2020 Interim Results     

- Vectura reports 2020 financial performance on-track and demonstrates progress on strategy execution with 12 new CDMO deals signed year to date -  

Chippenham, UK – 15 September 2020: Vectura Group plc (LSE: VEC) ("Vectura”, “the Group", “the Company”), an industry-leading specialist inhalation CDMO, today announces its unaudited Interim Results for the six-months ended 30 June 2020.

Financial summary

Operational highlights

• Executing on strategy to become an industry-leading inhalation CDMO
  • New Business Development team now established with presence in East and West Coast US, Europe and UK
  • 4 New CDMO contracts signed, with a further 8 signed since the period end; £3m-£5m revenue impact, expected in H2 2020
  • Operational transformation continues throughout COVID-19 pandemic
• Resilient base business performance with no disruption to customer supply chain, despite COVID-19 pandemic
• Progress across co-development pipeline
  • Approval of Enerzair^® Breezhaler^® in Japan triggered $1.25m milestone recognised in H1 2020; post period approval of the product in Europe triggered a further $5.0m milestone to be recognised in H2 2020
  • Potential approval of generic Advair^® programme (VR315 (US)), partnered with Hikma, in H2 2020

Financial highlights

• Total revenue of £89.7m, 2.2% down versus prior period (H1 2019: £91.7m)
  • Product supply revenue growth of 2.0% to £55.4m, driven by flutiform^® product supply revenues of £49.7m, up 2.7% (H1 2019: £48.4m)
  • Development services revenues down 29.6% to £5.0m, reflecting phasing of development milestones; revenues expected to be second half weighted with contribution from new CDMO revenues
  • Royalties of £29.3m down 3.3% versus prior period (H1 2019: £30.3m), impacted by market conditions
• Gross profit of £44.8m down 13.7% (H1 2019: £51.9m), impacted by revenue mix and one-off costs to improve Breelib^™ manufacture
• Progressive reduction in R&D¹ costs, down 29.3% to £12.8m (H1 2019 restated: £18.1m), with reported R&D spend focused on co-development programmes and technology platform investments
• Operating profit of £2.9m (H1 2019: £14.1m loss) as a result of a lower amortisation charges arising from asset impairments in 2019 (notably VR647) and extension to certain flutiform^® Japan patents
• Adjusted EBITDA² of £23.1m, down 8.0% (H1 2019: £25.1m), reflecting decline in gross profit, partially offset by reduction in costs
• Strong liquidity maintained with closing cash and cash equivalents of £81.9m (2019: £74.1m), following a capital return of approximately £9.2m in H1 2020
• New presentation of Income Statement in line with CDMO peers, with support costs, previously dedicated to R&D, now reported under ‘General and administrative’

Commenting on the results, Will Downie, Chief Executive Officer of Vectura, said:
"I am pleased to report that financial performance for 2020 is on-track, with our base business proving resilient in the face of wider challenges posed by the Coronavirus outbreak. We are continuing to execute on our inhalation CDMO strategy and have signed 12 new deals to date, revenue from which will begin to feed through in the second half of the year.

“We welcomed the recent approval of Novartis’s Enerzair^® Breezhaler^® (QVM149) in both Europe and Japan, and VR315 (US) remains under review by the FDA with potential approval and launch in the second half of the year. Clearly there are still uncertainties related to the current pandemic situation, but with measures in place to mitigate risks, combined with a positive outlook for our inhaled CDMO business, we are confident 2020 will be another year of strong delivery for Vectura.”

Analyst webcast and conference call today
Vectura will present its Interim Results via live webcast today from 9.30am to 10.30am BST. There will be a simultaneous live conference call.

The live webcast and the presentation slides can be accessed on Vectura's website: https://www.vectura.com/investors/presentations-and-webcasts

Dial-in details are:

Participant local dial-in: +44 (0) 207 192 8338

Participant free phone dial-in: +44 (0)800 279 6619

Participant code:  8899744 

- Ends-

For more information, please contact:
Vectura Group plc
Elizabeth Knowles - VP Investor Relations                          +44 (0)7767 160 565
David Ginivan - VP Corporate Communications                  +44 (0)7471 352 720

Consilium Strategic Communications                             +44 (0)20 3709 5700
Mary-Jane Elliott / Sue Stuart / David Daley

About Vectura
Vectura is a provider of innovative inhaled drug delivery solutions that enable partners to bring their medicines to patients. With differentiated proprietary technology and pharmaceutical development expertise, Vectura is one of the few companies globally with the device, formulation and development capabilities to deliver a broad range of complex inhaled therapies. 

Vectura has eleven key inhaled and eleven non-inhaled products marketed by partners with global royalty streams, and a diverse partnered portfolio of drugs in clinical development. Our partners include Hikma, Novartis, Sandoz (a division of Novartis AG), Mundipharma, Kyorin, GSK, Bayer, Chiesi, Almirall, and Tianjin KingYork.

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

Forward-looking statements
This press release contains forward-looking statements, including statements about the 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: 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.

Operational Review

Progress against our strategy
Through the execution of our strategy, we are building a market-leading company in the inhalation contract development and manufacturing organisation (CDMO) space. Globally, the CDMO market is growing at a rate of c.7% per annum, a rate of growth which slightly outpaces the growth of the pharmaceutical sector as a whole, reflecting the ongoing shift toward increased outsourcing.⁴

Our global Business Development team is now established, with a presence in the East and West Coast of the United States as well as in Europe and the United Kingdom. Led by Mark Bridgewater, our newly appointed Chief Commercial Officer, the Business Development team has continued to engage with customers and potential customers through digital communication channels, despite the travel restrictions in place as a result of COVID-19. Supporting business development activities, a number of marketing and communications initiatives have been delivered to further raise our profile as an inhalation CDMO including digital advertising, a new website, scientific webinars and a thought leadership and media programme.      

As a result of these initiatives, the number of customers in the deal funnel has grown more than three-fold since December 2019, and we are now in an active dialogue with more than fifty customers. Reflective of wider market trends, approximately 90% of the opportunities in the deal funnel are for small and medium-sized companies, with approximately 70% of the opportunities for pre-Phase II programmes across multiple disease areas.

During the first six months of 2020, we signed four new deals ranging from pre-clinical to Phase I programmes, delivering across a broad range of client needs, with a further eight deals signed post-period. The breadth of the deals signed demonstrates the applicability of our unique inhalation expertise beyond the larger indications such as Asthma and Chronic Obstructive Pulmonary Disease (COPD).  Two of the deals signed are for the treatment of asthma and COPD, with the other programmes addressing a range of indications, including specialist respiratory diseases⁵, COVID-19, and prevention of postpartum haemorrhage. 

Of the 12 deals signed, nine are feasibility programmes which may lead to full development deals in the event of a successful outcome. One of the deals, signed with Aerami Therapeutics for development of inhaled imatinib, is a full development deal, which includes potential licensing milestones and royalties in addition to services based revenues.  Inhaled imatinib is a former Vectura proprietary pipeline asset.

Whilst new CDMO deals did not make a material contribution to H1 2020 revenue, we anticipate that the new deals signed will contribute between £3m-£5m in 2020, to be recognised in the second half of the year. We are pleased with the progress made so far, which reinforces our confidence in the attractiveness of Vectura’s inhalation platform in the CDMO market.

Our operational and business process transformation, led by Sharon Johnson, our newly appointed EVP – Delivery Management, and other members of the Executive Leadership Team, has also continued throughout the pandemic. Work has focused on transforming the core business processes that support the customer experience, from initial quote through project to delivery and revenue recognition. In addition, a number of key hires have been made to further enhance Vectura talent in both front and back office functions.

Resilient base business
The focus on growing CDMO revenues is underpinned by a resilient base business, with performance on-track for a positive 2020. We continue to expect 2020 revenue to be second half weighted, with the potential approval of VR315 (US), our generic Advair^® programme partnered with Hikma, in H2 2020, and incremental development revenues from both legacy and new deals. 

Overall reported revenue of £89.7m for the six-months ended 30 June 2020 is 2.2% lower than the prior period (H1 2019: £91.7m), with growth in product supply revenues offset by a decline in development revenues, reflecting the phasing of development revenues, and a decline in royalty and other marketed revenues versus the prior period.

Product supply revenues grew 2.0% to £55.4m in H1 2020, led by flutiform^® which grew by 2.7% versus the prior period. 

flutiform^® (Mundipharma, Europe and Rest of world (excl. North America) / Kyorin, Japan) for the treatment of asthma has continued to perform well in the competitive asthma ICS/LABA market ex-US, generating total in-market sales of €134.3m (constant exchange rates 'CER') during H1 2020, up 5.6% in value and up 7.0% in volume compared to the prior period.^6,7 

• In Europe, the highly competitive and genericised ICS/LABA market grew by 6.8% in volume terms during the first six-months of 2020.⁷ This is in contrast to 2019 performance where market volumes grew by 1.9%.⁷ The increased growth in the ICS/LABA market during the first half of 2020 is thought to be the result of changing prescribing and pharmacy stocking behaviours during the COVID-19 outbreak. 
• Against this backdrop, flutiform^® continued to outperform the wider European ICS/LABA market, growing volumes by 12.1% compared to the prior period.⁷ flutiform^® volumes grew 5.3% in Europe in 2019.⁷  
• In Japan, flutiform^® volumes grew by 6.2%, versus market volume growth of 3.6%, compared to the prior period.^6,7
• flutiform^® remains at an early stage of its lifecycle in rest of world territories and it declined by 9.0% in volume compared to the prior period, with in-market sales of €13.4m (CER).^6,7  Rest of world territories are more reliant on tender driven markets and therefore growth is more volatile than the European and Japanese markets. 

Following the strategic shift to become an inhalation CDMO, Vectura has updated the presentation of expenses on the Income Statement to better reflect the activities and priorities of the new organisation. Under the new presentation, which is intended to aid comparison against other CDMO companies, R&D costs comprise the costs of delivering existing co-development programmes, most notably VR2081 with Sandoz and the generic Ellipta^® co-development agreement with Hikma which continue to progress well, and the cost of investment in platform technologies to support new business growth.  On a like-for-like basis, R&D has decreased by 29.3% to £12.8m (H1 2019 restated: £18.1m), reflecting the termination of investment in VR475, VR647 and the broader Vectura enhanced therapies pipeline in 2019. Further details regarding the change in accounting policy are provided in the Financial Review.

With increasing product supply revenues and lower development and royalty revenues, alongside one-off costs to improve Breelib^™ manufacture, the Group’s gross margin has reduced to 49.9% (H1 2019: 56.6%). Adjusted EBITDA² margin of 25.8% was 1.6 percentage points lower than the prior period (H1 2019: 27.4%) as continued strong cost management supported operational leverage.

Guidance and outlook
The Group expects to maintain momentum on the execution of its services based strategy during the second half of 2020. Revenues from existing co-development contracts are expected to be broadly similar to 2019, with the majority being milestone based and recognised in H2 2020. Revenue from newly signed CDMO contracts is expected to begin to complement these revenues in the second half of the year, with revenue in the range of £3m-£5m expected in H2 2020.

Approval of VR315 (US) H2 2020 would trigger milestones to Vectura of $11m, with a mid-teen percentage royalty on net sales of the product. We expect all other royalties and marketed revenues in H2 2020 to be broadly in-line with H2 2019 (H2 2019: £21.6m).

Whilst continued growth of flutiform^® in-market partner sales is expected in 2020, Vectura product supply revenues for the full year are expected to be in the range £92m-95m (2019: £101.4m). The Group expects flutiform^® underlying gross margin to be within the range of 30-32% for 2020, lower than 2019 as a result of dose presentation mix changes, pricing pressure in Japan and rest of world, and an expectation of additional compliance costs following the UK’s exit from the European Union.

Under the Group’s revised accounting policy, R&D investment for 2020 is expected to be within the range of £23m-£26m.

The Group currently expects to incur minimal cash outflows in relation to exceptional costs in 2020.

R&D costs associated with co-development agreements are expected to decline in-line with the progression and completion of co-development programmes. The Group will continue to invest in technology platforms over the medium and longer term. The deployment of existing resources to support new CDMO contracts, good cost management and a focus on simplifying the Group’s operating model are all expected to have a positive impact on the Group’s operational leverage over the medium term.

COVID-19
Protecting the health, safety and wellbeing of our employees and ensuring the continued supply of important medicines, such as flutiform^®, to our partners and ultimately to patients, have remained Vectura’s top priorities throughout the COVID-19 outbreak. 

Informed by robust crisis management and business continuity plans, our laboratories and manufacturing site have remained open and operational throughout national lockdowns, with social distancing and stringent hygiene protocols in place to protect employees. Where possible, extensive home working utilising digital platforms has been encouraged, and as a consequence 98% of our employees have been able to work throughout the crisis, either onsite or remotely.  

Our ‘COVID-19 Management Team’ has worked to ensure that our employees feel supported and a number of new health, safety and well-being initiatives have been rolled-out across the Company. The team has communicated regularly and proactively with employees sharing the latest guidance and Vectura policies.  We would like to thank our employees for their continued diligence, agility and commitment throughout this difficult time.

From an operational perspective, product supply activities have continued to progress normally with no interruption of supply to our partners, and we have not noted any signals of diminished demand from supply partners. We continue to work closely with key suppliers to identify and mitigate potential supply chain disruptions, and closely monitor inventory levels to ensure that continuity of supply can be maintained.

Virtual marketing and business development activities have continued through-out the first six-months of the year, and despite travel restrictions in place, we have made significant progress in expanding our business development funnel. 

Whilst the situation continues to evolve, the Group is now in the ‘return’ phase of its four-step business continuity plan, with a phased increase in on-site working now underway. As we move through the next phases of our plan, we will consider the learnings taken from the COVID-19 pandemic and reflect these in our long-term plans to shape an even stronger and more agile organisation.

With a strong balance sheet, an undrawn £50m Revolving Credit Facility (‘RCF’) and minimal corporate debt, Vectura continues to be a resilient business in the face of the risks posed by COVID-19.  

The Group’s current RCF facility expires in August 2021. The Group intends to renew this facility and discussions are being finalised.

Return of capital
The Board announced a capital return to shareholders of approximately £60m in September 2019, to be made up of a £40m special dividend, and two tranches of share buyback, each of £10m. 

The special dividend of approximately £40m in aggregate, representing 6 pence per ordinary share, was paid out to shareholders on 25 October 2019. The first £10m tranche of the share buyback commenced in October 2019; approximately £3.5m was completed as at 31 December 2019, with the balance completed in Q1 2020.

In May 2020, the Group entered into arrangements with Numis Securities Limited to execute the second £10m tranche of the share buyback. As at 14 September, £9.0m of this second share buyback tranche had been completed. The remaining £1.0m is expected to be completed in 2020.

Leadership and Board changes
To support the Group’s ambition to become the market-leading company in the CDMO space, two key leadership roles were appointed to the Executive Leadership Team in 2020. Sharon Johnson joined Vectura as EVP - Delivery Management, and Mark Bridgewater joined as Chief Commercial Officer.  

Neil Warner stepped down as Non-Executive Director and Chairman of the Audit Committee on 27 May 2020. The Board would like to thank Neil for his significant contribution to Vectura and his commitment to the Group during his tenure. The role of Audit Committee Chair has transitioned to Juliet Thompson who has been a member of the Committee since December 2017. Reflecting Juliet’s new role as Audit Committee Chair, Kevin Matthews has taken on the role of Chair of the Remuneration Committee, although Juliet remains on the Committee in her role as Non-Executive Director. 

Post period, on 7 July 2020, Kevin Matthews became a member of the Audit Committee.

Brexit
The Group has closely reviewed the potential risks associated with Brexit. The Board believes Vectura has undertaken a robust approach to ensuring any impact within the Group's control is mitigated as far as possible. 

Mitigating activities have included continued close working with our supply chain network and partners, establishing a new EU legal entity and transferring our notified regulatory body for our device assets.

GSK Litigation
Following a US Jury trial in May 2019, Vectura was awarded damages and estimated ongoing royalties amounting to approximately $200m, based upon the application of a 3% royalty rate to US sales of GSK infringing products for the period August 2016 to the expiration of Vectura's patent in mid-2021. Interest will also accrue on damages at the Treasury bill rate, compounded annually. No amounts have been recognised in the H1 2020 results in respect of these damages.

GSK has initiated an appeal in the US, with a hearing currently scheduled for 5^th October 2020. Based on the present appeal briefing schedule, a decision is likely to be received before the end of Q1 2021. 

Financial review

Following the Group’s shift in business model to a contract development and manufacturing organisation (CDMO), the Board has reviewed the presentation of the Income statement to assess whether it continues to provide reliable and relevant information about the effects of transactions, other events or conditions on the financial performance of the Group.

The previous Income statement presentation was relevant when the Group’s primary focus was on developing, or co-developing, a proprietary product pipeline of respiratory therapies or complex generics.

However, with the shift in business model, and the ceasing of investment in the development of proprietary respiratory therapies, the Board determined that it was appropriate to update the Group’s accounting policy relating to the categorisation of Research and development costs (R&D) and General and administration costs (G&A) to be more in line with peers and to provide a better understanding of the Group’s performance. As a result of this change the costs of support functions that were focused on supporting the Group’s R&D efforts under its previous strategy, and therefore reported as an R&D expense, are now reported within G&A expenses, reflecting the fact that these functions are focused on supporting a wider number of business priorities. The impact of the changes in accounting policy are detailed in note 13 to the interim financial statements.

This change is intended to improve the relevance of our financial statements by enabling users of the accounts to better interpret the Group’s performance versus CDMO peers. The scope of R&D, as now defined, will also be more closely aligned to Group decision making around investments, which are intended to provide longer term returns through innovation, differentiation and the creation of intellectual property.

The focus on growing CDMO revenues is underpinned by a resilient base business, with performance on track for a positive 2020. We continue to expect 2020 revenue to be second half weighted with potential approval of VR315 (US), our generic Advair^® programme partnered with Hikma, in H2 2020, and incremental development revenues from both legacy and new deals. 

Product supply revenues grew 2.0% in H1 2020, led by flutiform^® which grew by 2.7% versus the prior period. Royalty and other marketed revenues fell by 3.3% due to market conditions. Development revenues declined by £2.1m, due to the non-reoccurrence of certain licensing income recognised in H1 2019. Taken together, overall revenue declined by 2.2% versus H1 2019.

flutiform^® product supply delivered a gross margin of 36.6% in H1 2020, contributing £18.2m to gross profit (H1 2019: 34.5% gross margin, £16.7m gross profit), helped by a one-off supplier credit of £0.8m. However, a shift in revenue mix towards lower margin revenue streams, including strong growth of the oral development services business which to date contributes a negative margin, and one-off costs incurred to improve Breelib^TM manufacturing performance, have diluted overall gross margin to 49.9% (H1 2019: 56.6%). Royalty and milestone payments associated with VR315 (US) would contribute to an improved gross margin performance in the second half of the year.

R&D expenses declined 29.3%, mainly due to the reduction in costs associated with VR475 and VR647, as the Group ceased investment in its own proprietary product pipeline. The focus of R&D investment is now on existing co-development agreements, principally generic Ellipta^® (Hikma) and VR2081 (Sandoz), and investments in proprietary device and formulation technology platforms.

Selling and marketing costs increased in line with the build out of the Business Development function and increased promotional activities. General and administrative expenses increased 10.7% primarily due to increased share scheme costs relating to new senior hires, and the weakening of UK sterling versus the Swiss franc.

Adjusted EBITDA, a measure of underlying performance, decreased by 8.0% to £23.1m (H1 2019: £25.1m), despite the weakening of UK sterling against the US dollar contributing an additional £0.4m to adjusted EBITDA in the first half of 2020. The Group ended the period with an operating profit of £2.9m (H1 2019: loss of £14.1m) helped by significantly lower amortisation charges compared to the prior period.

1.  Revenue

1.1 Product supply revenue
The Group generates significant revenues from the supply of finished or semi-finished products, largely manufactured by third-party suppliers, to commercial distribution partners. The costs incurred to deliver these revenues are reported under cost of sales. These revenues grew by 2.0% in H1 2020, driven by positive volume demand from partners for flutiform®.

flutiform^® 
flutiform^® product supply revenues grew to £49.7m, a 2.7% increase versus the prior period, primarily due to higher in-market sales growth in Japan. flutiform^® continued to perform well in the competitive asthma ICS/LABA market ex US, with total in-market sales up 5.3% on a constant exchange rate ‘CER’ basis, compared to the prior period, with volume growth of 7.0%⁸. 

flutiform^® gross margin was up 2.1 percentage points compared to H1 2019 primarily due to a one-off supplier credit relating to 2018 and 2019. Without this credit, the margin would have been similar to the same period in 2019, despite increased price pressure in Japan and Rest of World.

We expect the full year flutiform^® margin to be within the guidance range of 30-32% as a result of dose presentation mix changes, pricing pressure in Japan and rest of world, and an expectation of additional compliance costs following the UK’s exit from the European Union.

The Group also earns royalties on flutiform^® sales made by Kyorin in Japan. Including these royalties, total revenues for flutiform^® were £52.9m (H1 2019: £51.4m).

Other inhaled products
The Group earns revenue from the supply of GyroHaler^® and GyroPLUS^® device components to Sandoz for use in the AirFluSal^® and AirBuFo^® Forspiro^® products. Revenues are also earned from the supply of FOX^® devices to Bayer for use in their Breelib^TM product. In total this revenue stream contributed £1.3m, a decrease of 35.0% compared to the prior period. 

Non-inhaled products
The Group’s oral manufacturing facility in Lyon, France, generates product supply revenues from sales of oral products to partners. The site has focused efforts on bringing new manufacturing contracts to the site to help mitigate the volume declines and operating losses from older products.   In H1 2020, product supply revenues from Lyon were £4.4m, a 12.8% increase compared to the prior period (H1 2019: £3.9m). 

Some of the products manufactured at the Lyon site also earn the Group royalties, reported separately.

1.2 Royalty and other marketed revenues
The Group also generates revenues from products marketed by partners which incorporate the Group’s intellectual property. These revenues typically comprise royalties, sales-based milestones, and product approval and launch milestones. These revenues reflect financial returns from historic R&D investments in co-development programmes and intellectual property and are earned without further material costs being incurred by the Group. 

Vectura royalty revenues for Ultibro^® and Seebri^® Breezhaler^® are derived from a percentage of net sales reported by Novartis and are also subject to certain contractual adjustments. Royalties from Ultibro^® and Seebri^® Breezhaler^® remained virtually flat in 2020, although declined by 4.9% on a CER basis.

In respect of GSK’s Ellipta^® products Vectura has recognised the capped annual royalty of £9.0m in H1 2020.

flutiform^® royalties are predominantly received in respect of sales made in Japan. Strong in-market performance by Kyorin drove value and volume growth in Japan, up 6.2% (CER) and 6.2% respectively. As a result, royalties from Japan grew by 6.7% (CER 2.3%), to £3.2m (H1 2019: £3.0m).

Non-inhaled royalties comprise royalties earned on oral and other non-inhaled products, which incorporate the Group’s intellectual property. Many of these products are manufactured at the Group’s production facility in Lyon.

Total non-inhaled royalties decreased by 20.5% primarily due to market conditions. The Group remains eligible to receive a non-patent dependent $32m sales milestone when twelve-month net sales of EXPAREL^® reach $500m on a cash received basis. In the twelve months ended 30 June 2020 net product sales of EXPAREL^® were $392.7m.

Other marketed revenues of £1.9m include a £1.0m ($1.25m) milestone received on approval in June of QVM149 (Enerzair^® Breezhaler^®) for use in Japan. In July, Enerzair^® Breezhaler^® was also approved for use in Europe which earned the Group a $5m milestone, which will be recognised in H2 2020. The Group will receive low single-digit royalties on net sales of Enerzair^® Breezhaler^® in both Japan and Europe.

Other marketed revenues also include a £0.9m milestone received on the anniversary of the first European launch of Breelib^TM. Under the terms of its agreement with Bayer, the Group is eligible to receive a further €1.75m in milestones spread over the next three years, paid annually.

In relation to new product launches, the Group will earn an $11m milestone upon approval of VR315 (US) plus a mid-teen royalty on net sales of the product, with potential approval in H2 2020.

1.3 Development revenues

The Group also earns revenues from contracted development activities provided to clients and partners. These activities draw on the Group’s device and formulation capabilities to help deliver commercially attractive inhalation products.

Historically these contracts have primarily been co-development agreements, under which the risks, costs and rewards of product development are materially shared between the parties. Under these types of agreements, Vectura would typically receive a series of cash flows in consideration for a variety of activities. These cash flows would often comprise an upfront fee as consideration for a licence to access intellectual property (licensing revenues) and milestone payments for specific clinical or other development-based outcomes or fees billed directly for work performed (inhaled development services).

Revenues are recognised when contractual performance obligations are deemed to have been met, with the profile of these revenues varying by programme and over time. Under co-development agreements revenues would normally be structured to cover the Group’s costs during the development phase, with the majority of returns earned later through the payment to the Group of approval and launch milestones, and royalties.

Given their co-development nature, costs to deliver these revenues continue to be reported under research and development expenses in the consolidated Income statement.

Following a shift in business model in 2019, the Group is focused on generating revenues from service-based (‘CDMO’) contracts, where the material risks, costs and rewards of development remain with the client. Under these contracts, revenues to Vectura will be normally derived from fees billed directly for work performed, including a profit margin, rather than milestone payments which are contingent on specific clinical or development-based outcomes. The costs to generate these ‘fee-for-service’ based revenues are reported under cost of sales in the Income statement.

Contracts may still involve a client paying to access the Group’s device and/or formulation intellectual property. This may result in upfront licence fees, milestones and royalty payments. These licensing revenues will be reported under development revenues where they relate to the development phase. Any subsequent approval, launch or sales milestones, or royalty payments, relating to this licence will be reported as Royalty and marketed revenues.

Licensing revenues

Enerzair^® Breezhaler^® (QVM149)
In May 2019, the Group recognised a $2.5m (£1.9m) milestone under an exclusive licensing agreement with Novartis AG following EU Regulatory Authorities acceptance of a valid Marketing Authorisation Application (MAA) made by Novartis for its Enerzair^® Breezhaler^® (QVM149) product.

As detailed above the Group has received further milestones related to Enerzair^® Breezhaler^® approvals in Japan and Europe, which are recognised within Royalty and other marketed revenues.

Development services

Inhaled development services
Overall inhaled development services revenue has decreased primarily due to lower activity related to the development of Mundipharma’s k-haler^® product. Inhaled development revenues are expected to be weighted to the second half of 2020, as new CDMO contracts begin to deliver revenues, and the expected payment of certain milestones related to the progression of the generic Ellipta^® and VR2081 programmes. In H1 2020, four new CDMO contracts were signed, and a further eight have been signed since the period end. New CDMO deals did not make a material contribution to H1 2020 revenue, however we anticipate that the new deals signed will contribute between £3m and £5m in 2020, to be recognised in the second half of the year.

Non-inhaled development services
The Group earned £1.4m in H1 2020 (H1 2019: £0.8m) from the provision of development services by Skyepharma SAS (Lyon, France) related to oral products. Costs to deliver these revenues are reported under cost of sales.

2. Research and development (R&D) expenses
Following a voluntary change in accounting policy, support function costs, including HR, Finance and IT that were previously considered as dedicated to R&D, are now included within general and administrative costs reflecting that these functions are now supporting a broader range of activities across the Group. Costs for H1 2019 have been restated in line with this new policy.

R&D expenses declined 29.3%, mainly due to the reduction in costs associated with VR475 and VR647. In addition as the focus of the Group has moved towards generating revenues from service based contracts, where the material risks, costs and rewards of development remain with the client, the Group ceased investment in its own proprietary product pipeline of respiratory therapies in 2020.

The scope of R&D expenses comprises expenditure relating to:

1. Co-development R&D – this category is the equivalent to the previous ‘Partnered’ category and represents R&D expenses related to co-development agreements. These expenses are principally funded by milestone revenues earned from the partner, which may be contingent upon programme progression.
    
2. Technology platforms – this category represents development and improvement of the Group’s own proprietary device and formulation technologies. This investment provides the basis for generating future partnering and licensing revenue opportunities.

Co-development R&D and technology platforms
The majority of H1 2020 co-development R&D costs are focused on the generic Ellipta^® (Hikma) and VR2081 programmes. There has been a reduction in spend versus the same period last year driven by work on VR315 (US) and k-haler® reaching conclusion.

The Group has increased investment in technology platforms in H1 2020 compared to the prior period, including additional investments in the innovative FOX^® handheld nebuliser, its dry-powder device platforms and formulation technologies. These investments were partially offset by reductions in Group investment in non-inhaled processes and capabilities, which are now being leveraged to generate increased oral development revenues.

Proprietary product pipeline programmes
In H1 2019, expenditure on the Group’s proprietary product pipeline primarily related to VR325 and VR647, and was previously presented as ‘pre-partnered’ R&D. From the end of 2019, all investment in this pipeline has ceased, and the category of ‘pre-partnered’ R&D will no longer be used for presentation of the Group’s results.

3. General and administrative (G&A) expenditure
Following the voluntary change in accounting policy, support function costs including HR, Finance and IT that were previously considered as dedicated to R&D are now included within general and administrative costs (G&A). This change reflects that these functions are now supporting a broader range of Group activities. Costs for H1 2019 have been restated in line with this new policy.

The 10.7% increase in G&A is primarily due to increased non-cash share scheme compensation charges relating to the recruitment of the senior team (H1 2020: £2.3m; H1 2019: £1.6m) and the weakening of UK sterling versus the Swiss franc.

4. Selling and marketing expenditure
Selling and marketing expenses have increased versus H1 2019 due to the build out of the new business development team in Europe and North America and increased promotional activities. 

5. Other operating expenditure and income
Other operating income includes R&D tax credits of £0.5m (H1 2019 £0.5m) and a £1.0m gain recognised on the receipt of an asset as part of the terms of the termination of a customer agreement.

6. Amortisation and impairment
The Group recognised a £12.2m charge for amortisation and impairment of intangible assets, compared to £30.5m in the prior period.  The lower charge in H1 2020 is largely the result of lower flutiform^® amortisation following an extension to certain Japanese patents (H1 2020: £9.5m, H1 2019: £19.1m), the full amortisation (£6.6m) of the GSK Ellipta^® intangible asset in H1 2019, and the amortisation of VR647 in H1 2019 (£1.6m) which was then fully impaired in H2 2019.

7. Exceptional items                                                                 
Exceptional items of £0.8m in H1 2020 (H1 2019: £2.6m) includes £0.6m of legal fees from proceedings against GSK for the enforcement of Vectura’s patents in respect of the Ellipta^® products. The Group currently expects minimal cash outflows in relation to exceptional costs in 2020.

8. Adjusted EBITDA
Adjusted EBITDA is a non-statutory measure that demonstrates the underlying performance of the Group. It is used by management and the Board to monitor the Group’s performance over time.

As shown in note 5 to the condensed consolidated financial statements, adjusted EBITDA is calculated by adjusting the operating profit for depreciation, amortisation and share-based compensation, and for items that are reported as exceptional items. These adjustments are not affected by the Group’s change in accounting policy or re-presentation of the Income Statement.

Adjusted EBITDA of £23.1m decreased by 8.0% compared to the prior period primarily due to the reduction in gross profit, partially offset by reductions in R&D costs.

9. Net finance income
Net finance income of £0.3m in H1 2020 (H1 2019: £0.7m) decreased primarily due to foreign exchange.

10. Profit/(Loss) before tax
The Group’s statutory profit before tax of £3.2m has improved from a loss of £13.4m in H1 2019 largely as a result of the £18.3m decrease in amortisation and impairment of intangible asset charges.

11. Tax
The tax charge arises due to the profit mix of the group whereby the Group’s profits which are generated primarily in Switzerland, are offset by the losses in the UK against which there are currently no deferred tax assets recognised. The current tax charge remains consistent at £2.9m (H1 2019: £2.6m) whilst deferred tax credits have reduced to £1.3m (H1 2019: £2.8m) as a result of lower intangible amortisation and impairment.

12. Earnings per share
The Group has recognised a profit per share of 0.3p compared to a loss per share of 2.0p in H1 2019. The Group has made an operating profit for H1 2020, which is largely due to the decrease in amortisation and impairment charges.

13.  Foreign exchange exposure

The Group receives revenue and incurs expenses in a number of foreign currencies and, as such, movements in foreign exchange rates can materially impact the Group’s financial results.  Had foreign currency rates in 2020 remained constant with those of 2019, the Group’s reported adjusted EBITDA would have been approximately £0.4m lower.

As an indication, a 5% strengthening or weakening of sterling against the euro, US dollar and Swiss franc would have had an impact of between £1.5m and £1.7m on the Group’s adjusted EBITDA in H1 2020.

Balance sheet

Goodwill
The increase of £4.2m in goodwill to £166.4m at 30 June 2020 arises from foreign exchange gains upon revaluation of goodwill denominated in foreign currencies, primarily the Swiss Franc.

Intangible assets
The £2.9m increase in the carrying value of intangible assets is due to foreign exchange gains of £14.2m and other intangible additions of £0.9m, offset by amortisation of £12.2m.

Property, plant and equipment
The net book value of property, plant and equipment is £60.6m, £5.5m higher than at 31 December 2019. The key movements are £4.9m of depreciation offset by £3.7m of foreign exchange gains and £6.7m of additions. The additions include £2.3m of non-cash additions relating to the recognition of right-to-use property assets under IFRS 16, and the receipt of an asset from a partner.

Inventory
Inventory is £4.3m higher with approximately 90% of the £32.0m carrying value at 30 June 2020 attributable to flutiform^®.  The increase in inventories is driven by continued growth in flutiform^® volumes and the need to build strategic stocks for Brexit related risks, partially offset by a foreign exchange loss.  

Cash and liquidity
The Group ended the year with cash and cash equivalents of £81.9m (2019: £74.1m). Net cash outflows from financing activities in the period were £11.6m, of which £9.2m relates to the on-going £20.0m share buyback programme announced in September 2019. As at 14 September 2020 £1.0m of this programme remained to be executed.

Before deducting these cash outflows from financing activities, the Group generated £14.2m of free cash flow (H1 2019: cash outflow of £1.6m). Operating cash flow contributed £19.9m, with a further £8.0m cash inflow from the reimbursement of historical purchases of capital equipment made by the Group on behalf of a client as part of a co-development agreement. Capital expenditure in the period was £5.7m, and tax payments totalled £7.1m, £4.1m relates to a payment that was due to be paid in H2 2019 but was paid in H1 2020 due to a late request by the Swiss tax authorities.

Cash generated from operating activities was £19.9m in H1 2020 (H1 2019: £3.2m), compared to adjusted EBITDA for the period of £23.1m. The conversion ratio of adjusted EBITDA to operating cash narrowed in H1 2020 compared to the prior period largely due to a significant reduction in exceptional costs associated with GSK litigation, and a washing through of a number of adverse working capital effects in H1 2019. The reconciliation of adjusted EBITDA to operating cash is presented in the table below.

The Group has access to a £50.0m multi-currency revolving credit facility with Barclays Bank PLC and HSBC Bank PLC. This facility expires in August 2021 and remains undrawn. The Group intends to renew this facility and discussions are being finalised.

Risks and uncertainties

A new principal risk has been added to the Group’s risk register since the Annual Report and Accounts 2019 reflecting the current pandemic situation. This risk is characterised as “COVID-19 has a material adverse effect on VEC operations and financial results”. To date there have been no material adverse impacts of COVID-19 on the Group, the situation is constantly evolving and will be monitored as a principal risk. Refer to the Operational Review for detail on how the Group has responded and continues to respond to the pandemic.

In addition to the new risk there have been some minor updates to existing risks, to better articulate the risk profile of the Group as it evolves its business model towards being an inhalation CDMO. The principal risk “Failure to win new customer contracts for development services and execute these profitably” has now been separated into two principal risks “Failure to build the sales funnel and win sufficient new customer contracts with target profitability”, and “Failure to execute new CDMO customer contracts, profitably”.

The risk “Failure to develop the FOX^® nebuliser platforms to secure future growth in new customer contracts” has been expanded to now incorporate all technology innovation and platform development risk, and is now characterised as “Failure to progress technology innovation and develop robust, differentiated device and formulation platforms, including the FOX^® nebuliser platforms”.

Outside of these changes, there have been no significant changes 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 31 to 38 of the Annual Report and Accounts 2019.

By order of the Board

Paul Fry
Chief Financial Officer

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

*Comparative expenses have been restated due to a voluntary change in accounting policies, to reclassify certain costs from research and development expenses to general and administrative expenses. There was no impact on gross profit or operating profit before exceptional items, amortisation and impairment. Refer to note 13 for further details.

**Adjusted EBITDA is a non-IFRS measure comprising operating loss, adding back amortisation and impairment, depreciation, share-based payments and exceptional items. Refer to note 5 “Adjusted EBITDA”.

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

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

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

The accompanying notes form an integral part of these condensed consolidated financial statements. The condensed consolidated financial statements of Vectura Group plc were approved by the Board of Directors.

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

Notes to the condensed consolidated financial statements
for the six months ended 30 June 2020

1.         General information

Corporate information
Vectura Group plc (the “Company”) is a public limited company incorporated and domiciled in the United Kingdom. The registered office is One Prospect West, Chippenham, Wiltshire SN14 6FH.  The “Group” is defined as the Company, its subsidiaries and equity-accounted associates. These condensed consolidated interim financial statements (‘interim financial statements’) as at and for the six months ended 30 June 2020 comprise the Company and its subsidiaries (together ‘the Group’). The Group’s operations and principal activities are described in the Annual Report and Accounts 2019.

Basis of preparation

These 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 2019.

There are a number of amendments to accounting standards that become applicable for annual reporting periods commencing on or after 1 January 2020, but they do not currently have a material effect on the Group’s financial statements:

(a) Definition of Material – amendments to IAS 1 and IAS 8

(b) Definition of a Business – amendments to IFRS 3

(c) Revised Conceptual Framework for Financial Reporting

(d) Interest Rate Benchmark Reform – amendments to IFRS 9, IAS 39 and IFRS 7.

All accounting policies, and methods of computation, applied by the Group in these condensed consolidated interim financial statements are the same as those applied in its consolidated financial statements for the year ended 31 December 2019, except for those otherwise stated in the voluntary change in accounting policy as detailed in note 13.

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 note 12 for basis of preparation.

2.             Critical accounting areas of judgement and estimation

In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported figures. Actual results may differ from these estimates. The impact of COVID-19 on all accounting areas of judgement and estimation has been considered with the conclusion that the critical areas disclosed in the 2019 Annual Report and Accounts remain unchanged and no additional critical areas have been identified as a result of COVID-19.
3.             Revenue

Detailed analysis and commentary on revenue is provided in the Financial review.

In the six months to 30 June 2020, the Group recognised a milestone of $1.25m (£1.0m) for Enerzair^® Breezhaler^® (QVM149) following the approval for use in Japan and a Breelib^TM anniversary milestone of £0.9m (H1 2019: £1.3m) both within Royalty and other marketed revenues. In the comparative six months, a development milestone of £1.9m was recognised for QVM149 following the Novartis EU acceptance of the marketing authorization application.

Development revenues include £2.0m (H1 2019: £4.7m) for completed development service obligations and £3.0m (H1 2019: £2.4m) on partially completed development service obligations.

Disaggregation of revenues

In the following table revenue from contracts with customers is disaggregated by major product and service line and timing of revenue recognition.

4.             Research and development expenses

*Following the voluntary change in accounting policy, support function costs including HR, Finance and IT that were previously supporting R&D are now included within general and administrative expenses reflecting that these functions are now supporting all activities of the Group. Refer to note 13 for further details.

Due to the shift in strategy the 2019 restated R&D expenses have reduced from £18.1m in H1 2019 to £12.8m in H1 2020 as the focus of the Group has moved towards generating revenues from service based contracts, where the material risks, costs and rewards of development remain with the client, and investment in own proprietary product pipeline of respiratory therapies has ceased.

Historically the Group’s R&D expenses have been presented under two distinct categories: Partnered which represents expenditure to progress partner programmes and is funded by development revenues earned from the partner, and pre-partnered which reflects investments funded by the Group on programmes yet to be partnered, as well as investments in its own innovative proprietary technology platforms.

Following the shift in strategy, the Group will incur the following types of R&D expenses.

1. Co-development R&D – this category is the equivalent to the previous ‘Partnered’ category and represents R&D expenses related to co-development agreements. These expenses are principally funded by development revenues earned from the partner, which may be contingent upon the achievement of certain milestones.
2. Technology platform – this category represents investment in the Group’s own innovative proprietary device and formulation technologies. This investment provides the basis for generating future partnering and licensing revenue opportunities.

5.             Adjusted EBITDA

Adjusted EBITDA is a non-statutory alternative performance measure used by management and the Board to monitor the Group’s performance.

6.             Exceptional items

Exceptional items are presented whenever significant expenses are incurred or income is received as a result of events considered to be outside the normal course of business, where the unusual nature and expected infrequency merits separate presentation to assist comparisons with previous years.

Legal fees of £0.6m (H1 2019: £2.2m) relate to ongoing legal proceedings against GSK from the enforcement of Vectura’s patents in respect of the Ellipta^® products. Site closure costs arise from the decision to close the Group’s operating site in Gauting, Germany, by October 2020 and consists of share-based payment charges related to the retention of staff of £0.2m (H1 2019: £0.1m).  Prior year other exceptional items of £0.3m relate to final IFRS 2 charges for retention shares that were issued post the 2016 merger and vested on 22 September 2019. Exceptional costs are lower than in previous periods largely due to a significant reduction in exceptional costs associated with GSK litigation.

7.             Tax

The Group’s effective tax rate is a 50.0% charge (H1 2019: 1.5% credit) on the Group’s profit/(loss) before tax.

As a result of lower intangible amortisation, the Group’s net position before tax has increased to a small profit of £3.2m in H1 2020 (H1 2019: loss before tax of £13.4m) and deferred tax credits have reduced to £1.3m (H1 2019: £2.8m). With the current tax charge, payable on the Group’s profits in Switzerland, remaining consistent, the reduced deferred tax credits are no longer offsetting it to the same degree as previously resulting in a net tax charge in H1 2020. This net tax charge appears significant as a proportion of the profit before tax because the Group’s profits are close to breakeven, resulting in a large effective tax rate charge.

Fundamentally, the tax charge arises due to the profit mix of the Group whereby the Group’s profits, which are generated primarily in Switzerland are offset by the losses in the UK against which there are currently no deferred tax assets recognised.

The March 2020 Budget announced that the previously enacted UK corporation tax rate reduction to 17% would no longer come into effect and that the 19% UK corporation tax rate would be maintained. This is substantively enacted and therefore UK deferred tax assets and liabilities have been re-measured accordingly; the impact to the Group was not material.

A tax charge of £1.6m (30 June 2019: £0.2m credit) has been recognised in the condensed consolidated income statement. This represents the net effect of a current tax expense in the Group’s Swiss operations offset by deferred tax credits on the amortisation of acquisition accounting fair value adjustments. 

8.             Goodwill and other intangible assets

Goodwill at 30 June 2020 is £166.4m (31 December 2019: £162.2m). The movement in the current period relates to foreign exchange.

The net book value of other intangible assets at 30 June 2020 is £167.0m (31 December 2019: £164.1m). The increase in the carrying value of intangible assets of £2.9m primarily relates to the foreign exchange gains of £14.2m and other intangible additions of £0.9m, offset by the amortisation charge of £12.2m.

Intangible assets principally comprise flutiform^® and other marketed oral and topical products recognised on the Skyepharma merger in June 2016. These intangible assets are being amortised with reference to average applicable patent lives in the Group’s main territories.

Impairment assessment
For the purposes of interim impairment testing, the Group assesses whether any impairment triggers have arisen in the period. A trigger relating to a change in product mix in partner demand forecasts was identified for the flutiform® intangible asset and, therefore, for the Swiss CGU also. Hence, a full impairment test is required for both.

The impairment model for the Swiss CGU goodwill, as disclosed in note 15 of the Annual Report and Accounts 2019, has been reviewed and updated with the most recent cash flow forecasts. The carrying value of goodwill associated with this CGU was considered supportable, but with low headroom; and as such no impairment has been recognised. Given the low headroom of the Swiss CGU, any reasonable adverse change in key assumptions or cash flow forecast items will likely result in an impairment charge.

The flutiform^® impairment model was also updated for the latest available information and assumptions. No impairment charge arises in the current period. In addition, a sensitivity analysis has been performed as follows: (1) an increase in the discount rate of 1.8% would result in impairment; (2) a decrease in product supply volumes by more than 8% gives rise to an impairment charge. 

The 2019 Annual Report and Accounts considers the sensitivity of the Swiss CGU and the flutiform^® intangible of the UK exiting the EU. The final position at the end of the implementation period could have a range of potential outcomes, of which the most severe is the UK not establishing a beneficial trading relationship with the EU before the end of the implementation period, 31 December 2020. flutiform^® is manufactured in the UK with raw materials imported mainly from the EU into the UK and the Group’s partners export finished product from the UK into the EU and Japan. The Group believes that there is a possibility that the Group’s supply chain could be disrupted. As disclosed in note 15 of the 2019 Annual Report and Accounts if any of the risks associated with the implementation period materialise it will likely result in an impairment in the Swiss CGU. Furthermore, 3 months loss of supply and destruction of 6 weeks of stock was considered as a plausible downside scenario for flutiform^® intangible in the context of UK exiting the EU. This scenario does not result in impairment of the intangible asset.

The potential impact of COVID-19 outbreak to flutiform^® demand was also considered. No reduction in demand has been observed and as such no further downside scenarios were considered.

Redeemable preference shares of 34,000 at £1 par value have no associated voting, dividend or coupon rights but are eligible to be repaid before any distribution to shareholders; the shares can be repaid by the Group at any time.

In October 2019, the Group announced that the Board had approved a share buyback programme to return up to £10m to shareholders, which concluded in March 2020. A second share buyback was announced in May 2020 for a further £10m and is expected to conclude in the second half of 2020. In total, in the six months to 30 June 2020, £9.2m of capital was returned to shareholders at a weighted average price of 90.9p per share. Directly attributable costs of £0.1m have been expensed to equity.

During the year, the Group allotted 1,131,476 (H1 2019: 1,561,183) ordinary shares related to employee share option awards.

Cash flows from investing activities

In the six months to 30 June 2020, the Group has received an amount of £8.0m (H1 2019: nil) for the sale of a long-term asset to a partner. This amount was previously classified on the balance sheet as a receivable.

11.          Contingent assets

In accordance with the requirements of IAS - 37 Provisions, Contingent Liabilities and Contingent Assets,  a possible asset that arises from past events, and  whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity is disclosed as a contingent asset.  

GSK patent enforcement 

As at 30 June 2020, potential assets estimated to be $147.4m (30 June 2019: nil) are not recognised in the interim financial statements, but are disclosed as contingent as the existence of these assets is dependent on the outcome of legal proceeding in the US.

In the May 2019 jury trial in the US, the Group’s US patent was found not invalid and infringed by GlaxoSmithKline's US sales of three Ellipta® products. The jury awarded Vectura $89.7m in damages for the period from August 2016 through to December 2018, based on 3% of US sales of these products. The jury also found that GSK's infringement was wilful, following post-trial motions, the 3% royalty rate was in effect confirmed as applicable until patent expiry in mid-2021. This is calculated to be an additional $51m from January 2019 to June 2020. A further $6.7m of interest was also awarded.

GSK has appealed the decision and the outcome of this appeal is expected by Q1 2021. Whilst the outcome of the trial was favourable, until the outcome of the appeal is known, all potential assets related to this (including a potential deferred tax asset on future income against brought forward trading losses) remain unrecognised.

Supplier rebate

As at 30 June 2020, the Group was negotiating a rebate from one supplier, of which £0.8m is estimated to be received in H2 2020, with a further £0.8m expected to be received in 2021, (31 December 2019: £3.6m).  The decrease since the 2019 year-end is owing to an updated best estimate following further progress with the negotiations towards a formal settlement.  The negotiation process remains ongoing and is expected to be settled in the second half of the year.

12.          Basis of preparation

The 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 2019, 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 the seasonality of product supply and royalties.

The Group’s consolidated comparative figures for the year ended 31 December 2019 do not constitute the Company’s individual statutory accounts for that financial year. Statutory accounts for the year ended 31 December 2019, 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.

Going concern

The Group meets its day-to-day working capital requirements through its on-hand cash resources and available bank facilities. For the purposes of the going concern review the Group’s cash flow forecasts and projections up until December 2021 have been considered. Having taken account of reasonably possible changes in trading performance and the anticipated impact of COVID-19, the review has shown that the Group is able to operate without the need to use its current facilities for the forecast period.

As part of the going concern review, the Directors have considered a severe, but plausible downside scenario to stress test the viability of the business. The scenario included modifying cash flow assumptions to include a severe disruption to the Group’s supply chain, significant reductions in future royalty revenues and the cancellation of the Group’s co-development programmes.

In addition, whilst COVID-19 has not to date had any significant impact on the Group’s performance, further stress testing of the going concern model has been performed. This included a potential COVID-19 related reduction in demand for flutiform® and for other products for which the Group receives royalties. This stress testing showed that the Group is able to continue trading without taking significant mitigating actions. The Group held £81.9m in cash and cash equivalents as at 30 June 2020, and has no material debt. Furthermore, the Group has access to a £50m multi-currency revolving credit facility with Barclays Bank PLC and HSBC Bank PLC. This facility expires in August 2021 and remains undrawn. The Group intends to renew this facility and discussions are being finalised. No events have taken place since the balance sheet date which have had a significant impact on the Group’s liquidity.

The Directors considered a number of measures to improve further the liquidity of the business, including the suspension of its capital returns programme, cancellation or postponement of capital expenditure, raising new debt or equity finance, changes to executive remuneration, and the legitimate utilization of government support schemes for example VAT or Corporation tax payment deferrals). After due consideration of the risks to the business, the current strong liquidity position, and of the potential business impacts of these measures, the Directors concluded no further measures are justified at this point.

Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a going concern basis.

13.          Voluntary change in accounting policy

Reclassification of expenses from research and development to general and administrative

In the context of the new CDMO strategy management has reviewed the presentation of the Income statement and considered whether it continues to provide relevant and reliable information to stakeholders. It was concluded that there should be an update to how certain expenses were classified and therefore the Group is voluntarily changing its accounting policy for expense classifications for research and development expenses (“R&D”) and general and administrative expenses (“G&A”) (previously referred to as corporate and administrative expenses).

Under the prior year accounting policy, expenses which were considered to be dedicated to progressing or supporting R&D activities were reported as R&D expenses. Under this definition support costs, including for example those Finance, HR or IT costs that were considered dedicated to R&D were reported as R&D expenses. This approach was consistent with the primary activity of the Group, which was the research and development of proprietary therapies or the co-development of pharmaceutical products, where the risks, costs and rewards of development were materially shared with partners. With the change in strategy, R&D is no longer the primary activity of the Group and therefore the expense classifications should more accurately reflect the change towards a CDMO model.

These changes are intended to improve the relevance of the Group’s financial statements in the context of the change in strategy, enabling users of the accounts to better interpret performance versus CDMO peers. The definitions of key metrics, for example R&D as a proportion of revenue and G&A as a proportion of revenue are more closely aligned to CDMO peer definitions and will therefore reflect more accurately the activities of the Group and enable more relevant peer comparison.

This change in accounting policy has been accounted for retrospectively and the comparative information has been restated. The restatement has no overall impact on gross profit, operating profit or adjusted EBITDA. The effect of the change is shown in the table below for both H1 2019 and FY 2019.

The new accounting policies are as follows:

Research and Development expenses

R&D comprises activities performed in relation to the Group’s own intellectual property (IP) and technology platforms, or as part of a co-development programme where the risks, costs and rewards are materially shared with a third party. The expenses include internal employee costs, indirectly attributable labour costs and external costs, for example procurement and facilities allocations, depreciation of R&D facilities, including R&D sites, and applicable third-party service costs.

These expenses are recognised on an accruals basis in the year in which they are incurred.

General & administrative (previously Corporate and Administrative)

General & administrative expenses represent shared costs incurred in managing the activities of the Group, these include indirect overhead costs, administrative support costs for the Group including employee costs and external costs of HR, IT, Legal (including the registration and maintenance of intellectual property), Finance, Head Office costs, and associated depreciation and utility costs. This category also includes share based payment charges in accordance with IFRS 2.

These expenses are recognised on an accruals basis in the period in which they are incurred.

14.          Related-party transactions

In six months ended 30 June 2020, the Group has signed two agreements with Aerami Therapeutics Inc (“Aerami”). Anne Whittaker, a non-executive director of Vectura, is the CEO of Aerami. The Director’s concluded that this was not a related party transaction in accordance with IAS 24 paragraph 11, which specifies that two entities are not considered to be related parties simply because they have a director in common.

15.          Post balance sheet events

Capital returns to shareholders
Since 30 June 2020, a further 5,721,960 shares have been repurchased as part of the £10.0m second share buyback programme (commenced 1 June 2020), at a weighted average price of 105.41p per share. As at the date of these condensed financial statements a total of £9.0m of the £10.0m have been repurchased, with associated costs of £0.1m, at a weighted average price of 101.67p.

European regulatory approval for Enerzair^® Breezhaler^® (QVM149)
In July, Enerzair^® Breezhaler^® (QVM149) was approved for use in Europe which earned Vectura a $5m milestone. The Group will receive low single-digit royalties on net sales of QVM149 in both Japan and Europe.

Directors’ responsibility statement

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;
   
• the interim management report includes a fair review of the information required by:
   
  1. DTR 4.2.7R of the Disclosure Guidance and Transparency Rules , being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
      
  2. DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The Directors of Vectura Group plc are listed in the Annual Report and Accounts for 31 December 2019, with the exception of following changes in the period:

·Neil Warner resigned as Non-Executive Director on 27 May 2020

A list of current Directors is maintained on the Vectura Group plc website: https://www.vectura.com/investors/board-and-leadership-team/

By order of the Board

Paul Fry
Director

14 September 2020

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 2020 which comprises the 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 2020 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

14 September 2020 

¹ ‘Research and development’ and ‘General and administrative’ expenses for H1 2019 have been restated to reflect a voluntary change in accounting policy which has been implemented to provide a better understanding of the Group’s performance and to provide consistency with CDMO peer group companies.  For details on the nature of the accounting policy changes that have been implemented, refer to note 13 to the financial statements. 

² Adjusted EBITDA is a non-IFRS measure defined as operating profit before exceptional items, amortisation and impairment, adjusted by adding back charges for depreciation and share-based payments.  A reconciliation of operating loss to adjusted EBITDA is presented in note 5 to the financial statements.

³ Percentage movement considered “not meaningful” (n/m) as metric has moved from a loss in the prior period to a profit in current period.

⁴ Consolidation of the CDMO industry: opportunities for current players and new entrants September 2017.

⁵ Specialist respiratory diseases include Cystic Fibrosis, Idiopathic Pulmonary Fibrosis and Pulmonary Arterial Hypertension.

^{6 IQVIA SMART MIDAS constant currency sales.  Royalties payable by partners to the Group are based on agreed contractual definitions of net sales, which differ from IQVIA reported sales and may include other adjustments or deductions.}

^{7 IQVIA SMART MIDAS} volume data. 

^{8 IQVIA} SMART MIDAS volume data.  Royalties payable by partners to the Group are based on agreed contractual definitions of net sales, which differ from IQVIA reported sales and may include other adjustments or deductions.