from operating activities 0.5 3.9*
Cash flows from investing activities    
Purchase of property, plant and equipment and intangible assets (5.9)(6.5)
Interest received 0.1 0.1 
Net cash outflow from investing activities (5.8)(6.4)*
Net cash outflow before financing activities (5.3)(2.5)
Cash flows from financing activities   
Share buyback programme9(13.8) 
Proceeds from issue of ordinary shares  0.4 
Repayment of secured mortgaged borrowings and other finance charges (0.3)(0.3)
Net cash (outflow)/ inflow from financing activities (14.1)0.1 
Foreign exchange (0.4)0.4 
Decrease in cash and cash equivalents (19.8)(2.0)
Cash and cash equivalents at beginning of the period 103.7 92.5 
Cash and cash equivalents at end of the period 83.9 90.5 

*  Following an FRC corporate reporting review of the Group’s 2016 Annual Report and Accounts, in accordance with IAS 7 paragraph 16, £1.1m of exceptional Skyepharma merger transaction costs disclosed as cash flows from investing activities in the H1 2017 condensed consolidated cash flow statement have been restated as cash flows from operating activities within the H1 2017 comparatives above in line with the Annual Report and Accounts 2017. This restatement does not impact closing cash or net debt; it solely relates to the classification of these exceptional cash flows as operating activities as opposed to investing activities as previously reported. Refer to note 11.

The accompanying notes 1-15 form an integral part of these condensed consolidated financial statements.


  1. General information

Vectura Group plc (the “Company”) is a public limited company incorporated and domiciled in the United Kingdom. The Group’s operations and principal activities are described in the Annual Report and Accounts 2017. The “Group” is defined as the Company, its subsidiaries and equity-accounted associates.

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34, “Interim Financial Reporting”. They do not contain all of the information which International Financial Reporting Standards (“IFRS”) would require for a complete set of annual financial statements, and should be read in conjunction with the consolidated financial statements for the Group for the year ended 31 December 2017.

Selected explanatory notes are included to explain events and transactions that are significant to the understanding of the changes in the Group’s financial position and performance since the last annual financial statements. Refer to basis of preparation at note 12.

  1. Revenue
 6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
(unaudited)
£m
Product and device supply38.039.4
Licensing – Royalties29.228.2
Licensing – Milestones and other3.74.4
Development – Milestones and other services5.63.4
Share of net sales of EXPAREL®3.43.4
Total revenue 79.978.8

A detailed analysis of revenue is provided by the Finance Review. Revenues from Development – Milestones and other services and Licensing – Milestones and other can vary materially between reporting periods dependent upon the terms of development and marketing agreements with partners.

The Group adopted IFRS 15 Revenue from contracts with customers in this period which has not had a material impact on reported revenues. It is expected to have a material impact on new licence and development agreements entered into with partners after 1 January 2018, being the adoption date of IFRS 15 (refer to note 13).

  1. Research and development expenses
 6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
(unaudited)
£m
Vectura enhanced assets12.917.3
Novel-patented molecule and device partnering projects4.89.2
Generic/analogue molecule and device partnering projects5.93.7
Other oral projects1.71.2
Total Research and development expenses 25.331.4

Research and development expenses related to internal employee costs and third party costs associated with Vectura’s development pipeline. 

In order to present research and development expenses consistently with the Annual Report and Accounts 2017, the £2.7m one-off credit previously presented on the face of the condensed consolidated income statement within net research and development expenses of £28.7m for the six months to 30 June 2017 has been re-presented as an exceptional item (refer to note 4).

  1. Exceptional items
 6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
(unaudited)
£m
Legal fees12.30.5
Skyepharma merger integration costs21.82.1
Site closure costs31.2
Other exceptional items40.40.5
One-off research and development accrual release (re-presented)*(2.7)*
Total exceptional items5.70.4

Classification if costs were not presented as exceptional:

  1. Classified as research and development expenditure
  2. Classified as research and development expenditure and corporate and administration costs
  3. Classified separately as restructuring costs
  4. Classified within cost of sales

      
*The comparative £2.7m one-off credit previously presented within research and development expenses (refer to note 3) for the six months to 30 June 2017 has been re-presented as an exceptional item. This was to ensure the presentation of exceptional items is made consistently with note 10 of the Annual Report and Accounts 2017.

Legal fees of £2.3m (30 June 2017: £0.5m) relate to ongoing legal proceedings against GSK from enforcement of Vectura’s patents in respect of the Ellipta® products.

Post-merger integration costs of £1.8m (30 June 2017: £2.1m) include redundancy and other costs from initiatives to combine the businesses, streamline ways of working and enhance productivity and £0.6m of share based payment charges. These arise from retention shares granted to key members of management considered critical to the integration process. The charges are lower than the comparative period primarily because the awards with an 18-month service condition vested on 22 March 2018.

The decision to close one of the Group’s four operational sites, Gauting in Germany, by June 2021 was communicated in June 2018. Activities will be transferred to the remaining sites during the closure period. A provision of £1.2m has been recognised for redundancies arising from the closure. The provision assumes the redundancy payments are made at the end of the closure period and is discounted at a rate of one percent.

Other exceptional items include the final redundancy costs from restructuring of the Group’s manufacturing facility in Lyon following the facility transferring back to Vectura in July 2016 in a state which required significant improvement.

  1. Taxation

The Group’s effective tax rate is a 22% credit (30 June 2017: 14% credit) on the Group’s loss before taxation. The increase in the credit is driven by the partial recognition of a deferred tax asset on non-trade losses, and a one off rate change adjustment from 33.33% to 25% on deferred tax in France following the substantive enactment of the staged reduction to the corporation tax rate.

A taxation credit of £6.5m (30 June 2017: £6.4m credit) has been recognised in the condensed consolidated income statement, being the net effect of a current tax expense in the Group’s US and Swiss operations offset by deferred tax credits on the amortisation of acquisition accounting fair value adjustments and the initial recognition of a non-current deferred tax asset in respect of non-trade losses.

The uncertain tax position reported in the Taxation note of the Annual Report and Accounts 2017 of £4.9m has increased by £0.1m to £5.0m in the period due to foreign exchange.

  1. Adjusted EBITDA

Adjusted EBITDA is a non-statutory measure used by the Board, the Executive Leadership Team and managers of the business to monitor the Group’s performance. 

 6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
 (unaudited)
£m
Operating loss(30.2)(41.3)
Exceptional items (re-presented)*5.7 0.4*
Amortisation of intangible assets45.2 53.3 
Depreciation of property, plant and equipment2.6 2.7 
Share-based payments1.3 1.1 
Adjusted EBITDA24.6 16.2*

* Adjusted EBITDA was previously reported in H1 2017 as £18.9m as it included the £2.7m one off R&D accrual release which was separately disclosed.  In order to present adjusted EBITDA on a consistent basis with the Annual Report and Accounts 2017, management has excluded the one off R&D accrual release from adjusted EBITDA as an exceptional item (refer to note 4).

  1. Goodwill and other intangible assets

Goodwill at 30 June 2018 is £161.6m (31 December 2017: £161.4m). The movement in the current period relates to foreign exchange movements.

An impairment trigger was identified in relation to goodwill. However, in accordance with IAS 36, no separate impairment test was performed because the net assets of each CGU have not changed significantly since the impairment test as at 31 December 2017. As there was a substantial margin identified in this impairment test, and as an additional six months’ amortisation to 30 June 2018 has reduced net assets further, management determined that the likelihood of any goodwill impairment was remote.

The net book value of other intangible assets at 30 June 2018 is £291.6m (31 December 2017: £335.4m). The decrease in the carrying value of intangible assets of £43.8m primarily relates to the amortisation charge of £45.2m but also includes foreign exchange movements and software additions.

Intangible assets principally comprise flutiform®, EXPAREL®, GSK’s Ellipta® products and other marketed oral and topical products recognised on the Skyepharma merger in June 2016. These intangible assets are being amortised over a period of between two and seven years with reference to average applicable patent lives in the Group’s main territories.

Intangible assets also include smart nebuliser-based technology separately acquired through the Activaero transaction on 13 March 2014 and leveraged in Vectura’s development programmes including VR475 (EU) and VR647 (US). These assets are amortised in line with the consumption of economic benefits and are due to complete clinical trials during the second half of 2018. These trials remain on track and there have been no adverse events during this period that warrant a different conclusion to the impairment assessments performed in 2017.

For the purposes of interim impairment testing, the Group assesses whether any impairment triggers have arisen in the period. An impairment trigger was identified for the flutiform® intangible due to a higher than expected National Health Insurance price reduction in Japan in the period. Accordingly, the impairment model for flutiform® as disclosed in note 16 of the Annual Report and Accounts 2017 has been reviewed and updated with more adverse forecast price reductions in Japan. In addition, a sensitivity analysis has been performed as follows: (1) an increase in the discount rate from 8% to more than 11% would result in impairment; (2) a decrease in in-market sales and product supply volumes by more than 10% gives rise to an impairment charge; and (3) a reduction in the annual product supply margin by more than 3% causes impairment. No impairment charge arises in the current period.

  1. Provisions and contingent assets
     
 EmployeePropertyCommercialTotal
 £m£m£m£m
At 31 December 20172.2 1.9 1.3 5.4 
Transfer from other payables  5.8 5.8 
Charged/ (released) during the period1.5 0.6 (2.2)(0.1)
Utilised during the period(0.3)(0.1)(0.1)(0.5)
At 30 June 20183.4 2.4 4.8 10.6 
Current0.8 0.2 - 1.0 
Non-current2.6 2.2 4.8 9.6 

Provisions of £10.6m (31 December 2017: £5.4m) have increased primarily as a result of the transfer of a commercial liability of £5.8m, which was previously recognised in other payables. This transfer reflects the uncertainty of the phasing of future payments and the obligation is now considered to be constructive in nature. In this one instance, as the phasing of repayments cannot be reliably measured and owning to immateriality, no discounting has been applied. £0.9m of this provision has been released during the period, and a further £1.1m has also been released in respect of a flutiform® supplier provision as payment is no longer considered probable.

Other movements primarily relate to the recognition of a £1.2m provision for redundancy payments following the decision to close the German site by June 2021 (refer to note 4). 

Contingent assets

On 13 June 2018, the Contract Development and Manufacturing Organisation, Recipharm, agreed to acquire Sanofi’s UK Holmes Chapel manufacturing facility in Cheshire. The sale is expected to complete in Q4 2018, at which point Vectura will receive a low single digit (millions) amount of income from Sanofi. As the receipt is conditional on the sale completing, the income will only be recognised when receipt is virtually certain on completion of the sale.

  1. Movements in equity shares 
   
Ordinary shares of 0.025p, each at 1 January 2018 678,508,698 
Issued to satisfy Vectura employee share plans 1,476,509 
Share buyback programme – cancellations (14,682,736)
Ordinary shares of 0.025p, each at 30 June 2018 665,302,471 

On 28 February 2018, the £15.0m share buyback programme was completed, returning a further £13.6m of capital to shareholders in 2018. Directly attributable costs of £0.2m has been expensed to equity.

  1. Restatement of share premium within reserves

Following completion of the share buy-back programme, a review of the Vectura Group plc’s distributable reserves was performed. It was identified that shares issued on 13 March 2014 with a market value of £41.3m, as part consideration for the Activaero acquisition, were incorrectly recorded in non-distributable share premium.

The share premium of £41.3m should have been recognised as a separate reserve, usually referred to as a merger reserve, and therefore this amount has been reclassified in the comparative period. Merger reserves are initially non-distributable, but can in future become distributable. See Statement of Changes in Equity for amounts previously reported.

11.        Cash generated from operating activities

    6 months ended

30 June 2018

£m
6 months ended

30 June 2017

(Restated*)

£m
Cash flows from operating activities     
Loss before tax   (29.9)(44.5)
Adjustments     
Amortisation   45.2 53.3 
Depreciation   2.6 2.7 
Net finance expense   (0.4)1.4 
Share-based payments (including those in exceptional items)   1.9 2.0 
Increase in inventories   (1.3)(2.8)
(Increase) / decrease in trade and other receivables   (5.0)4.3 
Decrease in trade and other payables   (8.5)(5.9)
Movement in associates   0.1 1.8 
Foreign exchange movements   (0.3)(1.6)
Other non-cash items   1.1 (2.2)
Total adjustments   35.4 53.0 
Cash generated from operating activities   5.5 8.5*

* Following an FRC corporate reporting review of the Group’s 2016 Annual Report and Accounts, in accordance with IAS 7 paragraph 16, £1.1m of exceptional Skyepharma merger transaction costs disclosed as cash flows from investing activities in the H1 2017 condensed consolidated cash flow statement have been restated as cash flows from operating activities within the H1 2017 comparatives above in line with the Annual Report and Accounts 2017. This restatement does not impact closing cash or net debt; it solely relates to the classification of these exceptional cash flows as operating activities as opposed to investing activities as previously reported.

  1. Basis of preparation

       

In preparing these interim financial statements, management have made judgements and estimates that affect the application of accounting policies and the reported figures. Actual results may differ from estimates. The judgements, estimates and assumptions made in preparing these condensed consolidated financial statements were the same as those described in the last annual financial statements, except where relating to the application of IFRS 15.

This is the first set of the Group’s financial statements where IFRS 15 has been applied. All other accounting policies, and methods of computation, applied by the Group in these condensed consolidated interim financial statements are the same as those applied by the Group in its consolidated financial statements for the year ended 31 December 2017, unless specified.

The Group is managed on the basis of a single reportable segment under IFRS 8, being development and supply of pharmaceutical products.  Whilst there is evidence that demand for on-market inhaled products is greater in winter months, revenues have not been historically distorted for product supply and royalties.

The Group’s consolidated comparative figures for the year ended 31 December 2017 do not constitute the Company’s individual statutory accounts for that financial year. Statutory accounts for the year ended 31 December 2017, prepared in accordance with IFRS as adopted by the EU (“Adopted IFRSs”) and as issued by the International Accounting Standards Board, have been reported on by the Group’s auditor, KPMG LLP, and delivered to the Registrar of Companies.

The report of the auditor was (i) unqualified, (ii) did not include a 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 section 498 of the Companies Act 2006.

Vectura meets its day-to-day working capital requirements through its on-hand cash resources and available bank facilities. The Group’s forecasts and projections, taking account of reasonably possible changes in trading performance, show that it is able to operate without the need to use its current facilities for the foreseeable future. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Having reassessed the principal risks, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements.

13.        Accounting policies – new standards adopted

IFRS 9 Financial Instruments

IFRS 9 “Financial Instruments” became effective for periods starting on or after 1 January 2018, however the Group chose to early adopt the standard on 1 January 2017 and therefore no transitional disclosure is included in these condensed interim financial statements. The adoption of IFRS 9 had no material impact on the Group’s financial statements. Refer to note 26 of the Annual Report and Accounts 2017.

IFRS 15 Revenue from contracts with customers

Vectura adopted IFRS 15 Revenue from Contracts with Customers with effect from 1 January 2018. The new standard specifies a comprehensive five step, principal based framework to the recognition of revenue generated through customer contracts replacing IAS 18 Revenue and related supplementary IFRS guidance.

Based on the profile of milestones in the first half of 2018 and the expected profile of milestones in the second half, the impact of IFRS 15 is not expected to have a material impact on the full year 2018. The main area of change is the acceleration of the licence portion of signing milestones and other early phase development milestones subject to a constraint that the phasing of cash received cannot materially exceed the cumulative revenue recognised on the contract. 

Following a detailed review of all revenue generating customer contracts within the Group, it has been determined that the adjustment to retained earnings at 1 January 2018 is a £0.3m increase to 2017 revenues.

Change in accounting for upfront and early phase development milestones
IAS 18 was based primarily on the notion that revenue should be recognised when substantially all the risk and rewards of goods or services are passed to the customer. A general principle required that revenue recognition should follow the substance of the underlying arrangement. However IAS 18 was silent on exactly how this principle applied to more complex customer arrangements spanning multiple reporting periods involving the provision of a number of related goods and services.

As these more complicated customer arrangements typically involve lump sum aggregate payments linked to the overall progress and risk associated with the overall development, these will need to be allocated to the separate goods and services as they transfer to a customer under IFRS 15.

The main principle of revenue recognition under IFRS 15
A company should recognise revenue when it transfers goods or services to a customer. The amount of revenue recognised should represent the consideration for goods and services performed at the date of each reporting period to which the Group expects to become entitled.
Under the current IAS 18 standard, revenue transactions in effect are separated into components aligned with the payment mechanism. The new standard does not contain a separation of revenues into components of payments. Instead, IFRS 15 provides a single accounting model for the recognition of all payments which have, or are expected to be, received.

Transitional cumulative effect adjustment at 1 January 2018
On transition, an adjustment from application of IFRS 15 only applies to the contract arrangements for VR2081 (commencing 28 June 2017) and VR730 (commencing 22 November 2016).

The Group has taken advantage of the transitional relief in IFRS 15 from having to apply the new standard where all the obligations for revenues had been satisfied before the 1 January 2018 transition date.

Disaggregation of revenues by performance obligation
Revenues disaggregated to performance obligations within customer contracts are as follows:

 6 months ended
30 June 2018
(unaudited)
£m
6 months ended
30 June 2017
(unaudited)
£m
Product supply38.039.4
Licensing32.932.6
Development5.63.4
Share of net sales of EXPAREL®3.43.4
Total revenue 79.978.8

Future application to Vectura’s revenue recognition for new contracts

The following table indicates how current revenue streams will be applied in the future to new collaborative arrangements. 

There is not expected to be any impact to product supply, royalties, sales based milestones and single source development contracts as the measurement and recognition principles are similar and the application of the IFRS 15 exemption for licence based royalties and sales milestones.

  Change in IFRS 15 versus IAS 18

 
 Likely impact
 

Upfront milestones
  

An upfront milestone must be allocated to the performance obligations (typically licence and development services) in the contract. This is achieved using the risk adjusted NPV of each performance obligation with reference to a standalone development services rate per hour.

 

Revenue arising from the licence of intellectual property rights is recognised when the Group transfers control of the intellectual property. This usually occurs when the customer signs the agreement or shortly thereafter and is therefore recognised upfront. The amount allocated to development services is normally amortised as those services accrue and presented as development services income.

 

However, should the intellectual property provided be deemed more symbolic (i.e. no standalone functionality and requiring ongoing, significant support from Vectura) the revenue would be recognised over the period over which the performance obligation is being satisfied (e.g. over the term of the licence). 

 
  

Material acceleration of recognition of the licence portion of upfront milestones. In general, these were previously spread over a number of years.

 

A proportion of an upfront milestone may also be allocated as a material right for the customer to receive later phase development services at a price considered to be discounted to the stand-alone price.

 
Development services  Development services chargeable to customers is recognised as the related work (measured in hours) is performed. This is the same as under IAS 18.

 
 

 
None.
Development services - contingent  milestones

 
 Where the full standalone selling price is not recovered through the Group charging directly for hours worked, then this shortfall is overcome through the allocation of a portion of upfront and/or future development milestones subject to the constraint that total revenue cannot exceed total cash received and to the extent a significant reversal of revenue could possibly occur. To the extent development milestones are dependent on processes within the Group’s control, it is likely recognition will be accelerated.

 

Whilst this summary provides relevant principles and indicative accounting treatment, it is not possible to pre-determine exactly how revenue in future contracts will be recognised until a new contract is signed and reviewed for application of IFRS 15.

In particular, an assessment needs to be made as to whether the phasing of cumulative cash received in the contract is significantly later than the phasing of services in the contract as IFRS 15 contains a constraint in this area to avoid a material reversal in revenues.

  1. Accounting policies – New Standards not currently adopted

The following standards and interpretations are mandatory from 1 January 2019 with early adoption possible. At present the Group has not adopted these standards, but as these will be mandatory in the future, an impact assessment is provided below:

IFRS 16 “Leases”

IFRS 16 eliminates the classification of leases as either operating leases or finance leases and introduces a single lessee accounting model where the lessee is required to recognise assets and liabilities for material leases, lasting over one year. 

Under the current accounting rules, Vectura’s right to use property assets and future rental obligations are not recognised on the balance sheet and annual rental charges are expensed to the income statement on an accruals basis. The Group has operating lease commitments of £6.6m as at 31 December 2017.  These primarily relate to UK property leases at Chippenham, Cambridge and London.

Based on the current lease portfolio, a right to use asset of approximately £2.5m and a discounted lease liability of approximately £4.5m is expected to be recognised upon first time adoption based on the position as at 31 December 2017. This will thus reduce net assets by c. £2.0m.

However, annual rental charges of approximately £1.0m will no longer be charged to the income statement which will hence improve adjusted EBITDA. A minimal impact is expected on overall loss before tax owing to increased depreciation.

IFRIC 23 “Uncertainty over Income Tax Treatments

IFRIC 23 has been issued to clarify the accounting for uncertainty within tax positions. This guidance precedes significant changes expected to tax legislation across a number of jurisdictions applicable to locations in which the Group operates.

Whilst it is not expected that the application of a weighted average probability approach to the interpretation of uncertain country-specific tax legislation would materially alter the value of assets and liabilities recognised, it is not possible to assess how this new guidance will impact reported tax balances from 2019 onwards. This is because of far reaching proposals to reform the current Swiss Tax regime currently lacks clarification as do the terms and timing of the planned UK exit from the European Union and the associated impact on tax legislation.

  1. Related-party transactions

In August 2018, the Group paid a final instalment of £150,000 to a German supplier on confirmation that a new Clickhaler® and Duohaler® cap filling and assembly line has received formal factory acceptance testing clearance and has been shipped to the Group’s Chinese associate. This payment represents the Group’s final anticipated contribution to the Chinese associate.


Directors’ responsibility statement

The Directors confirm that these Interim Condensed Consolidated Financial Statements have been prepared in accordance with International Accounting Standard 34, ‘Interim Financial Reporting’, as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

  • an indication of important events that have occurred during the first six months and their impact on the condensed set of consolidated financial statements; and
     
  • a description of the principal risks and uncertainties for the remaining six months of the financial year; and
     
  • material related-party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report and Accounts.

The Directors of Vectura Group plc are listed in the Annual Report and Accounts for 31 December 2017, with the exception of the following changes in the period:

  • Anne Whitaker was appointed as Independent Non-Executive Director on 1 June 2018; and
     
  • Andrew Derodra resigned as Chief Financial Officer on 31 July 2018

A list of current Directors is maintained on the Vectura Group plc website: http://www.vectura.com/company/leadership/

By order of the Board

James Ward-Lilley
Director

10 September 2018


Independent review report to Vectura Group plc

Conclusion 
We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises of a Condensed consolidated income statement, Condensed consolidated statement of other comprehensive income, Condensed consolidated balance sheet, Condensed consolidated statement of changes in equity, Condensed consolidated cash flow statement and the related explanatory notes.

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules (“the DTR”) of the UK’s Financial Conduct Authority (“the UK FCA”).   

Scope of review 
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.   

Directors’ responsibilities 
The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

The annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU.  The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU 

Our responsibility 
Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA.  Our review has been undertaken so that we might state to the company those matters we are required to state to it in this 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 for our review work, for this report, or for the conclusions we have reached. 

Adrian Wilcox
for and on behalf of KPMG LLP 
Chartered Accountants 

15 Canada Square
Canary Wharf
London
E14 5GL
United Kingdom

10 September 2018           

Tuesday, September 11, 2018 - 08:08