Financial review

It all adds up

Summary

The Group ended the year with £64.1m of cash following the final repayment of £6.6m ($10m) to Royalty Securitization Trust (Paul Capital). Revenues of £40.1m (2008/09: £31.2m) were 29% higher than the previous year and the operating loss of £15.3m (2008/09: £20.9m), after deduction of £12.1m (2008/09: £12.1m) of non-cash amortisation and share option costs, has reduced by 27%. Loss after tax reduced by 39% to £10.2m (2008/09: £16.7m).

Revenue

Revenue includes fee income from royalties, product licensing, technology licensing, development fees and device sales.

Royalties increased by 9% to £13.6m (2008/09: £12.5m). ADVATE® royalties increased by 21% in the period to £9.8m (2008/09: £8.1m) and contributed 72% of the royalties generated in the year; 13% of this increase was due to increased product sales and 8% due to favourable exchange rate movements. ADVATE® sales are continuing to grow, with sales in 2009 increasing to $1.7bn, compared with sales of $1.5bn in 2008. Vectura receives a net royalty of under 1% at these high levels of cumulative annual sales. Extraneal® royalties were £2.9m, a 15% decrease from the previous year (2008/09: £3.4m). Extraneal® royalties are expected to continue to decline. The majority of the remaining royalties were generated from Adept® (£0.8m; 2008/09: £0.8m).

Product licensing revenues in the period were £8.8m (2008/09: £4.2m), of which £1m was released from deferred income and £7.8m related to milestones received during the year. Milestones were received from Sandoz for VR315 EU (£2.2m) and for VR315 US (£3.6m) in relation to progression of these programmes. A milestone of £4.5m ($7.5m) was received from Novartis in June 2009, following the start of a Phase III clinical trial and this is being recognised over a 21-month period, which is the expected duration of the clinical trial; £1.9m was recognised in 2009/10. The remaining £2.7m will be recognised in 2010/11. A further £5.1m ($7.5m) milestone was achieved in May 2010, triggered by the start of a Phase III clinical trial for QVA149. This milestone will also be recognised over a 21-month period.

Technology licensing revenues of £9.4m (2008/09: £6.1m) were high due to the early release of deferred income triggered by the conclusion of a licence agreement between Vectura and Boehringer Ingelheim for which cash had already been received in 2008/09. Deferred income recognised in the year relating to Boehringer Ingelheim was £7.3m. There is no deferred income relating to technology licensing to be released in future financial periods.

Pharmaceutical development services (PDS) revenues exceeded our expectations, generating £7.6m (2009: £6.6m) through higher demand for these services from both our current licensing partners and potential new partners for whom we are undertaking feasibility work. We expect these revenues to decline in the next financial year as we complete our work on some partnered programmes. Future PDS revenues will depend on the extent and nature of feasibility studies and new licensing deals as the development of inhalation products is a very specialist area, with partners frequently requiring Vectura's involvement in the continuing development of a product.

Device sales of £0.7m (2008/09: £1.8m) were low due to the high levels of stock held by customers at the start of the year and low levels of third-party product sales. Device sales are mainly generated on our Clickhaler® proprietary reservoir DPI device. Products approved for sale in this device include salbutamol (Asmasal®), beclometasone (Asmabec®), budesonide, formoterol and procaterol. We are actively exploring new territories for marketing these and other Clickhaler® products. Territories under consideration include China, where it is estimated that over 5% of the population suffers from asthma/COPD.

Gross profit

The gross profit in the year to 31 March 2010 was £36.6m, a £9.3m improvement on the prior year (£27.3m). Gross profit represents 91% of revenue (2008/09: 88%) with the improvement arising from the increased proportion of royalties and milestones earned during the year.

Research and development

Total investment in research and development was £36.4m, a 13% increase on the prior year (£32.3m). Research and development costs primarily include clinical trial costs, salary costs for scientists and scientific support staff, intellectual property costs, laboratory running costs and depreciation. We expect our investment in this area to increase as some of our key products and devices move to late-stage development, with 2010/11 investment likely to be 10% in excess of the current year.

Other administrative expenses

Other administrative expenses for the period were £3.4m, a 6% increase on the previous year in line with the increase in Group activities.

Investment income

Investment income fell to £0.6m (2008/09: £3.6m) for the year as the Bank of England base interest rate reduced from a high of 5% in 2008/09 to remain at 0.5% throughout 2009/10. The Board operates an investment policy under which the primary objective is to invest in a diverse portfolio of low-risk cash or cash equivalent investments to safeguard the principal. These investments do not offer above-market rates of interest.

Loss after taxation and loss per share

The loss for the period after taxation reduced 39% to £10.2m (2008/09: £16.7m), giving a reduced loss per ordinary share of 3.2p (2008/09: 5.2p).

Non-current assets

Non-current assets were £95m, compared with £106.1m on 31 March 2009 and included goodwill (£49.6m), intangible assets (£41.6m) and property, plant and equipment (£3m). The decrease in the non-current assets is mainly due to amortisation of the intangible assets.

Financial liability

The financial liability to Royalty Securitization Trust in respect of a loan secured against US dollar denominated royalty streams had been fully paid at 31 March 2010, with the final payment of £6.6m ($10m) paid during the year. The exchange gain of £0.3m recorded in the year on this liability is due to the strengthening of sterling against the US dollar.

Deferred income

Deferred income relates to milestones received in cash but not yet recognised as revenue. The £2.7m of deferred income in the balance sheet at 31 March 2010 will be recognised as revenue in 2010/11. This relates to the balance of the £4.5m milestone received from Novartis for the start of the Phase III clinical trial of NVA237.

Cash flow

The net cash outflow from operating activities in the year was £3.8m (2008/09: £0.7m). After investing and financing activities, the net cash outflow was £9.9m (2008/09: £4.8m), which included the £6.6m ($10m) payment to Royalty Securitization Trust. At 31 March 2010, Vectura had cash and cash equivalents of £64.1m (31 March 2009: £74m).

Foreign exchange rates

The following foreign exchange rates were used during the year:


Anne Hyland
Chief Financial Officer

6 June 2010

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