Epistem Holdings Plc Annual Report and Accounts 2010 Controlling life-long tissue renewal i E p s t e m H o d n g s P c l i l A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 0 Epistem Plc 48 Grafton Street Manchester M13 9XX United Kingdom T +44 (0)161 606 7258 F +44 (0)161 606 7348 www.epistem.co.uk Divisional development and core company strength Business Overview Introductory Highlights What We Do Epistem: Contract Research Services Epistem: Personalised Medicine Epistem: Novel Therapies Our Business and Strategy Review of the Year Strength in Depth Chairman’s Statement Chief Executive’s Review IFC 2 4 6 8 10 12 14 16 Governance Board of Directors Directors’ Report Directors’ Remuneration Report Corporate Governance Report Independent Auditors’ Report Accounts Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to the Financial Statements Company Balance Sheet Company Statement of Changes in Equity Company Statement of Cash Flows Notes to the Company Financial Statements Directors, Secretary and Advisers 20 22 24 26 27 29 30 31 32 33 48 49 50 51 IBC Year of profit 2nd 45% 5.4m Revenue growth year-on-year Cash balance (£million) Directors, Secretary and Advisers Directors David Evans Matthew Walls Chris Potten Catherine Booth Gerard Brady Roger Lloyd Jeffrey Moore Robert Nolan John Rylands Company Secretary John Rylands Registered Office 48 Grafton Street Manchester M13 9XX United Kingdom Registrars Neville Registrars Limited 18 Laurel Lane Halesowen B63 3DA Nominated Adviser and Broker KBC Peel Hunt Limited 111 Old Broad Street London EC2N 1PH Legal Advisers McGrigors LLP Princes Exchange 1 Earl Grey Street Edinburgh EH3 9AQ Auditors HW Chartered Accountants Bridge House 157 Ashley Road Hale Altrincham Cheshire WA14 2UT Principal Banker Natwest Commercial Banking 1 Spinningfields Square Deansgate Manchester M3 3AP Printed on Revive 50:50 Gloss. Revive 50:50 Gloss is an FSC-recognised paper, produced from well-managed forests, and recycled wood or fibre. This publication was printed with vegetable oil-based inks by an FSC-recognised printer that holds an ISO 14001 certification. Cover and IFC photography by Hubert Sieverding i B u s n e s s O v e r v e w i Welcome Epistem is a biotechnology and personalised medicine company commercialising its expertise in epithelial stem cells in the areas of oncology, gastrointestinal disease, dermatology and ageing Every person develops from one cell – the fertilised egg. In the early stages of development, stem cells differentiate and become committed to generating a specific tissue or organ. Adult stem cells remain capable of regenerating tissue in our organs throughout our lives. As we get older, the ability of stem cells to regenerate new cellular tissue diminishes, leading to tissue ageing and disease. Epistem is focused on understanding how cells function and are controlled, so that we can identify new drug therapies to address the major diseases of oncology, gastrointestinal disease, dermatology and ageing. Epistem also identifies patient specific gene biomarkers, gene mutations and disease pathogens as part of its Personalised Medicine development. 2010 marks the 10 year anniversary of the formation of the Company. Highlights • • • • • • Year-on-year revenue growth up 45% All divisional revenues increased over the year Formation of a new Personalised Medicine division Development of Genedrive molecular diagnostic device TM ‘Point of Care’ mobile Growth in profit and increased Earnings Per Share Strengthened cash balance with continuing strong trading outlook • 10 year anniversary of company formation Epistem Holdings Plc Annual Report 2010 1 What We Do Scientific research services, personalised medicine and innovative therapeutics Life-long Tissue Renewal Explained Epithelial stem cells Epithelial stem cells are rare cells which represent the ‘building blocks’ of tissue growth and renewal. Stem cells are essential for tissue repair, since they are responsible for replacement of all cells. Expertise Epistem is applying its know-how and expertise to identify genes and proteins responsible for controlling cell production to develop drugs to treat cancer and other epithelial diseases. Vision Epistem’s vision is to exploit its leading stem cell technology to identify Novel Therapeutics and advance its next generation developments in personalised medicine. 2 Epistem Holdings Plc Annual Report 2010 Contract Research Services (page 4) Contract Research Services provide specialised preclinical efficacy services primarily for drug development companies on a ‘fee for service’ basis. The division is growing strongly, is cash generative and profitable. Our Contract Research Services division has a well established record of providing a specialist range of testing services to major pharmaceutical and biotechnology companies globally. We assist client companies with preclinical development of their drug therapies to treat epithelial diseases including: • • • • • • Cancer Cancer supportive care (Mucositis) Inflammatory bowel disease UV-induced skin damage Wound healing Skin and hair disorders 4 i B u s n e s s O v e r v e w i Personalised Medicine (page 6) Novel Therapies (page 8) Biomarkers Epistem has developed a range of innovative technologies allowing highly sensitive analysis of small numbers of cells. These technologies are used by pharmaceutical companies to measure drug-induced gene expression changes, primarily in the area of oncology. Our biomarker libraries assist in identifying changes in gene expression that result from treatment with an oncology drug. We work closely with top-tier pharmaceutical groups to better understand drug- induced gene expression changes in a subject during treatment. Diagnostics We have expanded our technology reach into diagnostics with the development of GenedriveTM, a ‘point of care’ molecular diagnostic device. GenedriveTM is targeted at providing a ‘near patient’ diagnosis in less than 30 minutes. Rapid, sensitive and accurate testing offers to revolutionise the field of medical diagnosis by enabling viral, pathogen and gene mutation diagnosis to be made readily available at minimal cost. Epistem is discovering key regulators (proteins and peptides) of epithelial cells and developing therapeutics to control cell production, initially targeting the areas of oncology and inflammatory bowel disease. With over 80% of adult cancers arising from epithelial tissue, we believe that applying our understanding of epithelial stem cells and cell production will identify new targets and pathways for drug development. Our Novel Therapies division continues to develop the regenerative medicine collaboration with Novartis and is identifying the key regulators of stem cells and epithelial cell production. The collaboration is now beginning to yield initial hits/leads. The division’s primary focus is to discover new drug leads across major epithelial diseases and expand its technology and intellectual property portfolio alongside other collaborative opportunities. Epistem Holdings Plc Annual Report 2010 3 68 Turnover£2.5m i B u s n e s s O v e r v e w i Contract Research Services Divisional development and strengthened operating margin The Contract Research Services division provides preclinical efficacy testing services in the areas of oncology, oncology supportive care (mucositis), inflammatory bowel disease and dermatology. The division saw continued growth and a broadening of its customer base over the year. The raised profile of the division and growing awareness of our technical expertise continued to build demand for our specialised drug efficacy and ‘mechanism of action’ models. Whilst revenue growth over the year was modest at 10%, the overall quality of business was significantly better with operating margin up 28% year on year, based on an improved mix of high margin service business. Strengthening partnerships Over the year the division grew its average contract value, increased the size of its customer base and enhanced its service offering. The division is focused on developing key client relationships with large pharmaceutical groups to generate a solid foundation for growth in the current economic climate. Biodefence Our collaboration with the US National Institutes of Health (NIH) continues to expand around the testing and efficacy of agents under the MCART (Medical Counter measures Against Radiological Threats) programme designed to address exposure to radiation or nuclear attack. Through the expanding scope of the collaboration we anticipate that our relationship with the US NIH and NIAID (National Institute of Allergy and Infectious Diseases) will develop further over the coming year. Case Study: US National Institutes of Health Epistem’s Contract Research Services division provides scientific expertise and preclinical research models to the NIH’s research programme on Medical Countermeasures Against Radiological and Nuclear Threats (MCART). Immunohistochemistry During the year the division launched a new hair immunohistochemistry (IHC) model. Our contract research services group has seen a significant growth in interest in this area. Immunohistochemistry is widely used to understand the distribution and localisation of differentially expressed proteins in biological tissue. Outlook A strengthened service offering, coupled with increased expertise across each disease area, has ensured that the division is well positioned for the year ahead. We will continue to nurture our key customer relationships, together with extending into selected territories through new business development and distributor opportunities. Through increasing recognition of our core cell biology expertise and the planned expansion of our service offerings, we anticipate that the division will continue to deliver sustainable growth over the coming year. Highlights • • • • Increased demand for oncology, mucositis and IHC service offerings Growth in US National Institutes of Health bio-defence programme Strengthening recognition of science base Operating profit increased 28% year on year Contract Research Services turnover 2010 £2.5m 2009 £2.3m Epistem Holdings Plc Annual Report 2010 5 +19%Year-on-year sales growth i B u s n e s s O v e r v e w i Personalised Medicine Globally leading biomarker and diagnostic technology Biomarkers Biomarkers provide measures of biological processes that can improve the precision with which we can guide drug development and disease treatment. Epistem’s GenetRxTM technology measures drug-induced changes in gene expression for drug development. Following the creation of the division last year, the newly formed group has continued to advance its technology with top tier pharmaceutical partners and has extended its proprietary offering to both tissue and blood biomarkers alongside its hair biomarker position. The biomarker division is currently collaborating with a number of major pharmaceutical groups including Novartis, Astrazeneca and Johnson and Johnson. Year-on-year revenues improved 19%, but this masked the significant development underway to prepare the division for growth in the coming year. With GCLP accreditation status now approved, we have extended our business presence in the US through the set up of our US office to provide a closer relationship with our key pharmaceutical and biotechnology partners. The biomarker division has developed a library of oncology pathway markers through its bioinformatic dataset Pathway DirectTM. This dataset and our novel application technologies will be used to provide partner access to specific drug biomarkers in oncology signal pathways. Outlook We anticipate a further strengthening in the growth of our biomarker business division over the coming year underpinned by the extension of our key collaborative relationships now unfolding in broader clinical phase studies. We continue to search for a suitable partner to help bolster our international coverage and growth ambition. GenedriveTM (Point-of-Care molecular diagnostic device) Molecular diagnostic testing is making headway into decentralised settings such as hospitals, clinics and smaller labs. Molecular diagnostic tests are being developed to provide rapid test results with decentralised labs and ‘near patient’ settings viewed as the emerging and growing market. The Point-of-Care (POC) market for tests in infectious disease is particularly broad and captures: hospital emergency rooms, GP/physician offices, community health centres and health outreach programmes, such as sexually transmitted disease (STD) and HIV clinics. Trends show that hospital testing is expected to decrease as POC tests becomes the preferred choice of diagnostic testing ‘near patient’ and in the community. The main objective is to keep patients out of hospitals and to reduce the need to go to hospitals and to diagnose patients in shorter timeframes to improve the quality of care. In addition, rapid result generation is sought so that appropriate treatment can be implemented without delay, leading to an improved clinical and economic outcome. Outlook Epistem is unveiling GenedriveTM, a ‘first to market’ proprietary and disruptive technology positioned to provide a new paradigm in Personalised Medicine and point-of-care diagnostics. It builds on our biomarker technology and existing assay expertise to provide a novel simple to use and cost effective platform that will diagnose a range of bacterial infections, pathogens and SNP gene mutations in less than 30 minutes. We anticipate formally launching GenedriveTM in 2011. Highlights • • • Good Clinical Laboratory Practice (GCLP) accreditation status Launch of proprietary GenetRx TM brand Unfolding biomarker technology across top-tier pharmaceutical groups • Development of Genedrive TM Case Study: GCLP Accreditation The Biomarker division conducts gene expression analysis to support clinical drug development programs within pharmaceutical and biotechnology organisations, with an increasing focus on providing valuable biomarker information that can be used in drug development. Personalised Medicine turnover 2010 £0.8m 2009 £0.7m Epistem Holdings Plc Annual Report 2010 7 £2.4m Turnover i B u s n e s s O v e r v e w i Novel Therapies Continued progress towards new drug targets The Novel Therapies division is discovering the body’s own key regulators of epithelial stem cells and tissues. The body’s own key (protein) regulators are largely unknown because of the difficulties in accessing and evaluating their effect in epithelial tissue. These key regulators are responsible for restoring damaged tissue and for maintaining ‘life-long tissue renewal’ throughout our lives. The division is primarily focused on identifying the key regulators of cells in the disease areas of cancer (based on 80% of cancer originating from epithelial tissue), gastrointestinal disease, wound healing and ageing. Novartis collaboration The discovery and development collaboration with Swiss based Novartis AG continued to progress over the year with the Novel Therapies division reporting its first full year revenue of £2.4m. This collaboration revenue includes £1.4m ammortisation of upfront income. New drug targets are continuing to emerge, with the division positioning itself to create a pipeline of early stage development targets. The discovery programme has been constructed to identify and map regulators which control the activity of cells and stem cells. Once regulators are identified, our development ‘route map’ enables each hit to be characterised for activity with a view to prioritising leads for further development. This carefully constructed process is driving a comprehensive understanding of cell inhibition, proliferation and self renewal, which alongside signalling pathways and identified regulators will allow us to better understand tissue control. The accounts for the year do not include any license income and the timings of license opportunities for targets and future development funding with Novartis remain difficult to accurately predict. Case Study: Novartis At the first anniversary of the collaboration, we are pleased with progress towards advancing our first therapeutic hits/leads. Partnerships Based on our programme of discovery and early stage development, interest continues to build around our core biology and molecular pathway understanding. We have extended our in-house expertise in signalling pathway bioinformatics and protein production to firmly establish our internal discovery position. We continue to evaluate other drug discovery opportunities with major industry players and have recently commenced an internal small molecule programme to identify our own proprietary leads for cell receptor regulation. Outlook We continue to build our understanding of the body’s key regulators and we remain focused on identifying novel drug agents. We look forward to continued progress under our Novartis collaboration and to advancing other partnerships from our emerging hits/lead pipeline. Highlights • • • Progress towards new drug targets Discovering and developing leads targeting cancer (oncology) and gastrointestinal disease Building intellectual property in identified regulators of epithelial cells Novel Therapies turnover 2010 2009 £1.0m £2.4m Epistem Holdings Plc Annual Report 2010 9 Our Business and Strategy A strengthening business model based on sustaining future growth Epistem has an unrivalled knowledge of epithelial tissue behaviour and an extensive array of stem cell assays, which is increasingly a key consideration in the development of new epithelial drugs. Epistem has also developed an innovative library of oncology biomarkers which coupled with our advance into disease diagnostics will build a leading position in personalised medicine. Future Strategy Discovery Preclinical Phase 1 Phase 2 Phase 3 Market Contract Research Services Specialised efficacy testing in • • • • Oncology Mucositis Inflammatory bowel disease Dermatology Fee for service Novel Therapies Discovery hits/leads and early stage development Partnering and licensing programmes Biomarkers Diagnostics Personalised Medicine Preclinical, clinical and market programmes Fee for service, partnering, licensing and product sales 10 Epistem Holdings Plc Annual Report 2010 i B u s n e s s O v e r v e w i Combined business model Epistem’s combined business model has now yielded a profitable and growing business across each of our three business divisions. The Contract Research Services business has established robust relationships with pharmaceutical and biotechnology leaders worldwide and these relationships and our wide-ranging stem cell services have provided the basis for partnering strategies for our emerging Novel Therapies and Personalised Medicine businesses. Partnering programme We continue to work closely with our partners and customers to build strong business relationships based on leading scientific discovery and development. In addition to our first major collaboration with Novartis, we are now nurturing other relationships to advance our emerging hits/leads. Licensing opportunities The strength of our discovery platform underpinning the Company’s Novel Therapies division continues to grow and this is partly reflected in the number of potential drug candidates which the Company has now identified. These candidates are undergoing development to drive Epistem’s emerging drug development pipeline. Epistem’s new Personalised Medicine division expands on last year’s newly formed Biomarker division to advance a new ‘Point of Care’ diagnostic device. We will continue to maintain our strong intellectual property position in this area and develop our deepening understanding of drug effect biomarkers and disease diagnosis. Strategic Goals: Growth: We expect to deliver sustained revenue growth and increased visibility and awareness of the Company and its achievements over the forthcoming year. Technical: We will continue to exploit our core stem cell expertise and build industry recognition around our stem cell science and gene expression technology. We will advance new product developments, Personalised Medicine partnerships and therapeutic leads to underpin our continued commercial success. Financial: Continued revenue growth over the coming year is anticipated with accelerated commercial delivery across all of our divisions. Our combined business model will continue to strengthen and our portfolio will enable us to accelerate investment across the Group and consider acquisition opportunities where appropriate. Investor: Continued development across each of our business divisions offers an increasingly attractive investment opportunity for both our existing and new investors. The impressive revenue growth across each of our divisions alongside increasing forecast revenues and growing profitability demarks Epistem as an exciting growth stock with significant potential upside. Epistem Holdings Plc Annual Report 2010 11 Strength in Depth Epistem continues to expand its technology offering, to maintain a high rate of growth and profitability The 2009/10 financial year saw Epistem continue its rapid growth with year-on-year sales up 45%. Highlights • • • • • • Year-on-year sales up 45% to £5.7m All divisional revenues increased over the year Contract Research Services operating profit up 28% Expansion of Biomarker division to form new Personalised Medicine division Group operating profit up at £0.3m from a loss of £(0.7)m Strengthened cash balance with improved trading outlook 12 Epistem Holdings Plc Annual Report 2010 Market dynamics International market conditions remained challenging during the year with the healthcare sector continuing to pursue merger and ongoing rationalisation. The Company has continued its strategy of focusing on bringing new globally leading technology to market whilst driving organic growth and cash generation. i R e v e w o f t h e Y e a r Group revenues Contract Research Services revenues Personalised Medicine and Novel Therapies revenue 2010 2009 £5.7m 2010 2009 £4.0m £2.5m £2.3m 2010 2009 £1.7m £3.2m Against a challenging economic background, Epistem’s year-on-year consolidated revenues increased 45% to £5.7m. Each division recorded increased revenues over the previous year. Territory revenues were split US 79%, EU 14% and UK 7%. The CRS division reports sales of £2.5m, a 10% increase over the previous year. The division saw increased demand for its oncology and mucositis service offerings along with expansion in the US NIH biodefence contract. Strong growth driven primarily by the Novartis collaboration together with Biomarker revenues helped sales rise significantly over the year. 2010 £5.7m Discovery, development and admin cost 2010 £2.5m 2010 £3.2m Profit before tax Cash reserves 2010 2009 £2.7m 2010 £0.4m £2.2m 2009 £(0.7)m 2010 2009 £5.4m £3.7m Investment in our Novel Therapies drug discovery and development programme accounted for £1.4m of the 2010 reported figure with the remaining £1.3m cost relating to central business overheads and administrative operating costs. Profit before tax for the period was underpinned by a £1.1m profit improvement from a loss of £(0.7)m to £0.4m. Cash reserves were strengthened over the year by the successful placing of shares in November 2009. 2010 £2.7m 2010 £0.4m 2010 £5.4m Epistem Holdings Plc Annual Report 2010 13 Chairman’s Statement David Evans Non-executive Chairman Dear Shareholder, I am delighted to report significant growth and ongoing improvement in Epistem’s results for the year ended 30 June 2010. Whilst market and trading conditions have remained volatile, the Company continues to invest in and strengthen its foundations and enjoyed a further exceptional year in difficult times. Results Further details of the results for the period are covered in the Chief Executive Officer’s review, but operationally and financially the year to 30 June 2010 saw the Company increase revenues by 45% to £5.7m (2009: £4.0m) with a Group profit on ordinary activities before taxation of £0.4m (2009: Loss £0.7m). Based on this improved trading performance the Company generated an after tax profit of £0.3m (2009: £0.1m). Cash reserves at the end of the period were £5.4m (2009: £3.7m). 14 Epistem Holdings Plc Annual Report 2010 ‘ Strengthening foundations in preparation for continued growth’ i R e v e w o f t h e Y e a r During the year the Company continued to make significant progress across each of its divisions: • • • • • Contract Research Services revenues grew by 10% to £2.5m (2009: £2.3m). The extension of our service offerings and continued expansion of our US government bio-defence contract enabled the division to deliver a solid performance over the year. With market uncertainties still persisting, the division continues to build on its core scientific strengths to provide a firm platform for future growth. Biomarker revenue growth was marginally increased over the year at £0.8m (2009: £0.7m), though this masked the significant effort underway to position the division for future growth. As part of our growth strategy to continue to develop this arm of the business whether through the addition of new technologies or through M&A, we are today announcing the creation of our Personalised Medicine division which expands on our Biomarker technology to provide a newly created ‘Point Of Care’ offering and the unveiling of our ‘on the spot’ molecular diagnostic platform GenedriveTM. The Novel Therapies division research and development collaboration with Swiss based Novartis AG continued to develop over the year with the division reporting its first full year revenue of £2.4m (2009: £1.0m). New drug targets are continuing to emerge, with the Novel Therapies division positioning itself to create a pipeline of early stage development targets. The timings of license opportunities and future development funding though remains difficult to accurately predict. Strengthened investor relations continue to advance the visibility of the Company, with the £2.9m placing in November 2009 bringing several new institutional investors to the share register. The Company now reports its second year of profits and a growth in its earnings per share to 3.8p (2009: 1.1p). Outlook Epistem continues to build on its scientific and technical strengths as it transforms into a diverse, technology leading, and profitable biotechnology and personalised medicine group underpinned by strong revenue growth. Against a backdrop of market uncertainty, Epistem remains vigilant, with the outlook for the expanding group increasingly positive. Despite the tough market conditions, each divisional business is establishing itself for growth in its chosen segment. The Contract Research Services division buoyed by the expansion and anticipated extension of the US biodefence contract is expected to perform well over the coming year, with the newly formed Personalised Medicine division and its disruptive biomarker and diagnostic technologies providing further support for Epistem’s future growth. The Novel Therapies drug discovery collaboration with Novartis is nearing completion of its first phase, with the emergence of a newly formed group of identified hits/leads. Whilst the timing of license and development opportunities remains difficult to judge, we remain optimistic about the growing strength of our hit/lead programme. Epistem continues to refine its discovery and development technology to position itself as a world leader in therapeutic discovery in the field of epithelial stem cell regulation. With the profile and visibility of each of our business divisions increasing, we expect to see the Company advance quickly over the coming year. I would like to thank the Chief Executive Officer for his leadership and navigation of the Company during these difficult times. I would also like to thank the Board and our employees for their effort and commitment in driving Epistem’s progress over the past year, as well as our investors whose valued support has provided a stable platform for our continued growth. David Evans Non-executive Chairman 5 October 2010 Epistem Holdings Plc Annual Report 2010 15 Chief Executive’s Review Matthew Walls Chief Executive Officer 16 Epistem Holdings Plc Annual Report 2010 Dear Shareholder, Against the backdrop of changing times and economic uncertainty, Epistem continues to make excellent progress in building itself into a globally recognised Drug Discovery and Personalised Medicine company. The financial results for the Group presented in this announcement reflect the results for the Group’s sole trading subsidiary for the year to 30 June 2010 and for the comparative period to 30 June 2009. Headline progress over the year included: • • • • • • • Year-on-year net sales up 45%. The Company reports its second year of profit growth and an increase in earnings per share. Novel Therapies sales increased to £2.4m, £1.4m increase over the previous year. Biomarker sales increased 19% year-on-year and now forms part of the newly created Personalised Medicine division. Development of our new Genedrive molecular diagnostic device. TM ‘Point of Care’ mobile Contract Research sales increased by 10% over the previous year. A strengthened cash balance of £5.4m and improved trading outlook. ‘ Divisional growth and globally leading technology’ i R e v e w o f t h e Y e a r Integrated business model The Company continues to progress its integrated business model, with each division targeting revenue growth and profitability. The establishment of independent divisions has created a strong portfolio of growing and profitable business units rarely seen in a biotechnology business model. Epistem provides a financially robust business, whilst offering the potential of significant financial upside from our Novel Therapies, Personalised Medicine and Contract Research Services divisions. We continue to enhance and exploit our integrated core competence in epithelial cell biology, whilst retaining commercial independence across each of our divisions. Financial review The Company reports a turnover of £5.7m (2009: £4.0m) for the year ended 30 June 2010. Revenues were underpinned by the Contract Research Services division, which delivered sales of £2.5m (2009: £2.3m) a 10% year-on-year growth. The Biomarker division (now forming part of the Personalised Medicine division) saw sales marginally increased to £0.8m (2009: £0.7m), with the Novel Therapies division reporting increased sales of £2.4m (2009: £1.0m). Consolidated territory revenues were split US 79% (63%), EU 14% (19%) and UK 7% (18%), the US territory figures continue to be strengthened by our US government and Novartis collaborations and represents a major growth market for the Company. Sales growth in Contract Research Services delivered a 28% increase in operating profit of that division, with operating profit up to £0.7m (2009: £0.6m). Increased Biomarker sales were partly offset by growing investment in our Biomarker and Diagnostics developments and the set up of our new US Biomarker operations to record a small loss for the year. Novel Therapies reported a significant increase in operating profit of £1.0m (2009: Loss £0.2m) driven by a full year’s funding of £1.0m from the Novartis collaboration and £1.4m revenue recognition from the up-front payment which is being spread over the length of the contract. Central administration costs increased by £0.2m to £1.3m (2009: £1.1m) primarily due to increased staff costs and professional fees. The Groups reported profit for the year was £0.3m (2009: £0.1m) with headcount in the company now at 51 (2008: 45). Cash reserves at the end of the year were £5.4m (2008: £3.7m) benefiting from improved trading and funding from the November 2009 £2.9m placing. Earnings per share increased to 3.8p per share (2009: 1.1p). Clear investor communication of the Company’s strategy and performance remains a key element of our success and we will continue to strengthen communications as we embark upon our next phase of growth. The Company’s annual audit was completed in October 2010 by HW Chartered Accountants, and their audit report is included in the annual accounts. 2000 2002 2004 2005 2007 Company formation Company sets up Contract Research Services group. Drug discovery Commencement of research into epithelial stem cell regulators. New disease models Company announces new models in inflammatory bowel disease. Fundraising Epistem closes £2.0m fundraising. LSE: AIM Admission Successful IPO and AIM Admission April 2007. Epistem Holdings Plc Annual Report 2010 17 Chief Executive’s Review (continued) ‘Building shareholder value by providing a high margin, diverse and rapidly growing portfolio of world class technologies’ Operating review Contract Research Services Over the financial year, Contract Research Services delivered a 10% year-on-year growth in revenue. Whilst market conditions remained challenging, our specialist preclinical services continued to expand and develop its business mainly with the larger pharmaceutical/ Biotechnology groups. Revenue increases were seen in our major US and EU markets, with the UK territory now representing the smallest territory in terms of revenue generation. Interestingly, only 4 years ago, the UK had been our major market. Our mucositis and inflammatory bowel disease models showed the greatest gain over the year supported by our new assays and technical developments. Our new client relationships and aggregate contract values also continued their trend of year-on-year increase over the year. The US National Institutes of Health’s biodefence programme continues to make good progress and continues to expand marking a significant milestone in our tests for agents which may treat radiation sickness following a nuclear incident. We enjoy a business relationship with the US biodefence group which is based on many years of close working and we expect this to continue over the forthcoming years. A solid start to the new financial year and our focus on specialist testing of preclinical drug compounds in our core disease areas continues to provide an attractive business model from which we anticipate further growth over the coming year. Personalised Medicine Following last year’s formation of the Biomarker division, we have now expanded our Diagnostic assay developments alongside our Biomarker technology to create a new ‘Personalised Medicine’ division. The oncology Biomarker business saw continued revenue growth over the year and the set up of the new US Biomarker office. We anticipate that US business expansion will continue to underpin our business development with the division poised to accelerate its revenue generation over the coming year. Our hair biomarker continues to engage with a growing customer base and provides a powerful measure of drug-induced gene expression for use in pre-clinical and clinical studies. Use of our technology to identify drug induced oncology genes (oncogenes) in molecular pathways is driven by the regulatory authority requirements to show that developmental drugs are effectively targeting these oncogenes. Our highly sensitive amplification technology, RNA-AmpTM which underpins our Biomarker technology has also recently been launched in a simple to use kit form. We are also unveiling our new GenedriveTM ‘Point Of Care’ (POC) molecular diagnostic device for ‘on the spot’ patient diagnosis. GenedriveTM is a unique, mobile and proprietary electronic device which targets a rapid molecular diagnostic assessment (sub 30 mins) for use in clinics, hospitals, surgeries as well as lending itself to OTC opportunities. The device is expected to have other marketing opportunities in veterinary, food and industrial use. We expect the device to bring a new ‘standard of care’ to the rapid diagnosis of pathogens and other molecular diseases. Whilst technical and development risks may still arise around each of our platforms, over time these continue to reduce. Validation of the new GenedriveTM system is now underway, with beta site clinical testing expected to start towards the end of this year with the launch of the device anticipated in the first half of next year. The Personalised Medicine market is forecast to grow considerably over the next few years driven by effective patient treatment, increasing regulatory requirements and patient specific drug development and our platform technologies are well positioned to capitalise on this market growth. 2008 2009 2010 Biomarker Epistem creates new Biomarker division. Discovery collaboration Epistem enters research and development collaboration with Novartis AG. Placing Epistem completes £2.9m share placing. March 10 year anniversary. July Epistem reports 2nd year of profitable growth. 18 Epistem Holdings Plc Annual Report 2010 i R e v e w o f t h e Y e a r Novel Therapies The Novel Therapies collaboration with Novartis is now in its second year and we are seeing the emergence of the first hits/leads from the Regenerative Medicine programme. Whilst these hits/leads are still at the discovery stage, the core cell biology and signalling pathways which regulate the cell/stem cell are becoming clearer and better understood as we identify which genes and pathways regulate specific characteristics of the cell. Our relationship with Novartis remains strong and we will be advancing each of our hit/leads under the collaboration over the coming year as we move into the next phase of development. Despite our confidence in the collaboration programme, the timing of potential licenses and future funding remains difficult to judge with accuracy. With the first phase of the discovery collaboration now nearing completion, discussions around the second phase of hit/lead development and future licensing/ funding will continue into next year. Aside from the Novartis collaboration, we have also commenced a focused small molecule programme to establish our own proprietary agents which regulate the signalling pathways and biology of the cell. This will allow us to develop our own drug leads and reinforce our lead position in the regulation of epithelial cells and stem cells, focused in the disease areas of regenerative medicine and oncology. We will continue to evaluate our other drug discovery and development opportunities with the major industry players over the forthcoming year to identify new lead developments and to expand our discovery and early stage development platform. Current trading and outlook Epistem continues to diversify its portfolio of business opportunities and strengthen its technology whilst maintaining profitable and sustainable growth. The past year has seen further strong operational and financial development across each of our divisions with each division developing its own independent strategy for growth. Trading in the first three months of the new financial year continues strong with revenues 15% ahead of the comparative period last year. The next phase of Epistem growth will continue to strengthen and build on each of our divisional operations. We continue to supplement our management team with world class, innovative individuals who fit with the culture and dynamism of the Company. We will also build on our corporate and board strength and supplement our scientific advisory board and advisory committees as appropriate. Our shareholder interest and support remains strong and we will ensure that our ongoing investor communications continue to grow this relationship. A strengthening operational and financial position confirms our belief that the year ahead will continue to generate substantial increases in our forecast revenues and growth ambitions. We remain selective in considering complementary technology, acquisitions and in-licensing, with few opportunities thus far meeting our high expectations. We continue to remain vigilant in our outlook in these uncertain times. Our ambition remains firmly fixed on building shareholder value by providing a high margin, diverse and rapidly growing portfolio of world class technologies. I would like to thank the Board, management and employees for their outstanding performance over the past year. I would also like to thank our investors for their continued close support and interest in our exciting and rapidly growing Company. Matthew H Walls Chief Executive Officer 5 October 2010 Epistem Holdings Plc Annual Report 2010 19 Board of Directors 20 Epistem Holdings Plc Annual Report 2010 G o v e r n a n c e 1. David Evans (50) Non-executive Chairman David joined Epistem as a Non-executive Director in June 2005 and became Executive Chairman in March 2006 until the flotation in April 2007, when he reverted to a non-executive position. David, a qualified accountant, has many years’ experience both as an executive and as a non-executive of publicly listed diagnostic and life science companies. In addition to his chairmanship of Epistem, he is currently Non-executive Chairman of the following AIM listed companies: Immunodiagnostic System Holdings plc, Omega Diagnostics Group plc and Scancell Holdings Plc. 2. Matthew Walls (46) Chief Executive Officer Matthew joined Epistem in February 2007 as Chief Executive Officer. He is an experienced CEO, most recently with Oxford Biosignals Limited, where he led the strategic collaboration with Rolls-Royce Plc and Covance Inc. Matthew spent the early part of his career with ICI Plc, progressing through to AstraZeneca Plc prior to its plant crop biotechnology group merger with Novartis to form Syngenta Plc. Matthew has led the growth of several technology and biotechnology companies as CEO, including Internexus Limited and Zylepsis Limited. He holds a non-executive post at Continum Limited and Riyada Oxford Investments Limited and is a chartered accountant and a member of CIMA. 3. John Rylands (55) Financial Director John originally joined Epistem as an investor and Non-executive Director, and in 2005 took over his current role. John provided corporate finance advice to private companies before joining Epistem. Until 1999 he was an investor in and consultant to the SDS group of companies. John holds a degree in Economics and Accountancy from Manchester University and is a member of ICAEW. 4. Jeffrey Moore, Ph.D. (51) Managing Director, Novel Therapies Jeffrey joined Epistem in 2005 in his current role. Prior to joining Epistem he had been at Phylogix, a US biotechnology company which he founded in 1998. Jeffrey has held two postdoctoral fellowships, at DNAX Research Institute of Molecular and Cellular Biology Inc and the Walter and Eliza Hall Institute of Medical Research, following which he joined Imclone Systems Inc. Throughout his career, Jeffrey has kept a strong interest in stem cell regulation and in identifying the potential commercial application of these factors. He holds a Ph.D. from George Washington University. 5. Prof. Chris Potten (69) Chief Scientific Adviser Chris is a co-founder of Epistem and the Company capitalises on the results of the research that was produced by him and his team at the Paterson Institute over the past three decades. Chris acts as Chief Scientific Adviser to the Company, although he does not participate in the day-to-day management of the Company. Chris retains a strong interest in the progress and success of the Company and prior to Epistem’s AIM listing was its biggest individual shareholder. 6. Catherine Booth, Ph.D. (45) Managing Director, Contract Research Services Catherine is a co-founder of Epistem and prior to starting Epistem, she worked for ten years with Prof. Chris Potten at the Paterson Institute. Whilst at the Paterson Institute, she developed many pre-clinical assays. This knowledge is at the core of the Epistem Contract Research Service. Catherine received her Ph.D. from Emmanuel College, University of Cambridge. 7. Gerard Brady, Ph.D. (54) Research Director Gerard joined Epistem shortly after its inception from Manchester University, where he was a lecturer, and was previously a Zeneca Fellow. He brought with him important technological expertise gained through working on blood stem cells. Of particular importance to Epistem, is his expertise in single cell gene analysis, which enables the examination of rare cells such as stem cells. Gerard previously held scientific positions in Canada and at EMBL, Heidelberg. 8. Robert Nolan, Ph.D. (67) Non-executive Director Robert has been a Non-executive Director of the Company since 2004. He brings with him a wealth of expertise in partnering and licensing negotiations with both small biotechnology and large pharmaceutical companies. Prior to his retirement he was Director, Global Licensing, at AstraZeneca Plc. He is also a Non-executive Director of Phico Therapeutics Ltd. 9. Roger Lloyd, Ph.D. (62) Non-executive Director Trained as a biochemist, Roger has almost 35 years’ experience in the healthcare and biotechnology sector, particularly in the areas of strategic planning and business development. International business management with ICI Plc and AstraZeneca Plc included living and working in the US and Germany, and having territorial responsibilities for Europe, Japan, Korea, Mexico and the Middle East. As Executive Director of Global Licensing at AstraZeneca, he personally completed 24 transactions, including strategic alliances with Abgenix and CAT, and acquisitions of KuDOS Pharmaceuticals and CAT. He operates as a Board Adviser in the biotech sector. Epistem Holdings Plc Annual Report 2010 21 Directors’ Report For the year ended 30 June 2010 The Directors present their report for Epistem Holdings Plc (the Company) and its subsidiaries (together Epistem or the Group) for the year ended 30 June 2010. Principal activities and review of the business The principal activity of the Group during the year was the provision of services to the biotechnology and pharmaceutical industries, covering pre-clinical testing and gene biomarker services and the development of novel therapeutics for partner companies. The trading activities of the Group are currently principally undertaken in the subsidiary undertaking, Epistem Limited, and a detailed overview of these activities is outlined in the Business Overview on the inside front cover to page 11 of this report. During the year, the Group established a US business development office in Boston, MA, trading through its wholly owned subsidiary Epistem Inc., incorporated during the year. A review of the business during the year which summarises overall progress, research and development and Key Performance Indicators, as well as risks and developments is detailed in the Business Overview and Review of the Year on the inside front cover of this report. Results and dividends The trading results for the year and the Group’s financial position at the end of the financial year are shown in the Financial Statements on pages 29–51 of this report. The Directors do not recommend payment of a final dividend. Going concern After due consideration, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the accounts. Directors and their interests in shares The Directors of the Company who held office throughout the year, unless otherwise stated, and their interests in the share capital of the Company, including family and pension scheme trust interests, were as follows: David Evans Chris Potten Catherine Booth Gerard Brady Roger Lloyd Jeffrey Moore Robert Nolan John Rylands Matthew Walls 1 July 2009 30 June 2010 80,645 80,645 919,320 519,320 980,419 981,538 419 – 14,919 8,065 1,538 – 16,038 8,065 190,317 191,436 6,064 7,183 Significant shareholdings In addition to the Directors’ holdings, the Company has been advised of the following interests of over 3% of the issued ordinary shares: Managed by Calculus Capital Ltd Helium Special Situations Fund Gartmore Investments Limited Generali Finances Northwest Business Investment Scheme Ordinary Percentage shares holding 947,707 807,500 605,000 400,000 294,780 11.9% 10.2% 7.6% 5.0% 3.7% Policy on payments to suppliers It is the policy of the Company in respect of all of its suppliers, where reasonably practicable, to settle the terms of payment with those suppliers when agreeing the terms of each transaction, to ensure that those suppliers are made aware of the terms of payment, and to abide by those terms. The Group has complied with this policy during the year. The average number of creditor days for the Group was 83 (2009: 66) based on the average daily amount invoiced by suppliers during the year. Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Financial Statements in accordance with applicable law and regulations. 22 Epistem Holdings Plc Annual Report 2010 G o v e r n a n c e Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared the Financial Statements in accordance with International Reporting Standards (IFRSs) as adopted by the European Union. In preparing those Financial Statements, the Directors are required to: • • • • select suitable accounting policies and then apply them consistently; make suitable judgements and estimates that are reasonable and prudent; state that the Financial Statements comply with IFRSs as adopted by the European Union, subject to any material departures being adequately disclosed and explained; and prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors confirm that they have complied with the above requirements in preparing the Financial Statements. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Financial Statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions. Principal risks The Board meets regularly to review operations and to discuss risk areas. The Review of the Year on pages 12–19 reports on the factors which are key to the ongoing development of the Company. The Corporate Governance Report contains details of the Group’s system of internal control. Details of the financial risks are disclosed in Note 19 to the Financial Statements. Provision of information to auditors The Directors who were members of the Board at the time of approving the Directors’ Report are listed on pages 20 and 21. Having made enquiries of fellow Directors and of the Group’s auditors, each of these Directors confirms that: • • to the best of each Director’s knowledge and belief, there is no information (that is information needed by the Group’s auditors in connection with preparing their report) of which the Group’s auditors are unaware; and each Director has taken all the steps that a Director might reasonably be expected to be taken to be aware of relevant audit information and to establish that the Group’s auditors are aware of that information. Approved by the Board H J J Rylands Company Secretary 5 October 2010 Epistem Holdings Plc Annual Report 2010 23 Directors’ Remuneration Report For the year ended 30 June 2010 Introduction This report has been prepared in accordance with the requirements of Schedule 2 Pt1 to the Companies Act 2006 (the Schedule) and also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the Principles of Good Governance relating to Directors’ Remuneration. In accordance with Section 439 of the Companies Act 2006 (the Act), a resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the Financial Statements are to be approved. Section 495 of the Act requires the auditors to report to the Company’s members on the ‘auditable part’ of the Directors’ Remuneration Report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with Part 3 of the Schedule. This report has therefore been divided into separate sections for unaudited and audited information. Unaudited information Remuneration policy Executive remuneration packages are prudently designed to attract, motivate and retain Directors of the necessary calibre and to reward them for enhancing value to shareholders. The performance measurement of the Executive Directors and key members of senior management and the determination of their annual remuneration package is undertaken by the Remuneration Committee. The remuneration of the Non-executive Directors is determined by the Board within limits set out in the Articles of Association. Executive Directors are entitled to accept appointments outside the Company providing the Board’s permission is sought. Non-executive Directors’ terms of engagement The Non-executive Directors have specific terms of engagement. Their remuneration is determined by the Board. In the event that a Non-executive undertakes additional assignments for the Company, the Non-executive’s fee will be agreed by the Company in respect of each assignment. Audited information Aggregate Directors’ remuneration Salary & fees £ Bonus £ Pension £ 2010 Total £ 2009 Total £ 15,000 7,169 118,644 115,000 125,000 115,000 – 15,000 15,000 200,000 100,000 34,992 43,943 24,000 24,000 – – – – 800,579 145,000 7,169 – – – – – – – – 140,813 115,000 140,000 130.000 300,000 133,667 121,667 147,667 121,667 300,000 34,992 43,943 24,000 24,000 952,748 25,000 64,029 24,000 24,000 961,697 Executive Catherine Booth Gerard Brady Jeffrey Moore John Rylands Matthew Walls Non-executive David Evans Chris Potten Roger Lloyd Robert Nolan 24 Epistem Holdings Plc Annual Report 2010 G o v e r n a n c e Directors’ share options Details of the options for Directors who served during the year are as follows: Executive Catherine Booth (2) Gerard Brady (2) Gerard Brady (2) Gerard Brady (2) Gerard Brady (2) Gerard Brady (2) Gerard Brady (2) Gerard Brady (4) Jeffrey Moore (3) Jeffrey Moore (1) Jeffrey Moore (1) Jeffrey Moore (1) John Rylands (3) John Rylands (1) Matthew Walls (5) Matthew Walls (6) Non-executive David Evans (1) Robert Nolan (1) Robert Nolan (1) Chris Potten (2) As at 1 July 2009 Options granted As at 30 June 2010 Exercise price Earliest exercise date Expiry date 15,528 88,800 3,200 2,200 1,800 24,224 12,653 57,727 83,333 100,000 83,333 83,333 83,333 127,847 177,653 80,644 62,112 78,000 15,528 15,528 – – – – – – – – – – – – – – – – – – – – 15,528 88,800 3,200 2,200 1,800 24,224 12,653 57,727 83,333 100,000 83,333 83,333 83,333 127,847 177,653 80,644 62,112 78,000 15,528 15,528 £1.20 £0.50 £0.75 £0.75 £0.75 £1.20 £1.67 £1.60 £1.20 £1.20 £1.20 £1.20 £1.20 £1.20 £1.24 £1.24 £1.20 £1.29 £1.20 £1.20 Exit Exit Exit Exit Exit Exit Exit 15/10/2010 04/04/2007 04/04/2007 01/09/2007 01/09/2008 04/04/2007 04/04/2007 31/10/2010 31/10/2010 04/04/2007 31/05/2005 10/01/2006 Exit 09/01/2016 06/01/2012 30/03/2013 06/04/2013 20/07/2014 24/11/2015 27/07/2017 15/10/2017 09/01/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 09/01/2016 27/03/2017 27/03/2017 09/01/2016 30/03/2015 09/01/2016 09/01/2016 1. Unapproved stand-alone agreement, no performance criteria. 2. EMI Company scheme, no performance criteria. 3. EMI stand-alone scheme, no performance criteria. 4. EMI and Unapproved stand-alone scheme, with performance criteria which require the Board to determine whether certain identified technical developments have been completed. EMI and Unapproved stand-alone scheme, with performance criteria which allow the options to vest (i) when the audited accounts for the year ended 30 June 2010 become available and (ii) when the earnings per share of the financial year are a positive figure. 5. 6. EMI stand-alone scheme, with performance criteria as detailed in (5) above. Share Investment Plan The details of the Epistem Share Investment Plan are outlined in Note 18(b) to the accounts. The Directors’ interests in the shares of the Company include shares acquired under the Share Investment Plan as follows: Partnership shares No. Cost of matching shares £ Total matching Total SIP shares Total SIP shares shares 30 June 2010 30 June 2009 No. No. No. Catherine Booth Gerard Brady Jeffrey Moore John Rylands Matthew Walls Approved by the Board D Evans Non-executive Chairman 5 October 2010 512 512 512 512 512 2,991 2,991 2,991 2,991 2,991 1,026 1,026 1,026 1,026 1,026 1,538 1,538 1,538 1,538 1,538 419 419 419 419 419 Epistem Holdings Plc Annual Report 2010 25 Corporate Governance Report For the year ended 30 June 2010 The Group is subject to the continuing requirements of the AIM Rules and is committed to adhering to corporate governance standards appropriate for a company of its size. The Group follows the Quoted Companies Alliance guidelines and has Remuneration, Audit and Nominations committees with written terms of reference and a schedule of matters reserved for the Board, which generally meets each month. The Board has established an Audit Committee, a Remuneration Committee and a Nominations Committee. The membership of these committees and attendance at meetings is as follows: Audit Remuneration Nominations Committee Committee Committee David Evans (Non-executive Chairman) Robert Nolan (Non-executive Director) Roger Lloyd (Non-executive Director), Remuneration and Nominations Committees only 3 3 N/A 3 3 3 1 1 1 Remuneration Committee The Remuneration Committee will review the scale and structure of the Executive Directors’ and senior management’s remuneration and the terms of their service contracts. The remuneration and terms of appointment of the Non-executive Directors will be set by the Board. The Remuneration Committee will also approve the issue of share options under schemes approved by the Board. None of the Committee have any personal financial interest (other than as shareholders), conflicts of interest arising from cross-directorships, or day-to-day involvement in the running of the business. No Director plays a part in any discussion about his or her own remuneration. Audit Committee The Audit Committee has responsibility for receiving accounts and reviewing reports from the management and the Company’s auditors, relating to Annual and Interim Accounts and the accounting and internal controls in place throughout the Group. At this stage of the Group’s size and development, the Committee has decided that an internal audit function is not required as the Group’s internal controls system in place is appropriate for its size. The Audit Committee has met three times during the year. Nominations Committee The Nominations Committee has responsibility for reviewing the size, structure and composition of the Board, as well as retirements and appointments of replacement and additional Directors, and for making appropriate recommendations to the Board. Relations with shareholders The Group recognises the importance of communicating with its shareholders to ensure that its strategy and performance is understood and that it remains accountable to shareholders. The Board as a whole is responsible for ensuring that a satisfactory dialogue with shareholders takes place, while the Chairman and Chief Executive ensure that the views of the shareholders are communicated to the Board as a whole. The Board ensures that the Group’s strategic plans have been carefully reviewed in terms of their ability to deliver long-term shareholder value. Internal controls The Board acknowledges its responsibility for establishing and maintaining the Group’s system of internal controls and will continue to ensure that management keeps these processes under regular review and improves them where appropriate. The system of internal controls is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can provide only reasonable and not absolute assurance against material misstatement or loss. Social, environmental and ethical matters The Board recognises the growing awareness of social, environmental and ethical matters and it endeavours to take into account the interests of the Group’s stakeholders, including its investors, employees, suppliers and business partners, when operating the business. Employment At a subsidiary level the individual company has established policies which address key corporate objectives in the management of employee relations, communications and employee involvement, training and personal development and equal opportunities. Health, safety and environmental issues The Board recognises its legal responsibilities to ensure the well-being, safety and welfare of its employees and to maintain a safe and healthy working environment for them and for its visitors and subcontractors. Health and Safety is on the agenda for regularly scheduled Board meetings. By their nature, the Group’s regular operations are judged to have a low environmental impact and are not expected to give rise to any significant inherent environmental risks over the next twelve months. The Group is committed to maintaining high standards in implementing appropriate health, safety and environmental protection policies. The Group has an excellent health and safety record. Waste materials are recycled where appropriate, and hazardous waste is catalogued and handled by licensed specialist disposal companies. 26 Epistem Holdings Plc Annual Report 2010 Independent Auditors’ Report to the Members of Epistem Holdings Plc For the year ended 30 June 2010 G o v e r n a n c e We have audited the group and parent company Financial Statements (the Financial Statements) of Epistem Holdings Plc for the year ended 30 June 2010 which comprise the group income statement, the group and parent company balance sheets, the group and parent company cash flow statements, the group and parent company statements of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs), as adopted by the European Union and, as regards the parent company’s Financial Statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors As explained more fully in the Statement of Directors’ responsibilities set out in the Directors’ Report the directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). These standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the Financial Statements An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • • whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; and the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the Financial Statements. Opinion on the Financial Statements In our opinion: • • • • the Financial Statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 30 June 2010, and of the group’s profit for the year then ended; the group Financial Statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company Financial Statements have been properly prepared in accordance with the IFRSs as adopted by the European Union and as applied in accordance with the requirements of the Companies Act 2006; and the Financial Statements have been prepared in accordance with the requirements of Companies Act 2006 and as regards the group Financial Statements, Article 4 of the IAS regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors’ Report for the financial year for which the Financial Statements are prepared is consistent with the Financial Statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006, we are required to report to you if, in our opinion: • • • • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company Financial Statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures or directors’ remuneration specified by law are not made; or we have not received all the information and explanations we required for our audit. Epistem Holdings Plc Annual Report 2010 27 Independent Auditors’ Report to the Members of Epistem Holdings Plc (continued) Under the Listing Rules we are required to review: • • the Directors’ statement, set out in the Directors’ Report, in relation to going concern; and the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. Carol Graham FCA (Senior Statutory Auditor) For and on behalf of: HW Chartered Accountants & Statutory Auditors Bridge House 157 Ashley Road Hale Altrincham Cheshire WA14 2UT 25 October 2010 28 Epistem Holdings Plc Annual Report 2010 Consolidated Statement of Comprehensive Income For the year ended 30 June 2010 A c c o u n t s Revenue Contract costs Discovery and development costs General administrative costs Operating profit/(loss) Finance income Finance costs Profit/(loss) on ordinary activities before taxation Taxation on ordinary activities Total comprehensive income for the financial year Earnings per share (pence) – Basic – Diluted All of the activities of the Group are classed as continuing. Notes 2010 £’000 2009 £’000 2 3 6 6 7 9 9 5,740 3,968 (2,697) (1,433) (1,298) 312 (2,424) (1,131) (1,114) (701) 40 (2) 350 (60) 290 41 (9) (669) 752 83 3.8p 3.3p 1.1p 1.0p The Company has taken advantage of section 408 of the Companies Act 2006 not to publish its own income statement. Epistem Holdings Plc Annual Report 2010 29 Consolidated Statement of Changes in Equity For the year ended 30 June 2010 Equity share capital £’000 Employee share Share premium incentive account plan reserve £’000 £’000 Share options reserve £’000 Reverse acquisitions reserve £’000 Retained earnings £’000 Total equity £’000 Balance at 1 July 2008 108 8,437 Allotment of ordinary shares Exercise of options Lapse of options Recognition of equity-settled share-based payments Total comprehensive income for the year At 30 June 2009 Balance at 1 July 2009 Allotment of ordinary shares Share issue costs Purchase of own shares (SIP) Exercise of options Recognition of equity-settled share-based payments Total comprehensive income for the year – – – – – 24 6 – – – 108 8,467 108 8,467 11 – – – – – 2,873 (135) – 1 – – – – – – – – – – – – (43) – – – 547 (2,484) (4,026) 2,582 – (6) (6) 71 – 606 – – – – – – – 6 – 83 24 – – 71 83 (2,484) (3,937) 2,760 606 (2,484) (3,937) 2,760 – – – (1) 28 – – – – – – – – – – – – 290 2,884 (135) (43) – 28 290 5,784 At 30 June 2010 119 11,206 (43) 633 (2,484) (3,647) 30 Epistem Holdings Plc Annual Report 2010 Consolidated Balance Sheet As at 30 June 2010 A c c o u n t s Notes 2010 £’000 2009 £’000 Non-current assets Intangible assets Plant and equipment Deferred taxation Current assets Trade and other receivables Tax receivables Cash and cash equivalents Liabilities Current liabilities Deferred income Trade and other payables Obligations under finance leases Corporation taxation Bank overdrafts and loans Net current assets Total assets less current liabilities Non-current liabilities Deferred income Obligations under finance leases Net assets Capital and reserves Called-up equity share capital Share premium account Employee share incentive plan reserve Share options reserve Reverse acquisition reserve Retained earnings Total shareholders’ equity 10 11 12 13 14 15 16 17 15 17 22 23 23 23 23 23 135 608 536 1,279 1,011 150 5,371 6,532 974 1,014 37 2 – 2,027 4,505 5,784 – – 5,784 119 11,206 (43) – 633 (2,484) (3,647) 5,784 139 465 594 1,198 820 150 3,748 4,718 1,380 721 46 – 52 2,199 2,519 3,717 (920) (37) 2,760 108 8,467 606 (2,484) (3,937) 2,760 These Financial Statements were approved by the Directors and authorised for issue on 5 October 2010 and are signed on their behalf by: D Evans Non-executive Chairman H J J Rylands Company Secretary Epistem Holdings Plc Annual Report 2010 31 2010 £’000 2009 £’000 312 169 28 509 (191) (1,326) 293 (715) 40 – 40 (701) 131 71 (499) (383) 2,300 293 1,711 41 183 224 (675) 1,935 (308) (308) (328) (328) 2,884 (135) – (43) (48) 2,658 24 – (53) (29) 1,675 3,696 5,371 1,578 2,118 3,696 5,371 – 5,371 3,748 (52) 3,696 Consolidated Statement of Cash Flows For the year ended 30 June 2010 Cash flows from operating activities Operating profit/(loss) for the year Depreciation, amortisation and impairment Share-based payment expense Operating profit/(loss) before changes in working capital and provisions (Increase) in trade and other receivables (Decrease)/increase in deferred income Increase in trade and other payables Net cash (outflow)/inflow from operations Interest received Tax received Net cash (outflow)/inflow from operating activities Cash flows from investing activities Acquisition of fixed assets Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of share capital Expenses of share issue Purchase of own shares Repayment of borrowings Net cash inflow/(outflow) from financing activities Net increase in cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of net funds Cash at bank and in hand Bank overdrafts Net funds 32 Epistem Holdings Plc Annual Report 2010 Notes to the Financial Statements For the year ended 30 June 2010 A c c o u n t s 1. Significant accounting policies Basis of accounting The Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and therefore comply with Article 4 of the EU IAS Regulation, International Financial Reporting Interpretations Committee (IFRIC) interpretations and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Epistem Holdings Plc is a company incorporated in the UK. The Financial Statements consolidate those of the Company and its subsidiaries (together referred to as the Group). They are presented in pounds sterling and all values are rounded to the nearest one thousand (£k) except where otherwise indicated. The Financial Statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods represented in these consolidated Financial Statements. The preparation of the Financial Statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, duration of contracts, income, expenses and taxation. • • • Determining the value of Deferred income and expenditure requires an assessment of the duration of the contract to which the Deferred income and expenditure relates which informs decisions as to when to recognise revenue and whether to carry forward costs. Determining the value of Intangible assets requires a judgement about the extent to which the relevant asset will be brought into economic use by the Company. The filing of a patent will generally lead to a judgement that the cost of filing the patent will have future economic use. Research and development expenditure will generally be expensed unless associated income can be identified. Determining the value of the deferred tax asset requires an estimation of future taxable profits against which the accumulated tax losses may be utilised. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Basis of consolidation Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The Financial Statements of subsidiaries are included in the consolidated Financial Statements from the date that control commences until the date that control ceases. Transactions between Group companies are eliminated on consolidation. On 16 March 2007, Epistem Holdings Plc merged with Epistem Limited, and on that date the shareholders of Epistem Limited exchanged their shares for equivalent shares in Epistem Holdings Plc. As Epistem Holdings Plc was newly incorporated at the time of the transaction under the terms of IFRS 3 Business Combinations, this transaction has been accounted for as a reverse acquisition, on the basis that the shareholders of Epistem Limited gained a controlling interest in the Group. The Financial Statements therefore represent a continuation of the Financial Statements of Epistem Limited. Revenue Revenue is measured at the fair value of the consideration received or receivable and net of discounts and sales-related taxes. Revenue recognition a. Contract revenue Contract revenue is recognised by reference to the stage of completion of its related transaction at the end of the reporting period. b. Collaboration and licensing revenue Contractually agreed up-front payments and similar non-refundable payments in respect of collaboration or licence agreements which are not directly related to ongoing research activity are recorded as deferred income and recognised as revenue over the anticipated duration of the agreement. Where the anticipated duration of the agreement is modified, the period over which revenue is recognised is also modified. Non-refundable milestone and other payments that are linked to the achievement of significant and substantive technological or regulatory hurdles in the research and development process are recognised as revenue upon the achievement of the specified milestone. Income which is related to ongoing research activity is recognised as the research activity is undertaken, in accordance with the contract. Epistem Holdings Plc Annual Report 2010 33 Notes to the Financial Statements (continued) 1. Significant accounting policies (continued) Segment reporting A segment is a group of assets, liabilities and operations engaged in providing products or services that are subject to risks and returns that are different from those of other parts of the business. The Group’s primary format for segment reporting is based on business segments. Research and development Research and development expenditure is written off in the year in which it is incurred, unless associated income has been identified. Intangible assets Intangible assets are stated at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is calculated so as to write off the cost of an intangible asset, less its estimated residual value, over the useful economic life of that asset, as follows: Intellectual property – 5% straight line basis Patents – over their estimated useful lives on a straight line basis No amortisation is charged on those assets which are not yet available for use. Plant and equipment Plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated so as to write off the cost of an asset, less its estimated residual value, over the useful economic life of that asset as follows: Plant & machinery – 25% reducing balance basis Fixtures & fittings – 25% reducing balance basis Equipment – 25% reducing balance basis Finance lease agreements Assets held under finance lease agreements are capitalised and disclosed as Plant and equipment. The capital element of the future payments is treated as a liability and the interest is charged to the consolidated income account so as to produce a constant periodic rate of interest on the remaining balance of the liability. Operating lease agreements Rentals applicable to operating leases where substantially all of the benefits and risks of ownership remain with the lessor are charged against profits over the period of the lease. Foreign currencies Transactions in foreign currencies are translated at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items carried at fair value and denominated in foreign currencies are retranslated at the rates prevailing on the date when fair value is determined. The foreign currency risks relating to assets and liabilities are detailed in Note 19. Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are taken to the income account. Exchange differences arising on non-monetary items, carried at fair value, are included in the income account, except for such non-monetary items in respect of which gains and losses are recorded in equity. Share-based payments The Group issues equity-settled and cash-settled share-based payments to certain employees (including Directors). Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight line basis over the vesting period, together with a corresponding increase in equity, based upon the Group’s estimate of the shares that will eventually vest. Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Where the terms of an equity-settled transaction are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled transaction is cancelled, it is treated as if it had vested on the date of the cancellation, and any expense not yet recognised for the transaction is recognised immediately. However, if a new transaction is substituted for the cancelled transaction, and designated as a replacement transaction on the date that it is granted, the cancelled and new transactions are treated as if they were a modification of the original transaction, as described in the previous paragraph. 34 Epistem Holdings Plc Annual Report 2010 A c c o u n t s The issuance by the Company of share options to employees of its subsidiary represents additional capital contributions and the fair value of such options and awards is therefore recognised as an increase in the Company’s investment in Group undertakings with a corresponding increase in total equity shareholders’ funds. Share Incentive Plan The Company operates an HMR&C qualifying Share Incentive Plan. Under the scheme, the Company may contribute Matching shares to employees who elect to invest in Epistem shares under the scheme. The Matching shares have vesting conditions, which require participants to remain employed with the Company and retain their investment in Epistem shares for at least three years. The cost of the Matching shares is expensed as and when the vesting conditions have been satisfied. Pension contributions Contributions to personal pension plans of employees on a defined contributions basis are charged to the income statement in the year in which they are payable. Financial instruments Financial instruments are classified and accounted for, according to the substance of the contractual arrangement, as either financial assets, financial liabilities or equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Trade and other receivables Trade and other debtors are recognised and carried forward at invoiced amounts less provisions for any doubtful debts. Bad debts are written off when identified. Cash and cash equivalents Cash and cash equivalents are included in the balance sheet at cost. Cash and cash equivalents comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Interest-bearing loans and borrowings All loans and borrowings are recognised initially at cost, which is the fair value of the consideration received, net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are measured at amortised cost using the effective interest method. Gains or losses are recognised in the consolidated income account when liabilities are derecognised or impaired, as well as through the amortisation process. Investments Investments in subsidiaries are stated at cost less any provisions for impairment. An impairment is recognised when the recoverable amount of the investment is less than the carrying amount. Taxation Current tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted, or substantially enacted, by the balance sheet date. Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the deferred tax arises from the initial recognition of goodwill (if amortisation of goodwill is not deductible for tax purposes) or the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting profit nor taxable profit and loss. Temporary differences are differences between the carrying amount of the Group’s assets and liabilities and their tax base. Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity. Any remaining deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxation profits, within the same jurisdiction, in the foreseeable future against which the deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising in subsidiaries, jointly controlled entities and associates, except where the timing of reversal of the temporary difference will not reverse in the foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based on tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Measurement of deferred tax liabilities and assets reflects the tax consequence expected from the manner in which the asset or liability is recovered or settled. Epistem Holdings Plc Annual Report 2010 35 Notes to the Financial Statements (continued) 1. Significant accounting policies (continued) New standards and interpretations not applied The International Accounting Standards Board (IASB) and IFRIC have issued the following standards and interpretations with an effective date for financial years beginning on or after 1 January 2010: IFRS 3 (revised) IFRS 7 (revised) IAS 1 (revised) IAS 7 (revised) IAS 32 (revised) IAS 36 (revised) IAS 38 (revised) IFRIC 15 Business combinations Statement of cash flows arising from 2009 Annual Improvements Presentation of Financial Statements, comprehensive revision Statement of cash flows, arising from 2009 Annual Improvements Puttable financial instruments Impairment of assets, arising from 2009 Annual Improvements Intangible assets, arising from 2009 Annual Improvements Agreements for construction of real estate The Directors do not anticipate that the adoption of these standards and interpretations will have a material effect on the Group’s Financial Statements in the period of initial application. 2. Segment information The Group’s primary reporting format is business segments and the secondary format is geographical segments. Business segments Contract Research Personalised Medicine Services £’000 £’000 Novel Therapies Unallocated £’000 £’000 Total £’000 2,519 800 2,421 – 5,740 759 (31) (6) 722 (51) (36) (12) (99) 1,067 (1,265) (80) – 987 (22) (11) (1,298) 510 (169) (29) 312 2,295 670 1,003 – 3,968 607 (37) (7) 563 739 60 521 24 51 (24) (19) 8 (103) (1,054) (53) (2) (17) (43) (158) (1,114) (499) (131) (71) (701) 218 17 736 192 6,118 39 7,811 308 – – 423 38 2,218 25 3,162 86 Twelve months ended 30 June 2010 Revenue Segment trading result – less depreciation and amortisation – less equity-settled share-based payments Operating profit/(loss) Twelve months ended 30 June 2009 Revenue Segment trading result – less depreciation and amortisation – less equity-settled share-based payments Operating profit/(loss) Twelve months ended 30 June 2010 Segment assets Segment capital expenditure Twelve months ended 30 June 2009 Segment assets Segment capital expenditure 36 Epistem Holdings Plc Annual Report 2010 Geographical segments The Group’s operations are located in the United Kingdom. The following table provides an analysis of the Group’s revenue by geographical market: A c c o u n t s United Kingdom Europe United States of America Asia 2010 £’000 2009 £’000 412 782 4,524 22 5,740 687 762 2,508 11 3,968 Revenues from customers accounting for more than 10% of turnover are detailed below: (a) £2,880k revenue, of which £1,380k represents recognition of deferred income, was derived from international pharmaceutical company, Novartis, with revenue included in all divisions (2009: £1,222k). No milestone or licensing revenue was receivable in the year (2009: £nil); and (b) £692k revenue was derived from the University of Maryland on behalf of the US Government with revenue included within Contract Research Services (2009: £514k). 3. Operating profit/(loss) The Group operating profit/(loss) is stated after charging: Discovery and development expenditure Amortisation Depreciation of owned fixed assets Depreciation of assets held under finance lease agreements Auditors’ remuneration – as auditors – for other services Operating lease costs – property rent 4. Particulars of employees The average number of staff employed by the Group during the financial year amounted to: Contract services Research and development Administrative The aggregate payroll costs of the above were: Wages and salaries Social security costs Equity-settled share-based payments Pension payments 2010 £’000 2009 £’000 1,433 1,131 4 4 143 22 23 – 5 173 80 47 20 153 2010 No. 2009 No. 29 12 9 6 5 47 28 42 2010 £’000 2009 £’000 2,144 250 28 13 – 2,435 2,022 218 71 2,311 Epistem Holdings Plc Annual Report 2010 37 Notes to the Financial Statements (continued) 5. Directors’ remuneration Remuneration Pension contribution Equity-settled share-based payments Full details of the Directors’ remuneration and Directors’ options are contained in the Directors’ Remuneration Report. 6. Finance income and costs Finance income – interest receivable – differences in foreign exchange Total finance income Finance costs (finance leases) 7. Taxation on ordinary activities (a) Recognised in the income statement Current tax Research and development tax credits UK corporation tax on profits for the period Adjustment relating to a previous period Total current tax Deferred tax Prior year tax losses now recognised Current year tax losses Prior year capital allowances in excess of depreciation now recognised Current year capital allowances in excess of depreciation In respect of prior year share options charges now recognised In respect of current year share options charges Total deferred tax 2010 £’000 946 7 – 11 964 2009 £’000 961 53 1,014 2010 £’000 2009 £’000 8 32 – 40 41 41 (2) (9) 2010 £’000 2009 £’000 – 2 – – 2 (8) 20 – 52 – (6) 58 (150) (8) (158) (423) (74) 26 49 (153) (19) (594) Total tax charge/(credit) for the year 60 (752) 38 Epistem Holdings Plc Annual Report 2010 (b) Reconciliation of the total tax charge Profit/(loss) before taxation Tax using the UK corporation tax rate of 28% (2009: 28%) Expenditure not deductible for tax purposes Transfers from previously unrecognised deferred tax Adjustments in respect of research and development tax credits Adjustment relating to a previous year Total tax in income statement A c c o u n t s 2010 £’000 2009 £’000 350 (669) 98 (187) 5 2 0 (35) (8) 60 (550) (9) (8) (752) The Group had losses, as computed for tax purposes, of approximately £1,749k (2009: £1,764k) available to carry forward to future periods. In accordance with the provisions of the Finance Act 2000 in respect of research and development allowances, the Group is entitled to claim tax credits for certain research and development expenditure. The amount included in the Financial Statements in respect of the year ended 30 June 2010 is £nil (2009: £150k). 8. Profit attributable to members of the parent company The profit dealt with in the accounts of the parent company was £6k (2009: £34k). 9. Earnings per share The basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders for the year by the weighted average number of ordinary shares in issue during the year less the weighted average number of Matching Shares held by the Epistem SIP which are not yet vested. The diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares in relation to share options and share warrants. The number of share options has been adjusted to take into account the issue price and the fair value, consistent with IAS 33 Earnings per share. Profit/(loss) for the year after taxation Weighted average number of ordinary shares in issue Dilutive ordinary shares from options and warrants in issue Dilutive weighted average number of ordinary shares Earnings per share – basic – diluted 2010 £’000 290 2010 No. 2009 £’000 83 2009 No. 7,649,732 7,201,928 739,372 1,075,938 8,725,670 7,941,300 3.8p 3.3p 1.1p 1.0p Epistem Holdings Plc Annual Report 2010 39 Notes to the Financial Statements (continued) 10. Intangible assets Cost At 1 July 2009 Additions At 30 June 2010 Amortisation At 1 July 2009 Charge for the year At 30 June 2010 Net book value At 30 June 2009 At 30 June 2010 Cost At 1 July 2008 Additions At 30 June 2009 Amortisation At 1 July 2008 Charge for the year At 30 June 2009 Net book value At 30 June 2008 At 30 June 2009 Patents £’000 Intellectual property £’000 Total £’000 88 – 88 – – 88 88 – 88 88 – – – – 88 77 – 77 26 4 30 51 47 77 – 77 22 4 26 55 51 165 – 165 26 4 30 139 135 77 88 165 22 4 26 55 139 During the year to 30 June 2010, the cost of the Company’s Patents assessed as not having been brought into economic use amounted to £88k (2009: £88k). 11. Plant and equipment Cost At 1 July 2009 Additions At 30 June 2010 Depreciation At 1 July 2009 Charge for the year At 30 June 2010 Net book value At 30 June 2009 At 30 June 2010 40 Epistem Holdings Plc Annual Report 2010 Lab equipment £’000 Fixtures & fittings £’000 Other equipment £’000 Total £’000 885 269 1,154 482 143 625 403 529 19 11 30 12 4 16 7 14 110 28 138 1,014 308 1,322 55 18 73 55 65 549 165 714 465 608 Cost At 1 July 2008 Additions At 30 June 2009 Depreciation At 1 July 2008 Charge for the year At 30 June 2009 Net book value At 30 June 2008 At 30 June 2009 A c c o u n t s Lab equipment £’000 Fixtures & fittings £’000 Other equipment £’000 Total £’000 684 201 885 372 110 482 312 403 19 – 19 9 3 12 10 7 71 39 110 774 240 1,014 41 14 55 30 55 422 127 549 352 465 Obligations under finance leases Included within the net book value of lab equipment is £67k (2009: £89k) relating to assets held under finance lease agreements. The depreciation charged to the Financial Statements in the year in respect of such assets amounted to £22k (2009: £30k). Capital commitments Contracted but not provided for in the Financial Statements 12. Deferred taxation Recognised Tax losses carried forward Excess of tax allowances over depreciation Share-based payment transactions 2010 £’000 2009 £’000 – 120 2010 £’000 490 (124) 170 536 2009 £’000 497 (75) 172 594 Deferred tax assets are recognised to the extent that the Directors, having reviewed expectations of future profitability, consider it is probable that there will be sufficient profit available against which the deferred tax asset may be utilised. The Group did not recognise deferred tax assets in respect of share-based payment transactions of £2,963k (2009: £2,765k). 13. Trade and other receivables Trade receivables Other receivables Prepayments Accrued income 2010 £’000 2009 £’000 662 114 46 189 1,011 474 71 106 169 820 Epistem Holdings Plc Annual Report 2010 41 Notes to the Financial Statements (continued) 13. Trade and other receivables (continued) Analysis of trade receivables Neither impaired nor past due Past due but not impaired Trade receivables 2010 £’000 2009 £’000 611 51 662 461 13 474 Ageing of past due but not impaired trade receivables There is no other class of financial assets that is past due but not impaired except for trade receivables. The Group’s credit period generally ranges up to 60 days. The age analysis of the trade receivables have been considered from the date of the invoice and, net of allowances that are past due, is given below: Not later than one month Later than one month but not later than three months 14. Cash and cash equivalents Cash at bank and in hand Short-term bank deposits 2010 £’000 2009 £’000 15 – 36 13 2010 £’000 2009 £’000 371 5,000 5,371 484 3,264 3,748 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short-term bank deposits with a maturity of three months or less. Market rates of interest are earned on such deposits. The credit risk on such funds is limited because the counter parties are banks with high credit ratings assigned by international credit rating agencies. 15. Deferred income The items recorded as Deferred income are to be recognised over future periods as follows: 2010 £’000 2009 £’000 974 – 974 1,380 920 2,300 2010 £’000 2009 £’000 457 213 344 1,014 349 147 225 721 Amounts to be recognised within one year Amounts to be recognised within two to five years 16. Trade and other payables Trade payables Other payables Accruals 42 Epistem Holdings Plc Annual Report 2010 17. Obligations under finance leases Future commitments under finance lease agreements are as follows: Due within one year Due within two to five years – less future finance charges Present value of finance lease obligations Current obligations Non-current obligations Obligations under finance leases A c c o u n t s 2010 £’000 2009 £’000 41 – 41 (4) 37 37 – 37 49 40 89 (6) 83 46 37 83 18. Share-based payments (a) Share options outstanding at 30 June 2010 Prior to 28 November 2007, the Company operated a number of HMR&C approved and unapproved share option schemes for employees (including Directors). The original options were granted by Epistem Limited but, following the acquisition by Epistem Holdings Plc, these were released in exchange for equivalent options over the ordinary shares of Epistem Holdings Plc. On 28 November 2007 the Company established the 2007 Epistem Share Option Scheme. Share options Award EMI – Approved EMI – Approved EMI – Approved EMI – Approved Share Warrants (Note 22) EMI – Unapproved EMI – Approved EMI – Unapproved EMI – Approved EMI – Approved EMI – Approved EMI – Unapproved EMI – Approved EMI – Unapproved 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme Number of awards Exercise price Period within which options are exercisable Fair value per option Fair value £ 88,800 11,200 9,000 10,200 198,554 78,000 31,824 472,153 197,722 9,400 80,644 177,653 25,903 57,727 71,918 65,800 £0.50 07 Jan 2002 to 06 Jan 2012 See note below £0.75 £0.75 £0.75 £1.61 £1.29 £1.20 £1.20 £1.20 £1.20 £1.24 £1.24 £1.67 £1.60 £1.53 £1.77 31 Mar 2003 to 30 Mar 2013 07 Apr 2003 to 06 Apr 2013 21 Jul 2004 to 20 Jul 2014 18 Mar 2005 to 17 Mar 2015 31 Mar 2005 to 30 Mar 2015 25 Nov 2005 to 24 Nov 2015 10 Jan 2006 to 09 Jan 2016 10 Jan 2006 to 09 Jan 2016 29 Sept 2006 to 28 Sept 2016 28 Mar 2007 to 27 Mar 2017 28 Mar 2007 to 27 Mar 2017 27 Jul 2007 to 26 Jul 2017 15 Oct 2007 to 14 Oct 2017 03 Mar 2011 to 02 Mar 2018 31 Jul 2011 to 30 Jul 2018 28.2p 28.2p 26.6p 56.1p 44.9p 42.6p 42.6p 42.6p 41.6p 42.6p 42.6p 38.9p 36.0p 36.0p 37.0p 3,158 2,538 2,713 111,389 35,022 13,557 201,137 84,230 3,910 34,354 75,680 10,076 20,782 25,890 24,346 Epistem Holdings Plc Annual Report 2010 43 Notes to the Financial Statements (continued) 18. Share-based payments (continued) Option valuations The options were valued using the Black-Scholes option-pricing model. Where appropriate, performance conditions were included in the fair value calculations. The fair value per option granted and the assumptions used in the calculations are in the table below. The Group’s effective date for IFRS 2 (Share-based payments) implementation is 1 July 2006 and the IFRS has been applied to all options granted after 7 November 2002 which have not been vested by this effective date. Award EMI – Approved EMI – Approved EMI – Approved Share Warrants EMI – Unapproved EMI – Approved EMI – Unapproved EMI – Approved EMI – Approved EMI – Approved EMI – Unapproved EMI – Approved EMI – Unapproved 2007 Epistem Share Option Scheme 2007 Epistem Share Option Scheme Expected term (Note a) Grant date 31 Mar 2003 5 years 07 Apr 2003 21 Jul 2004 18 Mar 2005 31 Mar 2005 25 Nov 2005 10 Jan 2006 10 Jan 2006 29 Sept 2006 28 Mar 2007 28 Mar 2007 27 Jul 2007 15 Oct 2007 03 Mar 2008 31 Jul 2008 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years 5 years Expected dividend yield % (Note b) Expected volatility % (Note c) Risk free rate (Note d) Performance condition 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 60 60 60 60 60 60 60 60 60 60 60 45 45 45 40 3.75 3.75 4.50 4.75 4.75 4.50 None None None None None None 4.50 See Note (e) 4.50 4.50 None None 5.25 See Note (f) 5.25 See Note (f) 5.50 5.75 5.25 5.00 None Note (g) Note (h) Note (h) (a) The expected term used in the model is five years and is based upon the Directors’ best estimates for the effects of exercise restrictions and behavioural considerations; (b) The dividend yield of 0% reflects the absence of a history of paying dividends and a clear dividend policy at the relevant grant dates; (c) The expected volatility at the date of grant was estimated by the Directors after inspection of the Financial Statements of comparable businesses in the same business sector as the Group; (d) The risk free rate used is based upon the prevailing UK bank base rate at the date of the grant; (e) These options vest on dates dependant on anniversaries of commencing employment with the Group which commenced 1 September 2005 with the final tranche vesting on 1 September 2008; (f) The main conditions for these options to vest are the later of (i) when the audited accounts for the year ended 30 June 2010 become available and (ii) when the earnings per share of the financial year are a positive figure; (g) These options are subject to performance criteria which are appropriate to the option holders’ role within the Company and which are assessed by the Remuneration Committee. (h) These options may be exercised following the third anniversary of grant and are subject to performance criteria which are appropriate to the option holders’ role within the Company and which are assessed by the Remuneration Committee. The number of options and their weighted average exercise prices are as follows: Group Outstanding as at 1 July Granted during the year Exercised during the year Lapsed during the year Outstanding as at 30 June Number Weighted average exercise price 2010 2009 2010 2009 Weighted average remaining contracted life – years 2010 2009 1,590,148 1,583,298 68,050 – (19,200) (2,900) (42,000) (750) 1,586,498 1,590,148 £1.28 – £1.21 £1.76 £1.28 £1.26 £1.77 £1.27 £1.53 £1.28 5.62 6.62 Options exercisable at 30 June 1,190,483 1,193,383 £1.24 £1.24 5.11 6.11 The weighted average share price at the exercise dates was £3.23 (2009: £2.57). 44 Epistem Holdings Plc Annual Report 2010 A c c o u n t s (b) Share Investment Plan During the year, the Company introduced the Epistem Share Investment Plan, SIP, which is open to Directors and employees in accordance with HMR&C approved rules. Under the terms of the SIP, Directors and employees may invest up to £125 per month to be invested in ordinary shares (Partnership Shares) in the Company at the prevailing market price. At the same time as each monthly subscription, a maximum of two Matching Shares for each Partnership Share will be acquired on behalf of the SIP’s participants. Both the Partnership and the Matching Shares are purchased on behalf of the scheme’s participants by Epistem SIP Trustee Limited, a wholly owned subsidiary of the Company. Participants, who must be employed by the Company, may withdraw their Matching Shares once their associated Partnership Shares have been held for three years. The cost of the Matching Shares is expensed as and when this vesting condition is met. Capital SIP Shares Partnership Shares held at 30 June Matching Shares held at 30 June 2010 2009 5,852 11,694 N/A N/A Unamortised cost of Matching Shares (comprising Employee SIP reserve) £43k – 19. Financial risk management objectives and policies The Group holds or issues financial instruments in order to achieve three main objectives, being: (a) to finance its operations; and (b) to manage its exposure to interest and currency risks arising from its operations and from its sources of finance. In addition, various financial instruments (e.g. trade receivables, trade payables, accruals and prepayments) arise directly from the Group’s and the Company’s operations. Transactions in financial instruments result in the Group assuming or transferring to another party one or more of the financial risks described below. Interest rate risk The Group currently finances its operations through reserves of cash and liquid resources and does not have a borrowing requirement. Surplus cash at bank is placed on deposits at variable rates. The Board monitors the financial markets and the Group’s own requirements to ensure that the policies are exercised in the Group’s best interests. The following table demonstrates the sensitivity to a possible change in interest rates on the Group’s profit before tax through the impact of floating rate cash balances. 2010 Cash and cash equivalents 2009 Cash and cash equivalents Decrease in the basis points Effect on loss before tax and equity £’000 25 25 5 5 An increase in 25 basis points would have a similar opposite effect. Credit risk The Group monitors credit risk closely and considers that its current policies of credit checks meet its objectives of managing exposure to credit risk. The Group has no significant concentrations of credit risk. Amounts shown in the balance sheet best represent the maximum credit risk exposure in the event that other parties fail to perform their obligations under financial instruments. Liquidity risk The Board’s policy aims to ensure that sufficient funds are held on a short-term basis in order to meet operational needs. Epistem Holdings Plc Annual Report 2010 45 Notes to the Financial Statements (continued) 19. Financial risk management objectives and policies (continued) Currency risk The Group’s functional currency is sterling. The exposure to currency risk relates to licence income and those short-term trade receivables which are not invoiced in sterling. There are no significant costs incurred that involve payments in foreign currency. The Group has no forward contracts at the year end (2009: nil) to manage foreign currency risk. Balances which are denominated in US dollars are detailed below: Trade and other receivables Cash and cash equivalents 2010 £’000 325 340 665 2009 £’000 121 479 600 The following table demonstrates the sensitivity to a possible change in currency rates on the Group’s loss before tax through the impact of sterling weakening against the US dollar. 2010 Trade and other receivables Cash and cash equivalents 2009 Trade and other receivables Cash and cash equivalents An increase in currency rate of 5% would have a similar opposite effect. Fair values of financial assets and liabilities There is no material difference between the book value and the fair value of the Group’s financial assets or liabilities. 20. Commitments under operating leases At 30 June 2010 the Group had annual commitments under non-cancellable operating leases as set out below. Operating leases which expire Within one year Decrease in the currency rate Effect on loss before tax and equity £’000 5% 5% 5% 6 5% 16 17 24 Land and buildings 2009 2010 £’000 £’000 148 143 The operating leases are in respect of the company’s office and laboratories which are held under short-term leases. 21. Related party transactions At the balance sheet date, the amounts owed to the following Directors, Prof. C Potten and D Evans were £3k and £8k respectively (2009: £7k and £3k). The transactions during the year with these related parties relate entirely to Directors’ remuneration for the year and the amounts for each are detailed in the Directors’ Remuneration Report. 46 Epistem Holdings Plc Annual Report 2010 22. Share capital On 25 November 2009, the Company adopted new Articles of Association which removed the requirement for the shareholders to proscribe a level of Authorised share capital. Prior to 25 November 2009, the Authorised share capital had been set at 10,000,000 shares (£150k.) A c c o u n t s Allotted and called up share capital: At 1 July Private placing Exercise of options 2010 No. 2010 £’000 2009 No. 2009 £’000 7,211,083 720,000 2,900 108 7,191,883 – 10 1 19,200 108 – – Ordinary shares of £0.015 each 7,933,983 119 7,211,083 108 On 16 March 2007, the Company entered into a warrant instrument in respect of the subscription for up to 198,554 ordinary shares of £0.015 each in Epistem Holdings Plc. This warrant instrument replaced a previous warrant instrument created by Epistem Limited on 18 March 2005. Each warrant confers the right to subscribe for one ordinary share at a subscription price of £1.61 per ordinary share. The subscription rights under the warrants may be exercised up to 21 September 2015. 23. Reserves Balance as at 1 July 2008 Total Comprehensive Income for the year Allotment of ordinary shares Exercise of options Lapse of options Recognition of equity-settled share-based payments in the year Balance at 30 June 2009 Balance as at 1 July 2009 Total Comprehensive Income for the year Allotment of ordinary shares Share issue costs Unamortised cost of Matching Shares Exercise of options Recognition of equity-settled share-based payments in the year Balance at 30 June 2010 Share Employee premium share incentive account plan reserve £’000 £’000 Share options reserve £’000 Reverse acquisition reserve £’000 Retained earnings £’000 8,437 – 547 (2,484) (4,026) – 24 6 – 8,467 8,467 – 2,873 (135) – 1 – 11,206 – – (6) (6) 71 606 – – – – 83 – 6 – (2,484) (3,937) 606 (2,484) (3,937) – – – – (1) 28 – – – – – – 290 – – – – – 633 (2,484) (3,647) – – – – (43) – (43) The reverse acquisition reserve arises as a difference on consolidation under merger accounting principles and is solely in respect of the merger of the Company and Epistem Limited. The employee share incentive plan reserve represents 11,694 shares in Epistem Holdings Plc (2009: nil shares) all of which are held by Epistem SIP Trustee Limited. These shares are listed on the Alternative Investment Market and their market value at 30 June 2010 was £38k (2009: £nil). The nominal value held at 30 June 2010 was £175 (2009: £nil). Epistem Holdings Plc Annual Report 2010 47 Company Balance Sheet As at 30 June 2010 Non-current assets Investments Current assets Amounts receivable from Group undertakings Cash and cash equivalents Current liabilities Trade and other payables Net current assets Total assets less current liabilities Capital and reserves Called-up equity share capital Share premium account Share options reserve Retained earnings Total shareholders’ equity Notes 2010 £’000 2009 £’000 a b 22 23 23 5,663 5,635 1,492 5,001 6,493 735 3,001 3,736 (2) – 6,491 12,154 3,736 9,371 119 11,206 633 196 12,154 108 8,467 606 190 9,371 These Financial Statements were approved by the Directors and authorised for issue on 5 October 2010 and are signed on their behalf by: D Evans Non-executive Chairman H Rylands Company Secretary 48 Epistem Holdings Plc Annual Report 2010 Company Statement of Changes in Equity For the year ended 30 June 2010 A c c o u n t s At 1 July 2008 108 8,437 547 150 9,242 Share capital £’000 Share premium account £’000 Share options reserve £’000 Retained earnings £’000 Total equity £’000 Allotment of ordinary shares Recognition of equity settled share-based payments Exercise of options Lapse of options Profit for the year At 30 June 2009 Balance at 1 July 2009 Allotment of ordinary shares Share issue costs Recognition of equity settled share-based payments Exercise of options Profit for the year At 30 June 2010 – – – – – 24 – 6 – – – 71 (6) (6) – 108 8,467 606 – – – 6 34 190 24 71 – – 34 9,371 108 8,467 606 190 9,371 11 – – – – 2,873 (135) – 1 – – – 28 (1) – – – – 6 2,884 (135) 28 – 6 119 11,206 633 196 12,154 Epistem Holdings Plc Annual Report 2010 49 Company Statement of Cash Flows For the year ended 30 June 2010 Cash flows from operating activities Profit for the year Operating profit before changes in working capital and provisions (Increase)/decrease in trade and other receivables Increase in trade and other payables Cash (outflow)/inflow from operations Interest received Tax (paid)/received Net cash outflow from operating activities Cash flows from financing activities Proceeds from issue of share capital Expenses of share issue Net cash inflow from financing activities Net increase in cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Analysis of net funds Cash at bank and in hand Bank overdrafts Net funds 2010 £’000 2009 £’000 – – – – (757) – (757) 8 – – 8 961 (19) 942 34 34 (749) 976 2,884 (135) – 2,749 2,000 3,001 5,001 5,001 – – 5,001 24 24 1,000 2,001 3,001 3,001 3,001 50 Epistem Holdings Plc Annual Report 2010 Notes to the Company Financial Statements For the year ended 30 June 2010 a. Investments The Company is the holding company of the Group. A c c o u n t s The Company owns 100% of the issued share capital of Epistem Limited and Epistem SIP Trustees Limited, companies both registered in England and Wales. The issued share capital is fully paid and is included in the consolidated Financial Statements of the Group. The principal activity of Epistem Limited is the provision of services to the biotechnology and pharmaceutical industries. The principal activity of Epistem SIP Trustees Limited is to act as trustee to the Epistem Share Incentive Plan. On 29th August 2009 Epistem Holdings Plc subscribed for 100% of the share capital of Epistem Inc., a company that was incorporated in United States of America. The principal activity of Epistem Inc. is the provision of services to the biotechnology and pharmaceutical industries. Cost At 1 July 2009 Additions At 30 June 2010 Net book value At 30 June 2009 At 30 June 2010 Cost At 1 July 2008 Additions At 30 June 2009 Net book value At 30 June 2008 At 30 June 2009 Investment in subsidiary £’000 5,635 28 5,663 5,635 5,663 Investment in subsidiaries £’000 5,564 71 5,635 5,564 5,635 Additions in the year ended 30 June 2010 comprised the fair value of the share options issued to employees of the subsidiary undertaking during the year of £28k. Additions in the year ended 30 June 2009 comprised the fair value of the share options issued to employees of the subsidiary undertaking during the year of £71k. Full details of the share options issued are set out in Note 18 to the consolidated Financial Statements. b. Cash and cash equivalents Company Cash at bank and in hand Short-term bank deposits 2010 £’000 2009 £’000 1 5,000 5,001 1 3,000 3,001 Cash and cash equivalents comprise current accounts held by the Group with immediate access and short-term bank deposits with a maturity of three months or less. Market rates of interest are earned on such deposits. The credit risk on such funds is limited because the counter parties are banks with high credit ratings assigned by international credit rating agencies. c. Related party transactions During the course of the year, Epistem SIP Trustee acquired 11,694 (2009: nil) shares in Epistem Holdings Plc on behalf of the Epistem Share Investment Plan at a cost of £43k (2009: nil). Epistem Holdings Plc Annual Report 2010 51 Notes 52 Epistem Holdings Plc Annual Report 2010 Business Overview Introductory Highlights What We Do Epistem: Contract Research Services Epistem: Personalised Medicine Epistem: Novel Therapies Our Business and Strategy Review of the Year Strength in Depth Chairman’s Statement Chief Executive’s Review IFC 2 4 6 8 10 12 14 16 Governance Board of Directors Directors’ Report Directors’ Remuneration Report Corporate Governance Report Independent Auditors’ Report Accounts Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to the Financial Statements Company Balance Sheet Company Statement of Changes in Equity Company Statement of Cash Flows Notes to the Company Financial Statements Directors, Secretary and Advisers 20 22 24 26 27 29 30 31 32 33 48 49 50 51 IBC Year of profit 2nd 45% 5.4m Revenue growth year-on-year Cash balance (£million) Directors, Secretary and Advisers Directors David Evans Matthew Walls Chris Potten Catherine Booth Gerard Brady Roger Lloyd Jeffrey Moore Robert Nolan John Rylands Company Secretary John Rylands Registered Office 48 Grafton Street Manchester M13 9XX United Kingdom Registrars Neville Registrars Limited 18 Laurel Lane Halesowen B63 3DA Nominated Adviser and Broker KBC Peel Hunt Limited 111 Old Broad Street London EC2N 1PH Legal Advisers McGrigors LLP Princes Exchange 1 Earl Grey Street Edinburgh EH3 9AQ Auditors HW Chartered Accountants Bridge House 157 Ashley Road Hale Altrincham Cheshire WA14 2UT Principal Banker Natwest Commercial Banking 1 Spinningfields Square Deansgate Manchester M3 3AP Printed on Revive 50:50 Gloss. Revive 50:50 Gloss is an FSC-recognised paper, produced from well-managed forests, and recycled wood or fibre. This publication was printed with vegetable oil-based inks by an FSC-recognised printer that holds an ISO 14001 certification. Cover and IFC photography by Hubert Sieverding Epistem Holdings Plc Annual Report and Accounts 2010 Controlling life-long tissue renewal i E p s t e m H o d n g s P c l i l A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 0 Epistem Plc 48 Grafton Street Manchester M13 9XX United Kingdom T +44 (0)161 606 7258 F +44 (0)161 606 7348 www.epistem.co.uk Divisional development and core company strength
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