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Delivering
Growth and
Focused on
Value Creation
Annual Report
and Accounts 2016
Midatech Pharma
Registered office
65 Innovation Drive
Milton Park
Abingdon
Oxfordshire
OX14 4RQ
United Kingdom
Registered number
09216368
Midatech Pharma plc Annual Report & Accounts 2016
We are committed to improving
patients' lives and creating value
for all of our stakeholders.
Our business model and
strategy are designed to
build long-term, profitable
growth and sustainable
shareholder value.
SIGNIFICANT PROGRESS WITH MIDATECH'S Q-OCTREOTIDE PROGRAMMEPage 12 ZUPLENZ IN THE USApproved for use in multiple indications in a $10bnUS marketProduct portfolio Page 02 MIDATECH CONTINUES TO EXECUTE AGAINST ALL KEY AREAS OF ITS BUSINESS MODELPage 09
FINANCIAL HIGHLIGHTS
• Tax credit receivable of £1.44m (2015: £1.20m,
2014: £0.84m)
• Entered into a senior secured £6 million loan
agreement with Silicon Valley Bank in Q1 2017
OPERATIONAL HIGHLIGHTS
• Preparation for final development and
commercialisation of Q-Octreotide
View our case study page 12
• Successful integration and strong sales performance
from recently acquired US commercial business
• Midatech’s launch of our anti-nausea product
Zuplenz® in the US
• Product candidate testing for hepatocellular
carcinoma (HCC) and glioblastoma (GBM)
• Dosing commenced in first immunotherapy vaccine
Phase I study for type 1 diabetes
• Further positive progress seen in the Company’s
OpsiSporin and MTX110/111 (DIPG) programmes
View our case study page 12
1) Total gross revenues represents the full list price of products shipped to
wholesales and other customers before product returns, discounts, rebates and
other incentives based on the sales price and grant revenue.
2) Statutory Revenue represents total gross revenue, excluding grant revenue and
after deductions for product returns, discounts, rebates and other incentives.
01
CONTENTS
Overview
Highlights
Midatech Overview
Investment Proposition
Strategic Report
Business Model
Vision and Strategy
Product Pipeline
Chairman's and Chief
Executive’s Statement
Financial Review
Risk Management
Governance
Directors’ Remuneration Report
Corporate Governance
Board of Directors
Directors’ Report
Financial Statements
Independent Auditor’s Report
Consolidated statement
of comprehensive income
Consolidated statement
of financial position
Consolidated statement
of cash flows
Consolidated statement
of changes in equity
Notes forming part of the
financial statements
Parent Company balance sheet
Parent Company statement
of changes in equity
Notes forming part of the
Company financial statements
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Other Information
Company Information
101
For more information and the latest
share price, go to:
www.midatechpharma.com/investors
TOTAL GROSS REVENUES1 £9.21m 510%2015: £1.51m2014: £0.16mSTATUTORY REVENUE2 £6.38m 718%2015: £0.78m2014: £0.03mCASH & DEPOSITS£17.61m2015: £16.8m2014: £30.3mNET LOSS AFTER TAX£20.16m2015: £10.10m2014: £8.82mOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
02
Midatech Pharma plc Annual Report & Accounts 2016
Midatech Pharma Overview
Midatech has a balanced portfolio of fast-growth marketed oncology products
and development programmes for its own products, using its proprietary
platform technologies to target diseases with unmet medical need.
In the US, Midatech commercialises oncology treatment and supportive
care products. The acquisition of DARA BioSciences in December
2015 brought three cancer supportive care products, along with an
established oncology-focused sales and marketing capability in the
largest and most profitable pharmaceuticals market in the world.
Six products are marketed in the US for oncology treatment and supportive care1:
Zuplenz®: an anti-emetic for the
treatment of post-chemotherapy
anti-nausea that does not need to
be injected or swallowed. Acquired
in December 2015 and launched by
Midatech in the US in April 2016.
Gelclair: oral gel for the
management and relief of pain
from oral mucositis and other
oral lesions caused by chemo-
or radiotherapy.
Oravig: the only orally dissolving
buccal tablet for treatment of
oral thrush associated with
chemo- and radiotherapy and in
HIV patients.
For more information:
www.zuplenz.com
For more information:
www.gelclair.com
For more information:
www.oravig.com
Soltamox: the only liquid form of
tamoxifen, for the treatment of
metastatic breast cancer, the adjuvant
treatment of node-positive breast
cancer in premenopausal women.
Ferralet: prescription iron
tablet for the treatment of all
anaemias that are responsive
to oral iron therapy.
Aquoral: artificial saliva spray
to provide relief from chemo-
and radiotherapy-induced
dry mouth.
For more information:
www.soltamox.com
For more information:
www.ferralet.com
For more information:
www.aquoral.com
Note: 1. Midatech Pharma US has an exclusive license to Soltamox® and Oravig®, an exclusive license to distribute, promote and market Gelclair ®, and a marketing
agreement to co-promote two Mission products: Ferralet 90® and Aquoral®. In addition, Midatech also holds the exclusive license to Zuplenz®.
03
In Europe, the Group is advancing a pipeline of novel clinical and
pre-clinical product candidates. Midatech repurposes existing drug
compounds by using its targeted delivery and sustained release
technologies, with the aim of improving safety and efficacy in the
treatment of rare or orphan diseases.
Midatech has two proprietary platform technologies for the targeted delivery and
controlled release of existing therapeutic drugs to the right place at the right time:
GNP
GOLD NANOPARTICLE
PLATFORM
Q-SPHERA
SUSTAINED RELEASE
MICRO PARTICLES
Specific targeting agents
to transport and safely
deliver a therapeutic
payload into the targeted
cell type.
Consistent and precise
encapsulation of active
drug compounds within
polymer microspheres for
controlled release.
Midatech is collaborating with several universities as well as pharmaceutical and biotechnology companies
to develop its platform technologies into a range of potential high value revenue opportunities within priority
therapeutic areas.
Three core programmes:
Intellectual property
• MTD201, Q-Octreotide for carcinoid syndrome
and acromegaly
• MTX110 for DIPG
• MTR104 for hepatocellular carcinoma
The Group has a strong intellectual property
base with 77 granted patents, 81 applications in
process and 35 patent families covering a range
of technologies.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
04
Midatech Pharma plc Annual Report & Accounts 2016
Investment Proposition
Midatech offers the potential for rapid revenue growth through its
differentiated product portfolio and exciting development pipeline, supported
by strong IP and, an ambitious and highly experienced leadership team.
Rapid
revenue
growth
Delivery of strong revenue
growth is core to Midatech’s
business model, allowing
the organisation to become
sustainably profitable in the
shortest possible time.
With its infrastructure in the US,
Midatech is focused on building
its commercial business
through product acquisitions
and by launching its wholly-
owned products, leveraging
the capabilities of its own sales
force, and thus shortening its
path to profitability.
Differentiated
product
offering
Each of Midatech’s niche cancer
therapies, currently in research
and development, has revenue
potential of well over $100m
per year and in some cases,
much more. Midatech’s multiple
programmes utilising its two
platform technologies allow the
Group to defray development
risks and thus be in a position to
deliver benefits to patients and
healthcare professionals and to
deliver high growth revenue for
the Company.
FOCUSED
COMMERCIAL
BALANCED
DELIVERING
VALUE
05
Intellectual
property
The foundation of Midatech’s
IP is on two core platform
technologies which have
enabled multiple patent
filings. The Group continues
to strive to protect its future
revenues and assets using
its technology advantages,
delivered by actively
managing its patent
portfolio and know-how.
Balanced
risk reward
profile
The Group has diversified
its risk through having
a balanced mix of fast-
growth marketed oncology
products, different types of
development programmes at
different stages of progress
and an approach to research
that reduces risk by using
known chemical entities,
where Midatech improves the
way they work as medicines.
Ambitious
leadership
team
Midatech’s leadership has
significant experience in the
pharmaceutical industry and
of creating value from high
growth companies.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
06
Midatech Pharma plc Annual Report & Accounts 2016
During 2016, our R&D
team identified the
optimal constructs of
chemotherapeutics and
targeting agents to balance
efficacy and tolerability for
our brain and liver cancer
programmes, having
screened a vast number
of possible combinations.
07
STRATEGIC REPORT
Business Model
Vision and Strategy
Product Pipeline
Chairman's and Chief
Executive’s Statement
Financial Review
Risk Management
08
10
12
14
16
20
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
08
Midatech Pharma plc Annual Report & Accounts 2016
Business Model
Midatech’s vertically integrated business model is built on diversified
revenue streams from licensed and in-house targeted therapies for
major diseases with unmet medical need.
WE APPLY OUR SOURCES OF
COMPETITIVE ADVANTAGE…
INNOVATIVE
THERAPIES
Utilising Midatech’s broadly
applicable platforms for
significant medical disorders that
have few or no existing clinical
therapeutic options.
FIRST MOVER
ADVANTAGE IN GNP
For targeted cancer therapies
based on Midatech's proprietary
gold nanoparticle platform
technology.
IN-HOUSE
MANUFACTURING
FACILITY
Covering both Midatech’s
nanoparticle and sustained
released technology
platforms.
ESTABLISHED
COMMERCIAL
PLATFORM IN THE US
With an attractive portfolio
of cancer supportive care
products.
STRONG INTELLECTUAL
PROPERTY BASE
With patents covering
major geographical regions,
owned solely by Midatech,
co-owned or in-licensed.
T
N
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M
T
S
E
V
N
I
-
E
R
RE-INVESTMENT
09
…TO OUR CHOSEN
APPLICATIONS AND MARKETS…
WHAT MIDATECH DOES
Midatech commercialises oncology treatments and cancer supportive care
products through its US commercial organisation, Midatech Pharma US.
In Europe, the Group is principally engaged in the development
of pharmaceutical products utilising its nanomedicine and sustained
release technologies.
PRODUCTS
OWN
Development and
commercialisation of
in-house products with
a particular focus on
oncology applications.
PARTNER
Development
and commercialisation
of partner-supported and
in-licensed products.
ACQUISITIONS
Acquisition of
later stage, strategic
opportunities with
complementary focused
portfolios or technologies
that are synergistic to
that of Midatech.
OPERATIONS
R&D is undertaken in the Group’s UK labs in Abingdon and Cardiff,
where Midatech employs a total of 29 scientific personnel.
The Group has a licenced in-house manufacturing facility in Bilbao,
Spain, producing nanoparticle and sustained release products.
ROUTE TO MARKET
The Group has US commercial infrastructure, complemented
by partnerships. The Group intends to further develop its
US presence and will, in due course, establish a European
commercial organisation to sell its in-house products.
…TO CREATE VALUE
FOR OUR STAKEHOLDERS
HOW MIDATECH
CREATES VALUE:
COMMERCIALISATION
STRATEGY
Near-term
• Existing commercial operations
with marketed product portfolio
in the US.
• Research and development
collaborations, with existing
and prospective customers
using Midatech’s technologies
to address their pharmaceutical
challenges.
• Partner licensing and royalty
deals, from existing and
prospective partnerships, with
possible milestone income and
product royalties potentially
realised from 2017 onwards.
Mid-term
• Commercialisation of in-house
developed products, initially
through Midatech’s existing
commercial sales organisation
in the US and subsequently in
Europe. In-house sales capability
will be supplemented by existing
and prospective partnerships.
• Acquisitions of value accretive
and synergistic target companies,
products or portfolios may be
sought from time to time.
R
E
-
I
N
V
E
S
T
M
E
N
T
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
10
Midatech Pharma plc Annual Report & Accounts 2016
Vision and Strategy
Midatech has a clear strategy and roadmap
to build a sustainable, commercially focused
and profitable organisation.
THREE STRATEGIC PRIORITIES PROGRESS IN 2016
Midatech has a US sales and marketing function
comprising 28 staff including 20 sales representatives
in the highest prescribing oncology markets. We recently
finalised a co-promotion agreement with R-Pharm US
LLC providing additional reach and frequency for the
promotion of Zuplenz® and Oravig® to oncology accounts
across the US.
Significant progress has been made on liver cancer,
brain cancer and DIPG programmes with all moving
towards pivotal human studies in the 2017/18 timeframe.
The development of sustained release manufacturing
capability in the Bilbao facility was completed as part of
the ongoing development and eventual commercialisation
of Q-Octreotide.
The Group entered into a licensing agreement with
Emergex Vaccines Limited, a private UK biotechnology
company focused on infectious diseases, utilising
Midatech’s Gold Nanoparticle Technology. Midatech has
also agreed a Service and Manufacturing Agreement with
Emergex for synthesis and development manufacturing
of undefined cGMP material for clinical trials.
GROW US COMMERCIAL ORGANISATIONPROGRESS DEVELOPMENT OF IN-HOUSE ONCOLOGY PRODUCTSDRIVE DEVELOPMENT OF PARTNER PROGRAMMES 11
Our vision
To profitably use the Group’s nanomedicine and
sustained release technologies to improve patients’
lives and, in so doing, create value for all stakeholders.
FOCUS FOR 2017
Midatech Pharma US is focused on expanding the uptake of its supportive care product portfolio
in the oncology market, through field based promotion, non-personal promotion, co-promotion
partnerships, and GPO and Specialty Pharmacy relationships. MPUS is also working to leverage
its current product portfolio in indicated non-oncology markets through non-personal promotion
and strategic partnerships.
Advance key technology platforms into the clinic for our target therapeutic areas. For our Sustained Release
Technology, MTD201 Q-Octreotide, for the treatment of acromegaly/carcinoid, will enter its First-In-Human trial
midway through 2017, to be followed by a subsequent study through 2018. For our Gold Nanoparticle Technology,
MTX102 will complete its First-In-Human study for the antigen specific immunotherapy of Type 1 diabetes. In
addition, our GNP conjugate product MTR104 for the treatment of liver cancer (and potentially MTR103 for GBM
brain cancer) is expected to enter IND enabling studies during 2017 in preparation for IND filing in 2018. We also
plan to commence a Phase I study of our MTX110 product for the treatment of Diffuse Intrinsic Pontine Glioma via
direct delivery to the tumour using convection enhanced delivery.
There is a shift in focus for 2017 as Midatech looks to build on its commercial success in 2016
and move its in-house products closer to market. Partnering will be considered where it can
bring added value.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
12
Midatech Pharma plc Annual Report & Accounts 2016
Product Pipeline
We are advancing a rich pipeline of high-value, targeted therapies,
based on our key technology platforms, for major diseases with
unmet medical need.
Research
Pre-clinical
Phase I
Phase II
Phase III
Launched
Clinical
Oncology
Q-Octreotide Carcinoid MTD201
DIPG Pontine Glioma MTX110
Liver Hepatocellular Carcinoma MTR104
Glioblastoma MTR103
Immunotherapy
Type 1 Diabetes Vaccine MTX102
OpsiSporin Uveitis MTD202
Cancer Peptide Vaccines MTR117
TAM Immuno-Oncology MTR118
Focus Programme: MTD201 Q-Octreotide
•
Long-acting formulation of octreotide acetate for chronic treatment of Carcinoid Syndrome
and Acromegaly
• Estimated global market $2 billion
• Easy to use and administer:
– Less pain due to smaller needle and lower injection volume
– Fewer injection failures
– Rapid reconstitution
– Reduced clinical visit time
•
Investment in Midatech’s Bilbao manufacturing facility completed in preparation for product launch
• MTD201 Pivotal clinical programme during 2017/18
• Marketing authorisation submission anticipated in 2017/18
• Launch anticipated in 2018/19
13
Our Sustained Release Technology will deliver products to treat the debilitating
effects of carcinoid syndrome and endocrine disorders, our gold nanoparticle
(GNP) technology will focus on providing improved, and targeted products
for the treatment of liver cancer and brain cancer, and our nano-inclusion
(NI) technology will address severe unmet needs in childhood brain tumours.
In immunotherapy, our nanotechnology is being developed for cutting edge
applications in immuno-oncology, as well as autoimmune disease.
Research
Pre-clinical
Phase I
Phase II
Phase III
Launched
(Human Studies)
Experimental Use NPS Program Underway
Focus Programme: MTX110
Focus Programme: MTR104
•
Treatment for rare childhood brain tumour (DIPG)
with delivery of therapeutic constructs directly
into tumour
• c.1,000 cases per year worldwide
•
Devastating childhood brain tumour, universally
fatal with average survival time of 9 months
• No effective, current treatment
• Surgical removal not possible
•
MTX110 expedited clinical development
programme planned during 2017/18
•
Accelerated approval anticipated 2018/19
• Targeted therapy treatment for liver cancer
•
•
•
•
Third leading cause of cancer deaths worldwide, over
800,000 people affected
95% non-curable, non-operable and median survival less
than one year
Successful outcomes with chemotherapy are rare and
generally short lived
MTR104 focus is to increase tolerability and generate
higher anti-tumour efficacy
• Clinical trial enabling programme during 2017
•
First study in humans planned 2018, followed by
accelerated approval 2019
FACILITATED ON-MARKETPRODUCT ACQUISITIONSENABLED COMMERCIALISATIONSIGNIFICANT UPLIFT IN R&D PRODUCTIVITYOVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
14
Midatech Pharma plc Annual Report & Accounts 2016
Chairman's and
Chief Executive’s Statement
We have made significant progress in 2016 and laid down sound foundations
for future growth both across the commercial side of the business and with
the exciting pipeline of drugs in development.
YEAR IN REVIEW
STRATEGY AND PATH TO PROFITABILITY
Midatech has continued to make good progress in 2016 in
research and development of its niche cancer therapies
including some potentially ground-breaking new therapies
for brain cancer and liver cancer using our GNP-enabled
technology platforms and know-how.
Our primary objective is to grow our innovative product
related revenues and launch our new products for rare
cancers so that we can create value for our shareholders
through a profitable and self-sustaining business with the
resultant benefit to patients and clinicians.
This has also been a year of strong revenue growth, with the
successful launch of Zuplenz®, alongside growing traction
within our wider product base, and the reorganisation and
optimisation of our US operation. We have brought in new
management talent and new national accounts positions
to allow us greater contact with hospital consortia, giving
formulary access capabilities that did not exist before.
Total gross revenues for 2016 were £9.2m, in line with
market expectations, up 510% from £1.51m in 2015 and an
increase of 88% from £4.9m for the pro-forma combined
Midatech and pre-acquisition DARA BioSciences, Inc.
businesses in 2015.
Statutory Revenue was also up, by 718%, to £6.4m from
£0.8m in 2015. Loss after tax was up significantly to £20.2m
from £10.1m in 2015. However, 2016 included a full year of
Midatech US costs and a one-off charge of £11.4m in respect
of our Oravig product, discussed below. Cash balance at year
end was £17.6m, an increase of £1.4m (including exchange
gains) on 2015, thanks to the oversubscribed fundraise
completed in Q4 2016, discussed below.
Our strategic priorities are to grow revenues from the
products we already have (which alone have the potential to
allow the business to achieve profitability) and to take our
three key R&D investment programmes efficiently through
drug development and into commercialisation.
As part of this strategy, a significant step was completion
of the latest investment in our Bilbao facility, enabling the
manufacture of our sustained release products on a larger
scale. This means we will be able to manufacture in-house
most of our own products to clinical stage, i.e. human
studies, and in some cases to early commercial scale.
Following a recent, successful inspection by the Spanish
Medicines Agency, AEMPS, we await the issuance of a
revised licence that will allow us to manufacture products
based on both of our platform technologies for use
in humans.
COMMERCIALISED PRODUCTS
The US business, with the addition of Zuplenz®, continued
to perform well after its reorganisation in the first quarter
of 2016, and we met our revenue targets for the year. We
continue to look for ways to increase our access to the US
market, such as co-promotional deals of the type we have
recently signed with R-Pharm, where they will be co-
promoting our products into places that we don’t currently
have the capacity to call on, potentially doubling our reach
into the US market.
Sales of our Oravig product, acquired as part of the DARA
deal, have been disappointing, particularly in the latter
part of the year. We were therefore required to write down
the value of that asset. However, total sales of our other
products, in aggregate, have outperformed our expectations,
compensating for any shortfall in revenue from Oravig,
such that the US business overall is doing well against
expectations. Accounting standards do not permit us to
reassess the book value of these other assets upwards
where performance exceeds expectations.
R&D PIPELINE
Our EU based R&D operation is very much focussed on our
three, lead research and development programmes, each of
which could transform the business, both in terms of saving
lives and in driving revenue growth and future profitability.
Each has the potential to achieve highly significant revenue
that would transform our financial performance.
15
SUMMARY AND OUTLOOK
Midatech delivered against its business plan in 2016.
We are aware of increased scrutiny on pricing in the US
but we do not expect it to have a significant impact on our
product portfolio. As a business, we are not overly exposed
to the potential implications of the UK leaving the EU. We
earn revenues mainly in US dollars and our expenses are
largely in Sterling or Euros, so the net effect of Brexit-
related currency movements has had a generally positive
impact on reported revenue and net assets. US and other
non-EU pharmaceutical businesses operate successfully in
Europe and we expect to continue to do so, however, through
our operation in Bilbao, Spain, we are well established within
the ongoing European Union.
We are well placed to deliver further growth: our existing
products give us the future opportunity to become profitable
(even without further products coming to market), we have
a strong management team and an exciting pipeline with the
capability to increase our revenues substantially over the
next five to ten years as those products come to market.
Thanks to the motivation, talent and hard work of our
colleagues, we are optimistic that the business can continue
to deliver strong revenue growth in preparation for the launch
of our new products, currently in development, as they come
to market over the coming years.
On behalf of the Board, we would like to thank all of Midatech
staff, investors, clinicians and patients for their support in 2016.
Rolf Stahel
Chairman
Dr Jim Phillips
Chief Executive Officer
3 April 2017
Our Q-Octreotide programme for the treatment of
acromegaly and carcinoid syndrome is preparing for a short
phase of first in-man bioequivalence clinical trials in 2017
to take the product to market. Over the last year, we have
completed the formulation of the product (which is a new
version of an existing drug, requiring less clinic time and
is easier to use) and completed pre-clinical testing. Now,
we hope to follow an expedited route to get the product
registered and filed over the next two years, requiring a
small number of clinical trials.
The product would be entering a global market for the
chronic treatment of acromegaly and metastatic carcinoid
syndrome, worth an estimated $2 billion per year. The
revised manufacturing licence for our Spanish facility opens
the way for our first in-man study of Q-Octreotide in 2017.
MTX110 is a treatment for DIPG, a rare childhood brain
cancer for which there is currently no satisfactory treatment.
Patients’ average survival time is just 7-9 months. Following
unsolicited requests from treating physicians, the treatment
has been made available on a compassionate use basis.
We look forward this year to taking that programme into
pivotal clinical trials which we hope will lead to successful
regulatory filing and approval.
The third key programme is a new treatment for liver cancer.
After having tested a large number of drug and targeting
agent constructs, built around our gold nanoparticle
platform, in 2016 we were able to identify a combination
that appears to have a significant impact on liver cancer
cells, while sparing the healthy tissues in the body. Levels
of chemotherapy that, without our technology can be lethal
to animals, have been exceptionally well tolerated when
targeted using our nanoparticle system, while clearly
showing strong anti-tumour activity. We are now taking that
product forward to prepare it for clinical trials by 2018.
We have now exited the legacy insulin programme following
the clinical trial readout in Q2 2016. The negative result has
no impact on our cancer focus, however, and the learnings
of the insulin programme have been applied – our current
nanotechnology formulations are suitable for injection/
infusion, but we do intend to develop alternative, novel forms
for oral administration.
FUND RAISE
In Q4 2016 we concluded the first round of fundraising
since the Group’s IPO in 2014, culminating in a significantly
oversubscribed offer which allowed the Company to raise
£16.7m before costs. The additional capital will be used to
fund the ongoing development of our R&D pipeline products
and growth of the commercial business with a view to
achieving sustainable profitability.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
16
Midatech Pharma plc Annual Report & Accounts 2016
Financial Review
Midatech generated consolidated total revenue of £9.2m
an increase of 510% on the prior year and ahead of expectations.
Key performance indicators
TOTAL
GROSS
REVENUES1
£9.21m
510%
£
9
.
2
1
m
£
1
.
5
1
m
2015
2016
STATUTORY
REVENUE
£6.38m
718%
£
6
.
3
8
m
£
0
.
7
8
m
2015
2016
US
REVENUE
£5.60m
900%
£
5
.
6
0
m
£
0
.
5
6
m
2015
2016
INTRODUCTION
FINANCIAL ANALYSIS
Midatech Pharma plc (the "Company") was incorporated
as a Company on 12 September 2014 and is domiciled in
England. The Midatech Group was formed on 31 October
2014 when Midatech Pharma plc acquired the entire issued
share capital of Midatech Limited and its wholly owned
subsidiaries. The Group was expanded when, on 8 December
2014, the Company acquired the entire issued share capital
of UK based Q Chip Limited (“Q Chip”), a pharmaceutical
development company. Q Chip was subsequently renamed
Midatech Pharma (Wales) Limited (“MPW”). On 4 December
2015, the Company acquired the entire issued share capital
of U.S. based, DARA BioSciences, Inc. (“DARA”), an oncology
supportive care pharmaceutical company. DARA was
subsequently renamed Midatech Pharma US, Inc. (“MPUS”).
The MPUS business brought with it a portfolio of five cancer
supportive care products and an established commercial
platform in the U.S. market with a field sales organisation.
To supplement this acquisition, on 24 December 2015, the
Company acquired Zuplenz® (ondansetron), a marketed
anti-emetic oral soluble film from Galena Biopharma, Inc.
(Nasdaq: GALE) for the prevention of chemotherapy-induced
nausea and vomiting, radiotherapy-induced nausea and
vomiting, and post-operative nausea and vomiting.
The Company was admitted to the London Stock Exchange’s
Alternative Investment Market (“AIM”) on 8 December 2014,
raising £32.0m before costs in new capital. On 4 December
2015, following the DARA acquisition, American Depositary
Receipts ("ADRs") with each ADR representing the right to
receive two ordinary shares, were admitted to trading on the
NASDAQ Stock Market LLC trading platform ("NASDAQ").
On 28 October 2016, the Company announced that at
a General Meeting, shareholders had approved the
issuance of 15,157,044 new ordinary shares following a
substantially oversubscribed Placing to new and existing
institutional shareholders and additional Open Offer. This
raised proceeds of £16.67m before expenses and the new
shares were admitted to AIM on 31 October 2016.
Midatech’s KPIs have historically been focused on the key
areas of cash management, operating results and R&D spend.
These areas continue to be critical to the business, however,
Midatech’s US commercial operation is increasingly important
and KPIs in this area are now included. Additional financial
and non-financial KPIs, including further KPIs in respect of
the research and development programmes and commercial
operation, will be formalised in due course.
For the year ended 31 December 2016, Midatech generated
consolidated total gross revenues(1) of £9.21m (2015: £1.51m),
an increase of 510% on the prior year and in-line with the
upper end of market expectation. Statutory Revenue for the
year also increased, by 718%, to £6.38m (2015: £0.78m).
As part of the DARA deal, Midatech acquired the sales
and marketing rights to five products, including Oravig®,
for the treatment of oral thrush, a common side effect
of chemotherapy. Whilst overall performance of the
MPUS business has been good, sales of Oravig has been
disappointing and, as a result, the value of this element of the
acquired intangible assets has become impaired, resulting in
a charge of £11.41m to the Income Statement. It is unfortunate
that accounting standards do not permit an impairment to
be offset by any increase in the value of other intangibles,
however, the performance of the other products, including
Zuplenz®, has enabled us to support the carrying value of
goodwill in the MPUS business.
Net cash inflows for the year were £0.97m (2015: outflow of
£14.17m) reflecting the share issue in October 2016 where
£15.57m was raised after costs. Stripping out the share issue
proceeds, the adjusted outflow of £14.14m was in line with
the forecast for the year. Cash management continues to
be a major focus for the Board and senior management.
Cost of sales
Cost of sales has increased commensurately with product
sales to £0.67m (2015: £0.07m) reflecting both a full year
of commercial operations and continued growth in sales.
* before intangible asset impairment charges and acquisition and listing costs
and acquisition expenses
17
US REVENUE
AS % OF STATUTORY
REVENUE
7
2
%
8
8
%
88%
2015
2016
R&D
COSTS
£6.68m
13%
£
6
.
6
8
m
£
5
.
9
2
m
2015
2016
R&D AS %
OF OPERATING
COSTS*2
35%
6
0
%
3
5
%
2015
2016
LOSS FROM
OPERATIONS BEFORE
INTANGIBLE ASSET
IMPAIRMENT CHARGES &
ACQUISITION & LISTING COSTS &
ACQUISITION EXPENSES2
(£19.17m)
13%
2015
2016
£
9
.
9
3
m
£
1
9
.
7
m
NET CASH
INFLOW/(OUTFLOW)
FOR THE YEAR
£0.97m
£
0
.
9
7
2015
2016
(
£
1
4
.
1
7
m
)
AVERAGE
HEADCOUNT
8
4
7
4
84
13%
2015
2016
Research and development expenditure
Research and development costs increased on the previous
year to £6.68m (2015: £5.92m) reflecting significant,
ongoing investment in Midatech’s R&D programmes.
Activities in the year included:
The increase in 2016 administrative costs was driven by
consolidation of the US commercial business for a full
year added £4.38m to administrative costs (2015: £0.33m)
including £1.10m associated with the departure of three
former senior executives.
• Final pre-clinical studies of Midatech’s Q-Octreotide
sustained release treatment of acromegaly and carcinoid
syndrome. This project is moving into its first in-man,
bio-equivalence study in 2017.
• Ongoing development work on MTX110 for the treatment
of the rare children’s cancer, DIPG. This programme
is moving towards a pivotal human study, expected
during 2017.
• Investigational New Drug (“IND”) enabling studies
and final candidate selection for our liver cancer and
glioblastoma (brain cancer) programmes. Further IND
enabling programmes planned for 2017 and first human
study in late 2017/early 2018.
• Final pre-clinical formulation development and
toxicological studies of Opsisporin sustained release
treatment for uveitis in readiness for clinical
development phase.
• Preparatory work leading to the Phase I study for
our first immunotherapy vaccine for type 1 diabetes.
Distribution costs, sales and marketing
Prior to the acquisition of DARA/MPUS in December 2015,
Midatech did not classify any of its costs as specifically
relating to distribution, sales or marketing. With a full year of
commercial operations in the US, distribution costs, sales and
marketing has increased significantly to £9.52m (2015: £0.37m).
This includes amortisation of intangible assets acquired as
part of the acquisition of DARA/MPUS resulting in a charge of
£3.38m (2015: £0.23m).
Administrative costs
Midatech’s administrative costs also increased on the
prior year to £9.22m (2015: £7.93m), largely due to the
inclusion of a full year of US commercial operations (2015:
included listing and acquisition expenses of £2.99m).
Impairment Charge
As noted above, write down by £11.41m of the product
sales and marketing rights of our Oravig product following
disappointing sales performance, particularly during the
latter part of 2016.
Staff costs
During the year, the average number of staff employed
grew by 13% to 84 (2015: 74) and the payroll cost increased
by 66% to £7.49m (2015: £4.52m), including £1.1m relating
to former, senior DARA management who left during 2016.
Capital expenditure
The total cash expenditure on property plant and equipment
in 2016 was £1.35m (2015: £0.92m), principally reflecting
investment in Midatech’s sustained release (“SR”) platform
technology in advance of the Q-Octreotide first in-man clinical
trial scheduled for early 2017. Midatech’s manufacturing
facility in Bilbao, Spain was expanded to enable the in-house
production of Q-Octreotide and additional equipment was
purchased for our SR development facility in Cardiff, UK.
Movement in total assets
Total assets saw a reduction from £64.0m at 31 December
2015 to £56.7m at 31 December 2016. This was principally
the result of the net effect of impairment and amortisation
charges on product right intangible assets of £15.0m, and
a £4.8m foreign exchange gain arising on US denominated
intangible assets as set out in note 10. Property plant and
equipment increased by £0.8m mainly as a result of the
manufacturing facility in Bilbao, noted above. Cash and cash
equivalents, increased by £1.4m as a result of the cash from
the fundraise that completed in October 2016 being greater
than net cash used in operating and investing activities during
the year.
1 Total gross revenues represents the full list price of products shipped to
2 Total operating costs used to calculate R&D as a percentage of operating costs
wholesalers and other customers before product returns, discounts, rebates
and other incentives based on the sales price plus grant revenue.
is stated before Oravig impairment charge of £11.41m (2015: stated before listing
and acquisition expenses of £2.99m).
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
18
Midatech Pharma plc Annual Report & Accounts 2016
Financial Review continued
Movement in total liabilities
Total liabilities saw a reduction from £17.2m at 31 December
2015 to £11.0m at 31 December 2016. This was principally the
result of the reduction of the £6.5m deferred tax liability as at
31 December 2015 to £nil at 31 December 2016. This reduction
has been driven by the impairment and amortisation charges on
product right intangible assets and the recognition of a deferred
tax asset in respect of losses set against any remaining deferred
tax liability. Furthermore, the derivative financial liability reduced
by £1.2m as a result of the share options and warrants acquired
with Midatech Pharma US lapsing during 2016 and the reduction
in the share price as described in more detail in the notes to the
financial statements.
Other comprehensive income
Other comprehensive income comprises £3.23m (2015:
£0.40m) foreign exchange gain arising on retranslation
of Midatech Pharma US operations.
Cash flow
Net cash outflow from operating activities for the year was
£13.09m (2015: £12.42m). There was, however, a net cash
inflow from financing activities of £15.26m (2015: outflow
of £0.22m) which, along with the capital expenditure in the
year, resulted in a net cash inflow for the year of £0.97m
(2015: outflow of £14.17m). This saw the year end cash
balance increase to £17.61m (2015: £16.18m).
CAPITAL STRUCTURE
As noted above, 15,157,044 new ordinary shares were issued
on 28 October 2016 to subscribers in a Placing and additional
Open Offer. This raised proceeds of £16.67m before expenses
and the new shares were admitted to AIM on 31 October
2016. In addition, on 1 July 2016, 74,908 new ordinary shares
were issued to former shareholders of Q Chip as the second
and final tranche of deferred consideration shares for that
acquisition. No other new shares were issued during the year.
As at 31 December 2016 Midatech Pharma plc had in issue
48,699,456 Ordinary Shares of 0.005 pence each.
PRINCIPAL RISKS AND UNCERTAINTIES
The Directors consider the principal risks facing the
business to be as follows:
Regulation
Midatech operates in a highly-regulated sector.
Government authorities in the United Kingdom, United
States and in other countries and jurisdictions, including
the European Union, extensively regulate, among other
things, the research, development, testing, manufacture,
quality control, approval, distribution, sale, marketing,
post-approval monitoring and reporting of pharmaceutical
products. The processes for obtaining regulatory
approvals, along with subsequent compliance with
applicable statutes and regulations require the expenditure
of substantial time and financial resources.
The Group’s manufacturing facility in Bilbao operates
under the current Good Manufacturing Practice (“cGMP”)
guidelines for Investigational Medicinal Products and has
been licensed to manufacture non-sterile products based
on Midatech’s Gold Nanoparticle Technology platform
since March 2011, with indefinite validity (subject to passing
regular inspections). The facility was refurbished in 2014
to enable the manufacture of sterile products and the
additional certification of the facility to include production
of sterile material was confirmed in February 2016. A
further upgrade was carried out to enable the production of
sustained release formulations, based around Midatech’s
second technology platform. The regulatory licence will be
issued for these products in early 2017. Midatech performs
its investigational work in accordance with the European
Commission recommendation on a Code of Conduct for
responsible nanosciences and nanotechnologies research.
The Group’s manufacturing health and safety control
in its Spanish facility is subcontracted to a specialist
provider and complies with all Spanish employee and
work regulations.
Waste solutions and products are suitably disposed of
under contract with a licensed provider for this purpose.
Prior to disposal, hazardous waste materials are stored
under appropriate conditions. Solvents and other
inflammable reagents are stored in appropriate fire
containment storage cabinets.
Competition and technological advances
The Group’s drug nanoconjugate platform is among the
latest generation of nanomedicine technologies. Liposomes
followed by various polymeric nanoparticles were the first
nanotechnologies and now inorganic nanoparticles like
Midatech GNPs are a rapidly emerging technology within
the nanomedicine market.
The Group’s Sustained Release Technology relies on a
manufacturing process that, the Directors believe, is unique
in the pharmaceutical industry. Competing sustained release
technologies are well established in the market, however,
Midatech’s platform has the potential for improved drug
delivery kinetics and manufacturing efficiency.
Success of Midatech’s portfolio of commercial products and
its product candidates currently in development, depends
in part on the market’s acceptance of these products as
well as the successful operation of the Group’s salesforce
and marketing operations. There can be no guarantee that
this acceptance will be forthcoming or that Midatech's
technologies will succeed as an alternative to competing
products. Furthermore, demand for Midatech’s products
may decrease if competitor products are introduced
with perceived advantages over Midatech’s products
or product candidates.
19
The speed and nature of technological change means that
physical science is always evolving and new competition and
alternatives are always a possibility, however, the Directors
believe that Midatech has established competitive advantage
over its peers. As a result of the combination of its platform
technologies, intellectual property and proprietary know-
how, the Group has a protected position in the nanoparticle
and sustained release spaces which allows the potential
for highly differentiated drugs serving high unmet needs,
such as orphan oncology, to be rapidly and independently
manufactured and scaled.
Clinical development and regulatory risk
There can be no guarantee that any of the Group’s products
will be able to obtain or maintain the necessary regulatory
approvals in any or all of the territories in respect of which
applications for such approvals are made. Where regulatory
approvals are obtained, there can be no guarantee that the
conditions attached to such approvals will not be considered
too onerous by the Group or its distribution partners in order
to be able to market its products effectively. The Group seeks
to reduce this risk by developing products using safe, well-
characterised active compounds, by seeking advice from
regulatory advisers, consulting with regulatory approval
bodies and by working with experienced distribution partners.
FINANCIAL RISK MANAGEMENT OBJECTIVES
AND POLICIES
The Group is exposed to a variety of financial risks which
result from both its operating and investing activities.
The Board is responsible for coordinating the Group's risk
management and focuses on actively securing the Group's
short to medium term cash flows.
Finance risk
The Group enters into very few transactions involving
significant complexity, potential material financial exposure
or atypical risk. The Group does not actively engage in the
trading of financial assets and has no financial derivatives
other than an equity settled derivative financial liability as
set out in note 22.
Funding risk
The Group continues to incur substantial operating expenses.
The IPO in December 2014 and subsequent fundraise in
October 2016 generated sufficient cash to take the Group
toward break even and to becoming cash flow positive.
However, until the Group generates positive net cash inflows
from the commercialisation of its products it may be required
to seek additional funding through the injection of further
equity capital from share issues. The Group may not be
able to generate positive net cash inflows in the future or be
able to attract such additional funding as may be required,
either at all, or on suitable terms. In such circumstances the
development programmes may be delayed or cancelled and
business operations cut back.
The Group seeks to reduce this risk by keeping a tight control
on expenditure, avoiding long-term supplier contracts (other
than for clinical trials), prioritising development spend on
products closest to potential revenue generation, obtaining
government grants (where applicable), maintaining a focused
portfolio of products under development and by keeping
shareholders informed of progress.
POLITICAL LANDSCAPE AND EXTERNAL RISK
In the referendum in June 2016, voters approved the United
Kingdom’s exit from the European Union (commonly
referred to as “Brexit”). On 29 March 2017, the United
Kingdom formally initiated its withdrawal from the European
Union by triggering Article 50 of the Treaty of Lisbon.
As a result of the triggering of Article 50, the process of
negotiation with EU member states will commence in order
to determine the future terms of the UK’s relationship with
the EU. This has led to a period of uncertainty and volatility
particularly in relation to UK financial and banking markets.
As the Brexit process unfolds, asset valuations, currency
exchange rates and credit ratings may be especially subject
to increased market volatility.
Depending on the terms of Brexit, Midatech may face a
new regulatory landscape and challenges that may have a
material adverse effect on it and its operations. Midatech’s
manufacturing infrastructure is located in Bilbao, Spain, and
when the UK ceases to be a member of the EU, Midatech’s
ability to integrate its UK and Spanish operations could be
adversely affected. For example, depending on the terms of
Brexit, Midatech could become subject to export tariffs and
regulatory restrictions that could increase the costs and
time related to doing business in Spain. Conversely, having
a long-established presence inside the EU may become
increasingly beneficial providing tariff-free access to the
European market and to EU grant funding.
On 20 January 2017, Donald Trump was sworn in as the
forty-fifth president of the United States. As a candidate,
President Trump proposed various policies including
reforming the US Food and Drug Administration that
regulates, inter alia, the development, manufacture and
sale of pharmaceutical products, repealing the Patient
Protection and Affordable Care Act, as amended by the
Health Care and Education Reconciliation Act of 2010
(the “Affordable Care Act”) and changing the manner in
which drug prices are negotiated by the US national social
insurance Medicare programme. Notwithstanding these
possible reforms, we do not expect the new administration
to have a significant impact on the Midatech business
given our product portfolio, but changes in United States
social, political, regulatory and economic conditions or
in laws and policies governing foreign trade, importation,
manufacturing, development, registration and approval,
commercialisation and reimbursement of our products
in the United States could adversely affect our business.
In Q1 2017, Midatech entered into a senior secured loan
agreement for £6m with Silicon Valley Bank, thereby helping
to reduce its short to medium term funding risk.
Nick Robbins-Cherry
Chief Financial Officer
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
20
Midatech Pharma plc Annual Report & Accounts 2016
Risk Management
The Group has formal procedures to monitor
and mitigate risk.
Risk Attitude
Embedding
of Mitigation
Plan
Business
Continuity
Planning
Risk
Awareness and
Monitoring
Risk
Management
Review
Contingency
Planning
Risk
Management
Risk
Reporting
Internal Contral
Framework
21
Some of the principal risks facing the Group include:
Risk
Description
Mitigation
Change
Competition /
technological
progression
Although R&D is directed towards
areas of currently unmet medical need,
existing and prospective competitors
may have superior capabilities, and/
or alternative products may become
available. There is a risk of our products
losing commercial viability in the fast-
moving biotechnology sector.
Obtaining /
maintaining
regulatory
approval
Commercial
viability of
products
There can be no certainty that our
products will receive regulatory
approvals in the countries where we
intend to operate, either within the
timescale envisaged or at all. Regulations
may also change after approval has been
granted, and subsequent regulatory
difficulties with products may result in
impositions against us.
There can be no assurance that our
products will be commercially viable;
the amounts and costs of production
may not be acceptable for commercial
use, or superior products may be
developed. The ability to sell products
at an acceptable cost would also
be affected by healthcare reform in
individual countries where we
plan to operate.
• Keep a watching brief on drug delivery industry developments
and academic outputs to identify disruptive technology and
products early
• Protect our own technologies and products as broadly as
possible with patents and trademarks
• Review commercial relevance of the company’s technology
platforms regularly
• Direct innovation effort towards identified strengths and USPs
• Examine opportunities to diversify the pipeline by adding some
non-sustained release and non-GNP projects
• Develop products using safe, well-characterised active
compounds
• Seek early scientific and regulatory advice
• Track the changing regulatory environment to ensure that we
remain in compliance with all regulations and expectations
1. R&D:
• Maintain a detailed understanding of GNP and SR technologies to
maximise successful application thereof in Midatech therapeutic
areas, whether in relation to chemistry, manufacturing,
development or commercialisation
• Have clear go/no-go decision criteria allowing early identification
of projects unlikely to succeed
• Portfolio management to balance higher risk projects with lower
risk projects
• Hold Scientific and Therapeutic Advisory Board meetings
to review the viability of the pipeline and allocate resources
accordingly
2. Commercial:
• Evaluate M&A activity to add approved and marketed products
with proven commercialisation track records to the portfolio
• Use desk research, conferences, key opinion leaders and
advisory boards to track market dynamics
Dependence
on suppliers,
partners and
customers
We source materials from certain
suppliers, depend on contract research
organisations to undertake clinical
research, and have collaboration
agreements with various partners for
aspects of the product development
and commercialisation processes.
• Identify and maintain relationships with alternative suppliers,
particularly for critical materials
• Seek partnerships with companies of diverse interests and sizes
• Hold regular dialogue with partners to increase understanding
of respective interests
• Optimise the portfolio mix and number of projects and improve
R&D productivity to expand the pipeline
Dependence
on key
personnel
We depend on our senior management
team, and on the recruitment and
retention of skilled individuals to
undertake product development.
• Utilise the Group’s appraisal system to encourage two-way
communication with individuals
• Utilise HR function to:
- Identify and deal with any issues as they emerge
- Develop succession planning
- Ensure stimulating and open culture and environment
- Identify and develop talent, both internally and externally
This Strategic Report was approved by the Board on 3 April 2017 and signed on its behalf.
Dr Jim Phillips
Chief Executive Officer
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
22
Midatech Pharma plc Annual Report & Accounts 2016
In 2016, our US business
put in place a Key Account
Management function to
address the increasingly
consolidated market
for cancer treatment in
the US and to enable
better patient access.
23
GOVERNANCE
Directors' Remuneration Report
Corporate Governance
Board of Directors
Directors’ Report
24
32
34
36
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
24
Midatech Pharma plc Annual Report & Accounts 2016
Directors’ Remuneration Report
Executive remuneration packages are designed to attract and retain
executives of the necessary skill and calibre to run the Group.
On behalf of the Board, I am pleased to present the
Remuneration Report for the year ended 31 December
2016, which sets out the remuneration policy for the
Directors and the amounts earned during the current year.
The Remuneration Committee welcomes feedback on any
aspect of Group remuneration and remuneration policy
as disclosed in this report. We have not consulted with
shareholders during the year,
but will do so in the future where appropriate.
Sijmen de Vries
Chairman of the Remuneration Committee
THE REMUNERATION COMMITTEE
The Remuneration Committee assists the Board in
carrying out its responsibilities in relation to remuneration,
including making recommendations to the Board on the
Group’s policy on executive remuneration, setting the over-
arching principles, parameters and governance framework
of the Group’s remuneration policy and determining the
individual remuneration and benefits package of each of
the Executive Directors and the Group Secretary.
The Remuneration Committee ensures compliance
with the UK Corporate Governance Code in relation to
remuneration wherever possible.
The Remuneration Committee is chaired by Sijmen de
Vries, and its other members are Simon Turton, Rolf
Stahel and Michele Luzi. The Remuneration Committee
is required to meet at least twice a year. During 2016 the
Remuneration Committee met on three occasions.
Policy on Executive Directors’ remuneration
Executive remuneration packages are designed to attract
and retain executives of the necessary skill and calibre to
run the Group with reference to benchmarking comparable
groups. The Remuneration Committee recommends
remuneration packages to the Board by reference to
individual performance and uses the knowledge and
experience of the Committee members, published surveys
relating to AIM companies and the pharmaceutical industry,
as well as advice and external benchmarking from a UK
remuneration specialist company and market changes
generally. The Remuneration Committee has responsibility
for recommending any long-term incentive schemes.
The Board determines whether or not Executive Directors
are permitted to serve in roles with other companies. Such
permission is only granted where a role is on a strictly
limited basis, where there are no conflicts of interest or
competing activities and providing there is no adverse
impact on the commitments required to the Group. Earnings
from such roles are not disclosed to the Group.
There are four main elements of the remuneration
package for Executive Directors and staff, and during
2016, the Remuneration Committee implemented a more
structured and consistent approach to the incentivisation
of Midatech employees, including bonuses and share
based compensation:
(i) Basic salaries and benefits in kind
Basic salaries are recommended to the Board by
the Remuneration Committee, taking into account
the performance of the individual and the rates for
similar positions in comparable companies. Benefits
in kind comprising death in service cover and private
medical insurance are available to staff and Executive
Directors. Benefits in kind are non-pensionable.
(ii) Share options and other share-based incentives
The Group currently operates three distinct share
option schemes for employees including the Executive
Directors, to motivate those individuals through equity
participation. The choice of scheme depends on the
location of the individual:
a) Approved share options awarded to UK based staff
under the 2014 Midatech Pharma plc Enterprise
Management Incentive Scheme;
b) Share options awarded to eligible employees
of Midatech Pharma US, Inc. under the Midatech
Pharma plc 2016 U.S. Option Plan, which is a
sub-plan of the approved UK plan; and
CEO remuneration 5.5xof average employee salary
Directors’ Remuneration Report
25
c) Unapproved share options awarded to non-UK
or non-US staff.
Prior to the Company’s IPO in December 2014, some
unapproved share options were granted to certain staff
and key consultants however, since then, the award of
unapproved share options has been limited to employees
of Midatech Pharma España SL. Exercise of all share
options under the schemes is subject to specified
exercise periods and compliance with the AIM Rules.
The schemes are overseen by the Remuneration
Committee, which recommends all grants of share
options to the Board based on the Remuneration
Committee’s assessment of personal performance and
specifying the terms under which eligible individuals
may be invited to participate. Since 2016, the quantum of
any award is based on a fixed percentage of base salary
dependent upon the position of the employee within the
Group. The exercise price of all awards is the volume
weighted average price for the 20 days prior to the date
of the Board meeting at which the award is made.
The UK Corporate Governance Code (“the Code”)
requires a significant proportion of the total
remuneration package of Executive Directors to
comprise performance related remuneration, and
should be designed to align Executive Directors’
interests with those of the shareholders. The
Remuneration Committee currently considers that
the best alignment of these interests is through the
continued use of performance-based incentives
through the award of share options or other share-
based arrangements.
Each specific objective had an associated bonus
weighting. The Remuneration Committee reviews
actual performance against each objective and applied
the appropriate weighting to individuals’ maximum
potential bonus in order to determine the amount
payable. The maximum amount payable against these
objectives is 100% of the individual’s fixed, on-target
percentage of base salary.
The Remuneration Committee and the Board seek
to set objectives that encourage optimal, short-term
financial performance and maximise potential progress
with the R&D portfolio thereby creating long-term
improvements in stakeholder value.
(iv) Pension contributions
The Group pays a defined contribution to the pension
schemes of Executive Directors and other employees.
The individual pension schemes are private and their
assets are held separately from the Group.
(v) Loss of office
The Group has no specific policy on loss of office
other than to ensure that employees and Directors
are compensated in accordance with their
contractual entitlements.
Scenarios
The charts below set out the maximum potential
remuneration, excluding share options, that could have
been paid to the Executive Directors in the year ended
31 December 2016.
(iii) Bonus scheme
The Group has a discretionary bonus scheme for staff
and Executive Directors. Bonus payments are based on
a fixed on-target percentage of base salary dependent
upon the position of the employee within the Group,
which is moderated depending on the achievement of
corporate and personal objectives.
Specific details of the objectives used to measure
performance are considered commercially sensitive
and hence are not disclosed in detail, however, the
corporate and personal objectives for 2016, used to
determine bonus payments, included the following:
• Cash position at year-end;
• Revenue for the year; and
• Specific measures linked to key R&D programmes.
100%
60%
100%
100%
100%
62%
100%
100%
300
250
200
150
100
50
0
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
26
Midatech Pharma plc Annual Report & Accounts 2016
Directors’ Remuneration Report
continued
Service contracts
Set out below are summary details of the service
agreements and letters of appointment entered into
between the Company and the Directors:
Executive Directors
Dr Jim Phillips (Chief Executive Officer)
Dr Phillips entered into a service agreement with the
Company to act as Chief Executive Officer on 2 December
2014. His continuous employment with the Group commenced
1 May 2013. Dr Phillips retired by rotation prior to the
Company’s Annual General Meeting held on 26 May 2015
during which he was re-elected by the Company’s members.
His appointment is terminable upon one year’s notice.
Nick Robbins-Cherry (Chief Financial Officer)
Mr Robbins-Cherry entered into a service agreement with
the Company to act as Finance Director on 2 December 2014
and has since been appointed as the Group’s Chief Financial
Officer. Mr Robbins-Cherry’s continuous employment with
the Group commenced 4 February 2014. Mr Robbins-Cherry
retired by rotation prior to the Company’s Annual General
Meeting held on 26 May 2015 during which he was re-elected
by the Company’s members. His appointment is terminable
upon six months’ notice.
Relative importance of spend on pay
The total amount paid by the Group in remuneration to
all employees since the incorporation of the Company
is as follows:
Remuneration
2016
£’000
7,492
2015
£’000
4,515
2014
£’000
2,813
No dividends to shareholders have yet been paid.
Chief Executive Officer remuneration
The total remuneration paid to Dr Jim Phillips, the Chief
Executive Officer since the incorporation of the Company
is as follows:
Remuneration
2016
£’000
477
2015
£’000
377
2014
£’000
345
In recognition of the increased scrutiny on executive pay and
of initiatives such as the 2011 Dodd-Frank Wall Street Reform
and Consumer Protection Act in the United States, where the
US Securities and Exchange Commission was charged
with drawing up rules for mandatory disclosure of pay ratios,
the Board has calculated that the emoluments paid to the
Chief Executive Officer, Dr, Jim Phillips, is a multiple of 5.5
times (2015: 6.3 times) the average amount paid to staff in
the Midatech Group. This is a relatively new initiative and
the availability of comparative data is limited, however this
compares very favourably with FTSE100 companies where
the average ratio is reported to be around 130 times.
The total remuneration, including bonus, paid to the
Chief Executive Officer in the current year represents
an increase of 26% compared to the prior year. The
corresponding increase in the average amount paid per
employee in the same period is 46%.
No performance related share options vested during the year.
Non Executive Directors
The service contracts of the Non Executive Directors are
made available for inspection at the AGM.
Rolf Stahel (Non-Executive Chairman)
Mr Stahel entered into an agreement with Midatech Limited
on 15 April 2014 and was subsequently appointed Chairman
with effect from 1 March 2014. Mr Stahel subsequently
entered into a revised appointment agreement with the
Company on 2 December 2014. With effect from 1 March
2015, the appointment became terminable upon the
election of the Board.
John Johnston (Non Executive Director)
Mr Johnston entered into a Non Executive Director
appointment letter with the Company on 2 December 2014.
Mr Johnston retired by rotation prior to the Company’s
Annual General Meeting held on 11 May 2016 during
which he was re-elected by the Company’s members. The
appointment is terminable upon the election of the Board.
Michele Luzi (Non Executive Director)
Mr Luzi entered into a Non Executive Director appointment
letter with the Company on 2 December 2014. Mr Luzi
was originally appointed as a Non Executive Director
of Midatech Limited on 20 August 2010 (subsequently
terminated on 2 December 2014). Mr Luzi retired by
rotation prior to the Company’s Annual General Meeting
held on 11 May 2016 during which he was re-elected by the
Company’s members. The appointment is terminable upon
the election of the Board.
27
Pavlo Protopapa (Non Executive Director)
Mr Protopapa entered into a Non Executive Director
appointment letter with the Company on 2 December
2014. Mr Protopapa was originally appointed as a Non
Executive Director of Midatech Limited on 5 December
2013 (subsequently terminated on 2 December 2014). The
appointment is terminable upon the election of the Board.
Simon Turton (Senior Independent Non
Executive Director)
Dr Turton entered into a Non Executive Director
appointment letter with Midatech Limited on 2 December
2014. Dr Turton was originally appointed as Chairman of Q
Chip Limited on 24 March 2014 (subsequently terminated
on 2 December 2014). Dr Turton retired by rotation prior to
the Company’s Annual General Meeting held on 11 May 2016
during which he was re-elected by the Company’s members.
The appointment is terminable upon the election of the Board.
retired by rotation prior to the Company’s Annual General
Meeting held on 26 May 2015 during which he was re-elected
by the Company’s members. The appointment is terminable
upon the election of the Board.
Policy on Non Executive Directors’ remuneration
The Non Executive Directors receive a fee for their services
as a Director, which is approved by the Board, giving due
consideration to the time commitment and responsibilities
of their roles and of current market rates for comparable
organisations and appointments. Non Executive Directors
are reimbursed for travelling and other incidental expenses
incurred on Group business in accordance with the Group
expenses policy.
The Board encourages the ownership of Midatech shares
by Executives and in normal circumstances does not expect
Directors to undertake dealings of a short-term nature.
Sijmen de Vries (Non Executive Director)
Dr de Vries entered into a Non Executive Director
appointment letter with the Company on 2 December
2014. Dr de Vries was originally appointed as a Non
Executive Director of Midatech Limited on 29 October 2004
(subsequently terminated on 2 December 2014). Dr de Vries
Non Executive Directors are preferred to remain
independent to the extent that they do not trade in the
Company’s shares themselves.
The emoluments of the Directors of Midatech Pharma
plc are set out below. No emoluments were paid to any
Director by any other Group Company:
Non Executive Directors
Rolf Stahel
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton
Sijmen de Vries
Jeff Brown (resigned 30 April 2015)
Executive Directors
Jim Phillips
Nick Robbins-Cherry
Salary
and fees
£
100,000
38,000
38,000
38,000
38,000
38,000
–
Bonus
£
Pensions
£
2016
£
2015
£
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100,000
107,640
38,000
38,000
38,000
38,000
38,000
–
35,000
35,000
35,000
35,000
35,000
46,667
280,000
168,000
160,000
49,600
28,000
16,000
476,000
225,600
377,289
199,639
Directors’ remuneration
730,000
217,600
44,000
991,600
906,235
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
28
Midatech Pharma plc Annual Report & Accounts 2016
Directors’ Remuneration Report
continued
Share based payment expense of £184k in respect of the Directors was charged to the income statement during the year.
In addition to the amounts stated above, Dr Jim Phillips received a benefit in kind of £1k (2015: £6k).
Details of the payments to other related parties are disclosed in note 31.
The Directors' interests in the shares of the Company are set out below:
Directors’ interests
in shares
Non–Executive Directors
Rolf Stahel1
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton2
Sijmen de Vries
Executive Directors
Jim Phillips
Nick Robbins-Cherry
31 December 2016
31 December 2015
Beneficial Interests
Non–Beneficial
Interests
Beneficial Interests
Non Beneficial
Interests
550,572
14,981
121,344
–
209,413
8,802
46,896
500
–
69,328
1,649,334
–
59,150
–
–
527,215
14,981
121,344
–
215,328
8,802
36,871
500
–
–
69,328
1,649,334
–
59,150
–
–
(1)
At 31 December 2016, 306,101 of Rolf Stahel’s shares were subject to restrictions preventing their disposal or transfer to another party. These restrictions fall
away on the following events:
a. 61,221 shares become unrestricted on each of 1 March 2017 and 1 March 2018
b. 122,440 shares become unrestricted when the market capitalisation of the Company achieves £155m
c. 122,440 shares become unrestricted when the market capitalisation of the Company achieves £213m
(2)
During the year, Simon Turton transferred 5,915 shares to various underlying beneficial owners under the terms of an agreement with the former owners
of Q Chip Limited.
Directors’ interests in share options
Other than as shown in the table and note above no Director had any interest in the shares of the Company or in any
subsidiary Company.
29
Directors’ interests in share options
The Board uses share options to align Executive Directors’ and employees’ interests with those of shareholders in order
to provide incentives and reward them based on improvements in Group performance.
Non Executive Directors
Rolf Stahel
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton
Sijmen de Vries
Executive Directors
Jim Phillips
Nick Robbins-Cherry
31 December 2016
Options Held over
Ordinary shares
31 December 2015
Options Held over
Ordinary shares
–
–
–
–
18,796
18,796
–
–
–
–
17,000
17,000
1,340,000
353,000
600,000
60,000
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
30
Midatech Pharma plc Annual Report & Accounts 2016
Directors’ Remuneration Report
continued
All share options were granted with an exercise price at or above market value on the date of grant. As detailed below, some
of the share options vest when the Company’s share price achieves certain targets. Otherwise the main vesting condition of
all share options is that the Director or employee remains employed with the Group as at the date of exercise or continues to
provide consultancy services as at the date of exercise. The share options of the Directors (included in totals in note 29) are
set out below:
Non Executive Directors
Michele Luzi1
Sijmen de Vries
Executive Directors
Jim Phillips
Grant Date
Number
Awarded
Exercise
Price/
Share
£
Vesting
Criteria
Expiry
Date
£
20/04/2012
31/12/2008
20/04/2012
30/06/2014
18,796
3,000
4,000
10,000
4.19 Fully vested
20/04/2022
1.425 Fully vested
31/12/2018
4.19 Fully vested
20/04/2022
0.075 Share price2
30/06/2024
09/05/2014
200,000
0.075 Fully vested
01/05/2023
30/06/2014
400,000
0.075 Share price2
30/06/2024
31/10/20164
250,000
2.68 Time based3
02/12/2025
19/12/2016
490,000
1.21 Time based3
07/12/2026
Nick Robbins-Cherry
30/06/2014
60,000
0.075 Share price2
30/06/2024
31/10/20164
125,000
2.68 Time based3
02/12/2025
19/12/2016
168,000
1.21 Time based3
07/12/2026
(1) Share options held by Michele Luzi were granted as part of a 2011 investment round in Midatech Limited.
(2)
For those options noted as vesting based on share price; 50% vest when the share price reaches £5.31 per share, a further 25% vests when the share price
reaches £13.72 and the remaining 25% when the share price reaches £18.86.
(3) 25% of the options vest 12 months after the grant date, followed by vesting of 12 equal quarterly tranches, over a subsequent three-year period.
(4)
Share option award relates to 2015 but the acquisition of DARA BioSciences and other activities during that year meant that there was insufficient time during
Open periods to make the awards until 2016.
31
Total shareholder return performance
The graph below illustrates the daily movements of the Company’s AIM share price compared to the value of the FTSE UK
Pharma & Bio share index, rebased to the Company’s share price at IPO.
350
300
250
200
150
100
50
0
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
Sep 16
Dec 16
Mar17
Midatech Pharma plc
FTSE UK Pharma & Bio
Sijmen de Vries
Chairman of the Remuneration Committee
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
32
Midatech Pharma plc Annual Report & Accounts 2016
Corporate Governance
As at 31 December 2016 the Board comprised eight Directors, two of whom are Executive
Directors and six Non Executive Directors, reflecting a blend of different experience and
backgrounds. The Group regards all of the Non Executive Directors as Independent. With
a view towards maintaining the independence of the Board no remuneration is paid to
either the Chairman or Non Executive Directors in the form of shares.
BOARD OF DIRECTORS
Although, as a Company that has securities which are
traded on the Alternative Investment Market (“AIM”),
adherence to the UK Corporate Governance Code is not
compulsory, the Directors apply certain aspects of the UK
Corporate Governance Code to the extent appropriate to
the Group’s size, resources and stage of development.
for reviewing and approving the annual report and accounts
and the half-yearly reports remains with the Board.
The Audit Committee is chaired by Pavlo Protopapa and its
other members are Simon Turton and John Johnston. The
Audit Committee meet not less than twice a year. During
2016 the Audit Committee has met three times.
The Company’s shares are also listed on the NASDAQ
Capital Market in the form of American Depositary Receipts
("ADRs") with each ADR representing the right to receive
two ordinary shares. The Company’s status as a Foreign
Private Issuer means that we are permitted to follow
English corporate law and the Companies Act 2006 with
regard to certain aspects of corporate governance; such
practices differ in significant respects from the corporate
governance requirements applicable to US companies
on NASDAQ.
The Board is responsible for inter alia, approving interim
and annual financial statements, formulating and
monitoring Group strategy, approving financial plans and
reviewing performance, as well as complying with legal,
regulatory and corporate governance matters. There is a
schedule of matters reserved for the Board.
The Board meet regularly to consider strategy, performance
and the framework of internal controls. To enable the Board
to discharge its duties, all Directors receive appropriate and
timely information. Briefing papers are distributed to all
Directors in advance of Board meetings.
The Company has established audit, nomination,
remuneration and disclosure committees of the Board
with formally delegated duties and responsibilities.
THE AUDIT COMMITTEE
The Audit Committee assists the Board in discharging its
responsibilities with regard to financial reporting, external
and internal audits and controls, including reviewing
and monitoring the integrity of the Group’s annual and
interim financial statements, advising on the appointment
of external auditors, reviewing and monitoring the extent
of any non-audit work undertaken by external auditors,
overseeing the Group’s relationship with its external
auditors, reviewing the effectiveness of the external audit
process and reviewing the effectiveness of the Group’s
internal control review function. The ultimate responsibility
THE NOMINATION COMMITTEE
The Nomination Committee assist the Board in discharging
its responsibilities relating to the composition and make-up of
the Board and any committees of the Board. It is responsible
for periodically reviewing the Board’s structure and identifying
potential candidates to be appointed as Directors or committee
members as the need may arise. The Nomination Committee
is responsible for evaluating the balance of skills, knowledge
and experience and the size, structure and composition of
the Board and committees of the Board, retirements and
appointments of additional and replacement Directors
and committee members and will make appropriate
recommendations to the Board on such matters.
The Nomination Committee is chaired by Rolf Stahel and its
other members are all of the members of the Board. There
has not as yet been any requirement to formally convene
the Nomination Committee.
INTERNAL CONTROL
The Board is responsible for establishing and maintaining
the Group’s system of internal control and for reviewing its
effectiveness. The system of internal control is designed
to manage, rather than eliminate, the risk of failure of the
achievement of business objectives and can only provide
reasonable but not absolute assurance against material
misstatement or loss.
The Audit Committee continues to monitor and review the
effectiveness of the system of internal control and report
to the Board when appropriate with recommendations.
The annual review of internal control and financial
reporting procedures did not highlight any issues
warranting the introduction of an internal audit function.
It was concluded, given the current size and transparency
of the operations of the Group that an internal audit
function was not required however this remains a
matter for ongoing review.
33
RELATIONSHIP WITH SHAREHOLDERS
The Directors seek to build a mutual understanding of
objectives between the Company and its shareholders.
The Company reports formally to shareholders in its
Annual Report and Interim Statements setting out details
of the Group’s activities. In addition, the Company keeps
shareholders informed of events and progress through the
issue of regulatory news in accordance with the AIM Rules
for Companies (“AIM Rules”) of the London Stock Exchange
and the Foreign Private Issuer reporting requirements
as set out in Rules 13a-16 or 15d-16 of the United States
Securities Exchange Act of 1934. The Chief Executive and
Chief Financial Officer meet with institutional shareholders
following interim and final results. The Company also
maintains investor relations pages and other information
regarding the business, the Group’s products and activities
on its website at www.midatechpharma.com.
The Annual Report is made available to shareholders at
least 21 days before the Annual General Meeting (“AGM”)
along with notice of the AGM. Directors are required
to attend the AGM, unless unable to do so for personal
reasons or due to pressing commercial commitments,
and shareholders are given the opportunity to vote on each
separate resolution proposed at the AGM. The Company
counts all proxy votes and will indicate the level of proxies
lodged for each resolution after it has first been dealt with
by a show of hands.
Rolf Stahel
Chairman
The main features of the internal control system are
outlined below:
• A strong control environment exists facilitated by the
use of SAP Business One accounting and business
management software, that supports a comprehensive
and auditable purchasing control and approvals
process. This is supplemented by the close management
of the business by the Executive Directors. The Group
has a defined organisational structure with delineated
responsibilities and approval limits. Controls are
implemented and monitored by the Executive Directors.
• The Board has a schedule of matters expressly reserved
for its consideration and this schedule includes
acquisitions and disposals, major capital projects,
treasury and risk management policies and approval
of budgets.
• The Group utilises a detailed budgeting and forecasting
process. Detailed budgets are prepared annually by
the Executive Directors before submission to the Board
for approval. Forecasts are updated at least quarterly
to reflect changes in the business and are monitored
by the Board including future cash flow projections.
Actual results are monitored against annual budgets
in detail on a monthly basis, with variances highlighted
to the Board.
Financial risks are identified and evaluated for each
major transaction for consideration by the Board and
senior management.
• Standard financial control procedures are operated
throughout the Group to ensure that the assets of the
Group are safeguarded and that proper accounting
records are maintained.
• A risk review process has been developed whereby the
Chief Financial Officer presents a report to the Board
each year on the key business risks.
GOING CONCERN
As disclosed in the Directors’ Report on page 36 the
Group financial statements have been prepared on the
going concern basis as the Directors have a reasonable
expectation that the Group has adequate resources to
continue in operational existence for the foreseeable future.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
34
Midatech Pharma plc Annual Report & Accounts 2016
Board of Directors
As at 31 December 2016 the Board consisted of two Executive Directors and
six Non Executive Directors. Brief biographies of the current Directors are set
out below. The Directors believe that Midatech Pharma plc benefits from
a strong, stable and proven Executive and Senior Management team.
JAMES PHILLIPS
Chief Executive Officer (54)
NICK ROBBINS-CHERRY
Chief Financial Officer (47)
ROLF STAHEL
Non-Executive Chairman (72)
JOHN JOHNSTON
Non Executive Director (58)
Jim is a physician by training
and has a strong background
in company leadership and
business development. Jim
founded Talisker Pharma in
2004, which was the first and
cornerstone acquisition of
EUSA Pharma Inc. in 2006.
As president of Europe and
senior vice president, corporate
development, of EUSA Pharma,
Jim led the strategy resulting
in the acquisition of OPi S.A.
and which in turn lead to its
ultimate acquisition by Jazz
Pharmaceuticals Inc. in 2012.
Jim is currently a Non Executive
Director of Herantis Pharma
plc, listed in Helsinki, Insense
Limited, a private spin-out
from Unilever, and, until joining
Midatech, was Chairman of
Prosonix Limited, guiding its
successful transformation into
a respiratory-focused business.
Prosonix was acquired by
Circassia Pharmaceuticals PLC
in 2015. Jim initially held senior
positions at Johnson & Johnson
and Novartis Pharmaceuticals.
At Novartis, Jim was in Clinical
and Business Development
and was a Board Director of
the $1.3 billion arthritis, bone,
gastrointestinal, haematology
and infectious diseases
business unit and a member
of the company’s Clinical
Leadership Team.
Nick is a Chartered Accountant
and MBA with extensive
commercial and finance
experience gained in the life
sciences, technology and
consulting sectors, including
roles at CACI Limited,
Johnson & Johnson and
ICI plc. Nick has a strong
track record in mergers and
acquisitions and of managing
complex multi-national
businesses. Nick qualified
with Coopers & Lybrand (now
PricewaterhouseCoopers)
and also has a BSc in
Pharmacology.
Mr Stahel has approximately
40 years of experience in the
pharmaceutical industry, of
which around 20 years were
spent at chief executive and
board level in public companies
listed in the United Kingdom,
Switzerland and the United
States and private life science
companies registered in
Europe, the United States
and Asia. Mr Stahel joined
Shire as chief executive in
1994 following a 27-year
career at Wellcome plc (now
GlaxoSmithKline plc). Mr Stahel
is currently the non-executive
chairman of Ampha Limited,
and was previously the non-
executive chairman of Ergomed
plc, Connexios Life Sciences
Pvt Limited, EUSA Pharma
Inc., Cosmo Pharmaceuticals
SpA, PowderMed Limited and
Newron Pharmaceuticals SpA.
Mr Johnston has served as
a Non Executive member of
Midatech's Board of Directors
since November 2014. Mr.
Johnston served as the
Non-Executive Chairman
of Constellation Healthcare
Technologies, Inc. (AlM:
CHT) from December 2014
to 30 January 2017 when the
takeover of the Company was
completed and the shares
were delisted. Mr Johnston
served as Managing Director
of Institutional Sales at
Nomura Code Securities Ltd, a
brokerage company, from 2011
to 2013. From 2008 to 2011,
he served as Director of Sales
and Trading at the investment
bank Seymour Pierce. Prior to
this Mr Johnston ran his own
asset management company
and held positions with various
investment firms, including
Legg Mason (NYSE: LM),
Murray Johnstone, Scottish
Amicable and lvory & Sime. Mr
Johnston began his investment
career at the Royal Bank of
Scotland in 1981, before moving
to General Accident in 1985,
holding the position of Head of
Retail Funds before his move to
Scottish Amicable. Mr Johnston
is currently Non Executive
Director of Flowgroup plc,
Action Hotels and MaxCyte lnc.
35
SIMON TURTON
Senior Non-Executive
Director (49)
Dr Turton previously headed
Warburg Pincus’ healthcare
investing activities in Europe
and was a principal at Index
Ventures in Geneva. He has
over 10 years of experience
investing in biopharma
companies following a ten-year
career in the international
pharmaceutical industry
incorporating roles in research,
business development and
general management. Dr Turton
has an MBA from INSEAD
and a Ph.D. in pharmacy from
the University of London. He
has been a Board Director of
private and public biomedical
companies: Archimedes
Pharma, Eurand, ProStrakan
and Tornier. Dr Turton was
most recently Chairman of Q
Chip prior to its acquisition
by the Group. He is currently
CEO of Gensmile, a new dental
corporate building a chain of
dental clinics in the UK.
SIJMEN DE VRIES
Non Executive Director (57)
PAVLO PROTOPAPA
Non Executive Director (50)
MICHELE LUZI
Non Executive Director (59)
Dr de Vries has served as a Non
Executive member of Midatech’s
Board of Director since October
2004 (including his service to
Midatech’s predecessor entity).
Dr. de Vries has served as of
the Chief Executive Officer of
Pharming Group NV (Euronext:
PHARM) since November 2008.
Prior to that, Dr. de Vries served
as Chief Executive Officer of
4-Antibody and Morphochem
AG. Prior to this he worked at
Novartis Pharma, Novartis
Ophthalmics and at SmithKline
Beecham Pharmaceuticals Plc,
where he held senior business
and commercial positions.
Dr. de Vries holds an M.D.
degree from the University of
Amsterdam and a Masters of
Business Administration in
General Management from
Ashridge Management
College (UK).
Mr Protopapa is the founder
and managing partner of
Ippon Capital, a private equity
company based in Geneva,
Switzerland. He is the Chairman
and Chief Executive officer
of Spacecode Holdings,
a technology provider in
healthcare and luxury goods,
which he founded in 2005. He
also serves as a Non Executive
Director and lead investor
of Socure Inc, a SaaS-based
internet security company.
Mr Protopapa has a Bachelor
of Commerce (accounting,
economics and commercial
law) and Bachelor of Accounting
Science (accounting) from the
University of the Witwatersrand
and the University of South
Africa, respectively. He
completed his articles at KPMG
in Johannesburg, South Africa
and has more than 15 years
of experience in international
commerce as Chief Financial
Officer of the Steinmetz
Diamond Group from 1997
to 2012.
Mr Luzi is a partner in Bain &
Company, based in the London
office. He has recently led Bain’s
EMEA Telecommunications
Technology Media Practice for
seven years and he was a Board
Director of Bain & Company
Global between 2006 and
2009. He has been a member
of the World Economic Forum
Global Agenda Council and of
the Web Foundation Advisory
Board. Prior to joining Bain
& Company, Mr Luzi worked
in international management
positions with Pirelli and also
worked in Agusta and with
the Italian Trade Commission.
Mr Luzi earned his MBA from
INSEAD and graduated in
Economics, with Honours, from
the University of Rome.
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
36
Midatech Pharma plc Annual Report & Accounts 2016
Directors’ Report
The Directors present their report and the consolidated financial
statements of the Group for the year ended 31 December 2016.
EMPLOYEES
Midatech recognises the essential importance of
employees to the success of the business and ensures
that they are fully informed of events that directly affect
them and their working conditions. Information on matters
of concern to employees is given in briefings that seek to
provide a common awareness on the part of all employees
of the financial and economic factors affecting the
Group's performance.
DISABLED EMPLOYEES
Applications for employment by disabled persons are given
full and fair consideration for all vacancies in accordance
with their particular aptitudes and abilities. It is the policy
of the Group that training and promotion opportunities
should be available to all employees.
DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Directors’
Report, Strategic Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the
Directors have elected to prepare the Group financial
statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European
Union, and the Company financial statements in
accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting
Standards and applicable law). Under company law the
Directors must not approve the financial statements
unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company
and of the profit or loss of the Group for that period.
DIRECTORS
The Directors during the year were:
Rolf Stahel
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton
Sijmen de Vries
Jim Phillips
Nick Robbins-Cherry
RESEARCH AND DEVELOPMENT
The Group is continuing to develop products within its
chosen areas of therapeutic focus.
MATTERS COVERED IN THE STRATEGIC REPORT
Details of the Group’s financial instruments are presented
in note 23 and future developments and policies are given
in the Strategic Report.
DIVIDEND
The Directors are not recommending the payment of a
dividend at this time due to the level of maturity of the
Group. The Directors intend implementing a dividend policy
of progressive payments when the Group reaches the right
stage of development.
POST BALANCE SHEET EVENTS
In Q1 2017, the Company entered into a senior secured
loan agreement for £6m with Silicon Valley Bank. The loan
is available to be drawn down in three tranches of £2m
each, the first being available following signing of the loan
agreement and the other two traches dependent upon
future research milestones.
DIRECTORS' AND OFFICERS'
LIABILITY INSURANCE
The Company has, as permitted by s234 and 235 of the
Companies Act 2006, maintained insurance cover on behalf
of the Directors and Company Secretary indemnifying them
against certain liabilities which may be incurred by them in
relation to the Company.
37
The Directors are required to prepare financial statements
in accordance with the rules of the London Stock Exchange
for companies trading securities on the Alternative
Investment Market. The Directors are also required to
prepare and file a Form 20-F in accordance with the rules
of the US Securities and Exchange Commission which
require the financial statements to also be prepared
in accordance with International Financial Reporting
Standards as issued by the International Accounting
Standards Board (IASB).
DIRECTORS’ STATEMENT AS TO THE
DISCLOSURE OF INFORMATION TO AUDITORS
All of the current Directors have taken all steps that
they ought to have taken to make themselves aware of
any information needed by the Group's auditors for the
purposes of their audit and to establish that the auditors
are aware of that information. The Directors are not aware
of any relevant audit information of which the auditors
are unaware.
In preparing these financial statements, the Directors
are required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and accounting estimates that are
reasonable and prudent;
• state whether they have been prepared in accordance
with IFRSs as adopted by the European Union and as
issued by the International Accounting Standards Board
(IASB), subject to any material departures disclosed
and explained in the financial statements; 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 are responsible for keeping adequate
accounting records that are sufficient to show and explain
the Group’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 requirements of the Companies Act 2006.
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.
WEBSITE PUBLICATION
The Directors are responsible for ensuring the Annual
Report and the financial statements are made available
on a website. Financial statements are published on the
Group's website in accordance with legislation in the United
Kingdom governing the preparation and dissemination
of financial statements, which may vary from legislation
in other jurisdictions. The maintenance and integrity of
the Group's website is the responsibility of the Directors.
The Directors' responsibility also extends to the ongoing
integrity of the financial statements contained therein.
By order of the Board
Nick Robbins-Cherry
Chief Financial Officer
03 April 2017
OVERVIEWGOVERNANCESTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATION
38
Midatech Pharma plc Annual Report & Accounts 2016
In December 2016, our
manufacturing facility was
inspected by the Spanish
Medicines Agency (“AEMPS”)
to enable manufacture
of our sustained release
products. We expect to
be ready to manufacture
material for the first human
trials of Q-Octreotide for the
treatment of Acromegaly
and Carcinoid Syndrome,
scheduled for H1 2017.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 39
FINANCIAL STATEMENTS
Independent Auditor’s Report
Consolidated statement
of comprehensive income
Consolidated statement
of financial position
Consolidated statement
of cash flows
Consolidated statement
of changes in equity
Notes forming part of the
financial statements
Parent Company balance sheet
Parent Company statement
of changes in equity
Notes to the Parent Company
statement of financial position
40
42
43
44
45
47
92
93
94
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
40
Midatech Pharma plc Annual Report & Accounts 2016
Independent Auditor’s Report
to the Members of Midatech Pharma plc
We have audited the financial statements of Midatech
Pharma plc for the year ended 31 December 2016 which
comprise the consolidated statement of comprehensive
income, the consolidated statement of financial position,
the consolidated statement of cash flows, the consolidated
statement of changes in equity, the Parent Company
balance sheet, the Parent Company statement of changes
in equity and the related notes. The financial reporting
framework that has been applied in the preparation of
the Group financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as
adopted by the European Union. The financial reporting
framework that has been applied in preparation of the
Parent Company financial statements is applicable law and
United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice), including
Reporting Standard 102 ‘The Financial Reporting Standard
applicable in the UK and Republic of Ireland.
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 auditor’s
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, 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 and express an opinion on the
financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Financial
Reporting Council’s (FRC’s) Ethical Standards for Auditors.
SCOPE OF THE AUDIT OF THE
FINANCIAL STATEMENTS
A description of the scope of an audit of financial
statements is provided on the FRC’s website at
www.frc.org.uk/auditscopeukprivate.
OPINION ON 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 31 December 2016 and of the Group’s loss 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’s financial statements have been
properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
• the financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006.
SEPARATE OPINION IN RELATION TO
IFRSS AS ISSUED BY THE IASB
As explained in note 1 to the Group financial statements,
the Group in addition to applying IFRSs as adopted by the
European Union, has also applied IFRSs as issued by the
International Accounting Standards Board (“IASB”).
In our opinion the Group financial statements comply
with IFRSs as issued by the IASB.
OPINION ON OTHER MATTERS PRESCRIBED
BY THE COMPANIES ACT 2006
In our opinion, based on the work undertaken in the course
of the audit:
• the information given in the strategic report and
directors’ report for the financial year for which the
financial statements are prepared is consistent with
the financial statements; and
• the strategic report and directors’ report have
been prepared in accordance with applicable legal
requirements.
41
MATTERS ON WHICH WE ARE REQUIRED
TO REPORT BY EXCEPTION
In the light of the knowledge and understanding of the
Group and the Parent Company and its environment
obtained in the course of the audit, we have not identified
material misstatements in the strategic report or the
directors’ report.
• We have nothing to report in respect of the following
matters where the Companies Act 2006 requires us 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 are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified
by law are not made; or
• we have not received all the information and
explanations we require for our audit.
Christopher Pooles
Senior Statutory Auditor
For and on behalf of BDO LLP
Statutory Auditor
Reading
03 April 2017
BDO LLP is a limited liability partnership registered in
England and Wales (with registered number OC305127).
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
42
Midatech Pharma plc Annual Report & Accounts 2016
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Gross profit
Research and development costs
Distribution costs, sales and marketing
Administrative costs
Impairment of intangible assets
Loss from operations before intangible asset impairment charges,
listing costs and acquisition expenses
Included in administrative costs:
Impairment of intangible assets
Listing and acquisition expenses - included in administrative costs
Loss from operations
Finance income
Finance expense
Loss before tax
Taxation
Loss for the year attributable to the owners of the parent
Other comprehensive income:
Items that will or may be reclassified subsequently to profit or loss
when specific conditions are met: Exchange gains/(losses) arising on
translation of foreign operations
Total other comprehensive income/(loss), net of tax
Note
2016
£’000
2015
£’000
2014
£’000
3
3
4
6
6
7
8,659
547
9,206
6,376
547
6,923
(667)
6,256
(6,684)
(9,523)
(9,222)
(11,413)
914
600
1,514
775
600
1,375
(70)
1,305
(5,920)
(374)
(7,929)
–
25
132
157
25
132
157
–
157
(3,639)
–
(4,405)
(1,800)
(19,173)
(9,927)
(6,952)
(11,413)
–
–
(2,991)
(30,586)
(12,918)
1,337
(73)
1,691
(5)
(29,322)
(11,232)
9,160
1,133
(20,162)
(10,099)
(1,800)
(935)
(9,687)
8
(161)
(9,840)
1,018
(8,822)
3,228
3,228
399
399
(151)
(151)
Total comprehensive loss attributable to the owners of the parent
(16,934)
(9,700)
(8,973)
Loss per share
Basic and diluted loss per ordinary share - pence
8
(56p)
(36p)
(98p)
43
Consolidated Statement of Financial Position
at 31 December 2016
Company Number 09216368
Assets
Non-current assets
Property, plant and equipment
Intangible assets
Other receivables due in greater than one year
Current assets
Inventories
Trade and other receivables
Taxation
Cash and cash equivalents
Total assets
Liabilities
Non-current liabilities
Borrowings
Deferred tax liability
Current liabilities
Trade and other payables
Borrowings
Derivative financial liability – equity settled
Total liabilities
Issued capital and reserves attributable to owners of the parent
Share capital
Share premium
Merger reserve
Shares to be issued
Foreign exchange reserve
Accumulated deficit
Total equity
Total equity and liabilities
Note
2016
£’000
2015
£’000
2014
£’000
9
10
17
19
17
18
21
24
20
21
22
25
26
26
26
26
26
2,766
31,172
448
1,984
41,339
387
1,516
13,094
425
34,386
43,710
15,035
817
2,439
1,439
17,608
22,303
56,689
1,620
–
1,620
8,407
538
400
9,345
10,965
1,002
47,211
53,003
–
3,618
459
2,496
1,201
16,175
20,331
64,041
1,508
6,547
8,055
7,084
442
1,573
9,099
17,154
1,002
31,643
52,803
200
390
–
462
841
30,325
31,628
46,663
1,488
354
1,842
2,341
491
–
2,832
4,674
1,001
31,643
37,776
800
(9)
(59,110)
(39,151)
(29,222)
45,724
56,689
46,887
64,041
41,989
46,663
The financial statements were approved and authorised for issue by the Board of Directors on 03 April 2017 and were
signed on its behalf by:
Nick Robbins-Cherry
Chief Financial Officer
The notes form an integral part of these consolidated financial statements
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
44
Midatech Pharma plc Annual Report & Accounts 2016
Consolidated Statement of Cash Flows
for the year ended 31 December 2016
Cash flows from operating activities
Loss for the year
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of intangible fixed assets
Loss on disposal of fixed assets
Net interest (income)/expense
Impairment of product and marketing rights
Impairment of IPRD
Gain on bargain purchase
Share based payment expense
Taxation
Cash flows from operating activities before changes in working capital
Increase in inventories
(Increase)/Decrease in trade and other receivables
Increase in trade and other payables
Cash used in operations
Taxes received
Net cash used in operating activities
Investing activities
Purchases of property, plant and equipment
Purchase of intangibles
Acquisition of subsidiary, net of cash acquired
Acquisition of business, net of cash acquired
Interest received
Net cash used in investing activities
Financing activities
Interest paid
Payments to finance lease creditors
Repayment of borrowings
New bank loan
Loan finance raised
Share issues net of costs
Net cash generated from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange gains on cash and cash equivalents
Note
2016
£’000
2015
£’000
2014
£’000
(20,162)
(10,099)
(8,822)
9
10
6
14
14
13
5
7
12
13
18
772
3,583
–
(1,264)
11,413
–
–
203
501
236
–
(1,686)
–
–
(165)
170
(9,160)
(1,133)
(14,615)
(12,176)
(237)
(242)
358
(62)
(1,540)
711
321
1
89
153
–
1,800
–
–
(1,018)
(7,476)
–
761
466
(14,736)
(13,067)
(6,249)
1,650
646
794
(13,086)
(12,421)
(5,455)
(1,347)
(19)
–
–
164
(922)
(3)
1,867
(2,528)
53
(1,030)
–
115
–
8
(1,202)
(1,533)
(907)
(74)
(69)
(235)
65
–
15,568
15,255
967
16,175
466
(5)
(49)
(165)
–
–
–
(219)
(14,173)
30,325
23
(48)
(48)
(346)
–
890
33,852
34,300
27,938
2,387
–
Cash and cash equivalents at end of year
18
17,608
16,175
30,325
The notes form an integral part of these consolidated financial statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
45
At 1 January 2016
Loss for the year
Foreign exchange translation
Total comprehensive loss
Transactions with owners
Shares issued on
31 October 2016 – note 18
Costs associated with
share issue – note 18
Share option charge
Shares issued as deferred
consideration for business
combination
Total contribution by and
distributions to owners
At 31 December 2016
1,002
Share
capital
£'000
Share
premium
£'000
Merger
reserve
£'000
Shares
to be issued
£'000
1,002
31,643
52,803
200
–
–
–
–
–
–
–
–
–
–
–
16,673
(1,105)
–
15,568
47,211
–
–
–
–
–
–
–
–
–
–
–
–
200
200
53,003
(200)
(200)
–
Share
capital
£'000
Share
premium
£'000
Merger
reserve
£'000
Shares
to be issued
£'000
1,001
31,643
37,776
800
At 1 January 2015
Loss for the year
Foreign exchange translation
Total comprehensive loss
Transactions with owners
Shares issued on exercise of
share options
Shares, warrants and share
options issued as consideration
for a business combination –
4 December 2015
Share option charge
Shares issued as deferred
consideration for business
combination
Total contribution by and
distributions to owners
–
–
–
1
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
14,427
–
–
–
–
–
–
–
600
(600)
15,027
52,803
(600)
200
Foreign
exchange
reserve
£'000
390
–
3,228
3,228
Accumulated
deficit
£'000
Total
equity
£'000
(39,151)
46,887
(20,162)
(20,162)
–
3,228
(20,162)
(16,934)
–
–
–
–
–
3,618
Foreign
exchange
reserve
£'000
(9)
–
399
399
–
–
–
–
–
–
–
203
16,673
(1,105)
203
–
–
203
(59,110)
15,771
45,724
Accumulated
deficit
£'000
Total
equity
£'000
(29,222)
41,989
(10,099)
(10,099)
–
399
(10,099)
(9,700)
–
1
–
170
–
170
14,427
170
–
14,598
46,887
At 31 December 2015
1,002
31,643
390
(39,151)
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
46
Midatech Pharma plc Annual Report & Accounts 2016
Consolidated Statement of Changes in Equity continued
for the year ended 31 December 2016
Merger
reserve
£'000
Shares
to be issued
£'000
Foreign
exchange
reserve
£'000
At 1 January 2014
Loss for the year as
restated (see note 11)
Foreign exchange translation
Total comprehensive loss
Issue of Midatech Limited
shares – pre-share for
share exchange
Transfer to merger reserve
on the merger of Midatech
Pharma plc and Midatech
Limited – 31 October 2014
Transfer of A Preference
shares from liability to
equity (28 October 2014)
and subsequent conversion
to Deferred shares –
8 December 2014
Share
capital
£'000
–
–
–
–
–
Share
premium
£'000
21,018
–
–
–
3,202
–
–
–
–
–
–
(24,220)
24,220
1,000
–
–
Accumulated
deficit
£'000
(20,400)
Total
equity
£'000
760
(8,822)
(8,822)
–
(8,822)
(151)
(8,973)
–
–
–
3,202
–
1,000
–
–
–
–
–
–
–
142
–
(151)
(151)
–
–
–
Share
capital
£'000
Share
premium
£'000
Merger
reserve
£'000
Shares
to be issued
£'000
Foreign
exchange
reserve
£'000
Accumulated
deficit
£'000
Total
equity
£'000
Issue of shares to settle A
Preference share accrued
dividend – 8 December 2014
Shares issued as consideration
for a business combination –
8 December 2014
Shares to be issued as
consideration for a business
combination – 8 December 2014
Issue of shares on placing –
8 December 2014
Costs associated with
share placing
Total contribution by and
distributions to owners
At 31 December 2014
–
–
–
1
–
994
–
–
–
32,000
(1,351)
13,556
–
–
–
1,001
1,001
10,625
31,643
37,776
37,776
–
–
800
–
–
800
800
The notes form an integral part of these consolidated financial statements.
–
–
–
–
–
–
–
–
–
–
–
–
(9)
(29,222)
994
13,556
800
32,001
(1,351)
50,202
41,989
47
Notes Forming Part of the Financial Statements
for the year ended 31 December 2016
1 ACCOUNTING POLICIES
General information
Midatech Pharma plc (the "Company") is a Company
domiciled in England. The Company was incorporated
on 12 September 2014.
The Company is a public limited company, which has
been listed on the Alternative Investment Market (“AIM”),
which is a submarket of the London Stock Exchange, since
8 December 2014.
In addition, since 4 December 2015 the Company has
American Depository Receipts (“ADRs”) registered with
the US Securities and Exchange Commission (“SEC”) and
is listed on NASDAQ.
Basis of preparation
The Group was formed on 31 October 2014 when Midatech
Pharma plc entered into an agreement to acquire the entire
share capital of Midatech Limited and its wholly owned
subsidiaries through the issue equivalent of shares in the
Company which took place on 13 November 2014.
The acquisition of the Midatech subsidiaries on
13 November 2014 was outside the scope of IFRS 3
“Business combinations” and was treated under the
principles of merger accounting as set out under United
Kingdom Generally Accepted Accounting Practice.
Accordingly, although the units which comprise the Group
did not form a legal group for the entire comparative period
ended 31 December 2014, and the 2014 results comprise
the results of the subsidiary companies as if the Group had
been in existence throughout the entire period.
These financial statements have been prepared in
accordance with International Financial Reporting
Standards, International Accounting Standards and
Interpretations (collectively IFRS) issued by the
International Accounting Standards Board (IASB) and as
adopted by the European Union ("adopted IFRSs") and are
presented in £’000’s Sterling.
The principal accounting policies adopted in the
preparation of the financial statements are set out below.
The policies have been consistently applied to all the
periods presented.
Adoption of new and revised standards
A number of new standards, amendments to standards,
and interpretations are not effective for 2016, and therefore
have not been applied in preparing these accounts.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS
9 Financial Instruments that replaces IAS 39 Financial
Instruments: Recognition and Measurement and all
previous versions of IFRS 9. IFRS 9 brings together all three
aspects of the accounting for financial instruments project:
classification and measurement, impairment and hedge
accounting. IFRS 9 is effective for annual periods beginning
on or after 1 January 2018, with early application permitted.
IFRS 9 requires the Company to record expected credit
losses on all of its debt securities, loans and trade
receivables, either on a 12-month or lifetime basis. The
Company expects to apply the simplified approach and
record lifetime expected losses on all trade receivables.
The Company plans to adopt the new standard on the
required effective date. The Company expects no significant
impact on its balance sheet and equity.
The Company does not expect a significant impact on its
balance sheet or equity on applying the classification and
measurement requirements of IFRS 9.
IFRS 15 Revenue from Contracts with Customers
IFRS 15 was issued in May 2014 and establishes a five-step
model to account for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognized at an
amount that reflects the consideration to which an entity
expects to be entitled in exchange for transferring goods
or services to a customer.
The new revenue standard will supersede all current
revenue recognition requirements under IFRS. Either a
full retrospective application or a modified retrospective
application is required for annual periods beginning on or
after 1 January 2018. The Company plans to adopt the new
standard on the required effective date. The Company has not
yet performed a preliminary assessment of IFRS 15, but plans
to do so by the end of Q3 which will then be subject to changes
arising from a more detailed ongoing analysis. Once the
analysis is performed the transition method will be chosen.
Based on the current sales contracts, both methods are
feasible from implementation perspective. Furthermore, the
Company is considering the clarifications issued by the IASB
in April 2016 and will monitor any further developments.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS
17 Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases-Incentives and
SIC-27 Evaluating the Substance of Transactions Involving
the Legal Form of a Lease. IFRS 16 sets out the principles
for the recognition, measurement, presentation and
disclosure of leases and requires lessees to account for
all leases under a single on-balance sheet model similar
to the accounting for finance leases under IAS 17.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
48
Midatech Pharma plc Annual Report & Accounts 2016
Notes Forming Part of the Financial Statements continued
for the year ended 31 December 2016
1 ACCOUNTING POLICIES CONTINUED
The standard includes two recognition exemptions for lessees
– leases of ’low-value’ assets (e.g., personal computers) and
short-term leases (i.e., leases with a lease term of 12 months
or less). At the commencement date of a lease, a lessee
will recognize a liability to make lease payments (i.e., the
lease liability) and an asset representing the right to use the
underlying asset during the lease term (i.e., the right-of-use
asset). Lessees will be required to separately recognize the
interest expense on the lease liability and the depreciation
expense on the right-of-use asset.
Lessees will be also required to remeasure the lease
liability upon the occurrence of certain events (e.g.,
a change in the lease term, a change in future lease
payments resulting from a change in an index or rate used
to determine those payments). The lessee will generally
recognize the amount of the remeasurement of the lease
liability as an adjustment to the right-of-use asset.
IFRS 16 is effective for annual periods beginning on or
after 1 January 2019, subject to endorsement by the
European Union. Early application is permitted, but not
before an entity applies IFRS 15. A lessee can choose to
apply the standard using either a full retrospective or a
modified retrospective approach. The standard’s transition
provisions permit certain reliefs.
During 2017 the Company plans to assess the potential effect
of IFRS 16 on its consolidated financial statements. To see
the volume of operating leases please refer to note 27.
The Directors are currently reviewing the impact of the
above-mentioned Standards and Interpretations and are
yet to conclude on whether any such standards will have a
significant impact on the financial statements of the Group
in the year of initial application.
The other standards, interpretations and amendments
issued by the IASB (of which some still are subject to
endorsement by the European Union), but not yet effective
are not expected to have a material impact on the Group’s
future consolidated financial statements.
Basis for consolidation
The Group financial statements consolidate those of the
Parent Company and all of its subsidiaries. The parent
controls a subsidiary if it has power over the investee to
significantly direct the activities, exposure, or rights, to
variable returns from its involvement with the investee, and
the ability to use its power over the investee to affect the
amount of the investor’s returns. All subsidiaries have a
reporting date of 31 December.
All transactions and balances between Group companies
are eliminated on consolidation, including unrealised gains
and losses on transactions between Group companies.
Where unrealised losses on intra-Group asset sales are
reversed on consolidation, the underlying asset is also
tested for impairment from a Group perspective. Amounts
reported in the financial statements of subsidiaries have
been adjusted where necessary to ensure consistency with
the accounting policies adopted by the Group.
The loss and other comprehensive income of Midatech
Pharma US, Inc. (formerly DARA Biosciences, Inc) acquired
in December 2015 is recognised from the effective date of
acquisition i.e. 4 December 2015. Similarly, the loss and
other comprehensive income of Zuplenz®, acquired as a
business by Midatech Pharma plc., is recognised from the
24 December 2015.
Basis of consolidation
The consolidated financial statements consist of the results
of the following entities:
Entity
Summary description
Midatech Pharma plc
Midatech Limited
Midatech Pharma (Espana) SL
(formerly Midatech Biogune SL)
Midatech Andalucia SL
PharMida AG
Midatech Pharma (Wales) Limited
(formerly Q Chip Limited)
Midatech Pharma US, Inc.
(formerly DARA Biosciences, Inc.)
Dara Therapeutics, Inc.
Midatech Pharma Pty
Ultimate holding company
Trading company
Trading company
Dormant
Dormant
Trading company
Trading company
Dormant
Trading company
Going concern
The Group is subject to a number of risks similar to
those of other development and early-commercial stage
pharmaceutical companies. These risks include, amongst
others, generation of revenues from the existing product
portfolio and in due course the development portfolio
and risks associated with research, development, testing
and obtaining related regulatory approvals of its pipeline
products. Ultimately, the attainment of profitable operations
is dependent on future uncertain events which include
obtaining adequate financing to fulfil the Group’s commercial
and development activities and generating a level of revenue
adequate to support the Group's cost structure.
The Group has experienced net losses and significant cash
outflows from cash used in operating activities over the
past years as it develops its portfolio. As at 31 December
2016 the Group had total equity of £45.72m which includes
an accumulated deficit of £59.11m, it incurred a net loss
after tax for the year to 31 December 2016 of £20.16m and
used cash in operating activities of £13.09m for the same
period. As at 31 December 2016, the Group had cash and
cash equivalents of £17.61m.
49
The future viability of the Group is dependent on its
ability to generate cash from operating activities, to
raise additional capital to finance its operations or to
successfully obtain regulatory approval to allow marketing
of the Group's development products. The Group's failure
to raise capital as and when needed could have a negative
impact on its financial condition and ability to pursue its
business strategies.
The Directors have prepared cash flow forecasts and
considered the cash flow requirement for the Group for a
period including twelve months from the date of approval
of this interim financial information. These forecasts show
that the Group has sufficient cash resources for at least
the next 12 months. The Directors therefore consider it
appropriate to continue to adopt the going concern basis in
preparing the financial information.
Revenue
The Group’s income streams include milestone income
from research and development contracts and the sale of
goods. Milestone income is recognised as revenue in the
accounting period in which the milestones are achieved.
Milestones are agreed on a project by project basis and will
be evidenced by set deliverables.
Revenue from the sales of goods by Midatech Pharma US,
Inc. is recognised when the significant risks and rewards
of ownership are transferred to the buyer and it is probable
the previously agreed upon payment will be received.
It represents the full list price of products shipped to
wholesalers and other customers less product returns,
discounts, rebates and other incentives based on the sales
price. These criteria are considered to be met when the
goods are delivered to the buyer.
Sales to wholesalers provide for selling prices that are
fixed on the date of sale, although Midatech Pharma US, Inc
offers certain discounts to group purchasing organisations
and governmental programs. The wholesalers take title to
the product, bear the risk and rewards and have ownership
of the inventory. The Group has sufficient experience
with their material wholesaler distribution channel to
reasonably estimate product returns from its wholesalers
while the wholesalers are still holding inventory.
Grant revenue
Where grant income is received which is not a direct re-
imbursement of related costs and at the point at which the
conditions have been met for recognition as income, this
has been shown within grant revenue.
Government grants and government loans
Where government grants are received as a re-imbursement
of directly related costs they are credited to research and
development expense in the same period as the expenditure
towards which they are intended to contribute.
The Group receives government loans that have a below–
market rate of interest. These loans are recognised and
measured in accordance with IAS 39. The benefit of the
below–market rate of interest is measured as the difference
between the initial carrying value of the loan discounted at
a market rate of interest and the proceeds received.
The difference is held within deferred revenue as a
government grant and is released as a credit to research
and development expense in line with the expenditure
to which it relates. In a situation where the proceeds
were invested in plant and equipment, the deferred
revenue is credited to research and development within
the income statement in line with the depreciation of
the acquired asset.
Business combinations and externally acquired
intangible assets
Business combinations are accounted for using the
acquisition method at the acquisition date, which is the
date at which the Group obtains control over the entity.
The cost of an acquisition is measured as the amount of
the consideration transferred to the seller, measured at
the acquisition date fair value, and the amount of any non-
controlling interest in the acquiree. The Group measures
goodwill initially at cost at the acquisition date, being:
• the fair value of the consideration transferred to the
seller, plus
• the amount of any non-controlling interest in the
acquiree, plus
•
if the business combination is achieved in stages,
the fair value of the existing equity interest in the
acquiree re-measured at the acquisition date, less
• the fair value of the net identifiable assets acquired
and assumed liabilities.
Acquisition costs incurred are expensed and included in
administrative costs. Any contingent consideration to be
transferred by the acquirer is recognised at fair value at
the acquisition date. Subsequent changes to the fair value
of the contingent consideration, whether it is an asset or
liability, will be recognised either as a profit or loss or as a
change to other comprehensive income. If the contingent
consideration is classified as equity, it is not re-measured.
An intangible asset, which is an identifiable non-monetary
asset without physical substance, is recognised to the
extent that it is probable that the expected future economic
benefits attributable to the asset will flow to the Group and
that its cost can be measured reliably. The asset is deemed
to be identifiable when it is separable or when it arises
from contractual or other legal rights.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
50
Midatech Pharma plc Annual Report & Accounts 2016
1 ACCOUNTING POLICIES CONTINUED
Business combinations and externally acquired
intangible assets continued
Externally acquired intangible assets other than goodwill
are initially recognised at cost and subsequently amortised
on a straight line basis over their useful economic lives
where they are in use. The amortisation expense is
included within the administrative cost in the consolidated
statement of comprehensive income. Goodwill is stated at
cost less any accumulated impairment losses.
The amounts ascribed to intangibles recognised on
business combinations are arrived at by using appropriate
valuation techniques (see section related to critical
estimates and judgements below).
In-process research and development (IPRD) programmes
acquired in business combinations are recognised as
assets even if subsequent expenditure is written off
because the criteria specified in the policy for development
costs below are not met. IPRD is subject to annual
impairment testing until the completion or abandonment
of the related project. No further costs are capitalised
in respect of this IPRD unless they meet the criteria for
research and development capitalisation as set out below.
As per IFRS 3, once the research and development of each
defined project is completed, the carrying value of the
acquired IPRD is reclassified as a finite-lived asset and
amortised over its useful life.
Internally generated intangible assets
(development costs)
Expenditure on the research phase of an internal project
is recognised as an expense in the period in which it
is incurred. Development costs incurred on specific
projects are capitalised when all the following conditions
are satisfied:
• completion of the asset is technically feasible so that
it will be available for use or sale;
• the Group intends to complete the asset and use
or sell it;
• the Group has the ability to use or sell the asset
and the asset will generate probable future economic
benefits (over and above cost);
• there are adequate technical, financial and other
resources to complete the development and to use
or sell the asset; and
• the expenditure attributable to the asset during
its development can be measured reliably.
Judgement is applied when deciding whether the
recognition criteria are met. Judgements are based on
the information available. In addition, all internal activities
related to the research and development of new projects
are continuously monitored by the Directors. The Directors
consider that the criteria to capitalise development
expenditure are not met for a product prior to that product
receiving regulatory approval in at least one country.
Product and marketing rights acquired in business
combinations are recognised as assets and are amortised
over their useful life. Under the terms of various licenses,
the Group holds the US rights to sell four products
approved by the Food and Drug Administration: Zuplenz®,
Gelclair®, Oravig® and Soltamox®.
Development expenditure not satisfying the above criteria,
and expenditure on the research phase of internal
projects are included in research and development
costs recognised in the Consolidated Statement of
Comprehensive Income as incurred. No projects have
yet reached the point of capitalisation.
The significant intangibles recognised by the Group and
their useful economic lives are as follows:
Goodwill
IPRD
IT and website costs
Product and marketing rights Between 2 and 13 years
Indefinite life
In process, not yet amortising
4 years
The useful economic life of IPRD will be determined when
the in-process research projects are completed.
Impairment of non-financial assets
Assets that have an indefinite useful life, for example
goodwill, or intangible assets not ready for use, such
as IPRD, are not subject to amortisation and are tested
annually for impairment. Assets that are subject to
amortisation are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying
amount may not be recoverable. An impairment loss is
recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset’s fair value less costs to
sell and value in use. An impairment charge of £11.4m was
recognised in 2016 against the product rights of Oravig, a
product of Midatech Pharma US and £1.8m was recognised
in 2014 against the IPRD of the Midatech Pharma (Wales)
Limited cash generating unit.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 51
For the purposes of assessing impairment, assets are
grouped at the lowest levels for which there are separately
identifiable cash flows (cash-generating units). The group
at 31 December 2016 had two cash generating units (2015:
Two, 2014: One), see note 14. Non-financial assets other
than goodwill that suffered impairment are reviewed for
possible reversal of impairment at each reporting date.
Impairment charges are included in profit or loss,
except, where applicable, to the extent they reverse gains
previously recognised in other comprehensive income. An
impairment loss recognised for goodwill is not reversed.
Patents and trademarks
The costs incurred in establishing patents and trademarks
are either expensed in accordance with the corresponding
treatment of the development expenditure for the product
to which they relate or capitalised if the development
expenditure to which they relate has reached the point
of capitalisation as an intangible asset.
Joint arrangements
The Group is a party to a joint arrangement when there is a
contractual arrangement that confers joint control over the
relevant activities of the arrangement to the Group and at
least one other party. Joint control is assessed under the
same principles as control over subsidiaries.
The Group classifies its interests in joint arrangements
as either:
• Joint ventures: where the Group has rights to only
the net assets of the joint arrangement.
• Joint operations: where the Group has both the rights
to assets and obligations for the liabilities of the joint
arrangement.
In assessing the classification of interests in joint
arrangements, the Group considers:
• the structure of the joint arrangement;
• the legal form of joint arrangements structured through
a separate vehicle;
• the contractual terms of the joint arrangement
agreement; and
• any other facts and circumstances (including any other
contractual arrangements).
The Group accounts for its interests in joint ventures using
the equity method. The equity accounted joint venture is
highly immaterial with a profit and loss impact of £Nil
during 2016 (2015: Nil, 2014: £12k).
Any premium paid for an investment in a joint venture above
the fair value of the Group's share of the identifiable assets,
liabilities and contingent liabilities acquired is capitalised
and included in the carrying amount of the investment
in joint venture. Where there is objective evidence that
the investment in a joint venture has been impaired the
carrying amount of the investment is tested for impairment
in the same way as other non-financial assets.
Amounts received under collaborative joint agreements,
representing contributions to the Group’s research and
development programmes, are recognised as a credit
against research and development expense in the period
over which the related costs are incurred. All costs
related to these collaborative agreements are recorded as
research and development expenditure.
The Group accounts for its interests in joint operations by
recognising its share of assets, liabilities, revenues and
expenses in accordance with its contractually conferred
rights and obligations.
Foreign currency
Transactions entered into by subsidiaries entities in a
currency other than the currency of the primary economic
environment, in which they operate, are recorded at the
rates ruling when the transactions occur. Foreign currency
monetary assets and liabilities are translated at the rates
ruling at the reporting date. Exchange differences arising
on the retranslation of unsettled monetary assets and
liabilities are recognised immediately in profit or loss.
The functional currency of the Company is Pounds Sterling,
and the reporting currency is also Pounds Sterling. Foreign
subsidiaries use the local currencies of the country where
they operate. On consolidation, the results of overseas
operations are translated into Pounds Sterling at rates
approximating to those ruling when the transactions took
place. All assets and liabilities of overseas operations,
including goodwill arising on the acquisition of those
operations, are translated at the rate ruling at the reporting
date. Exchange differences arising on translating the
opening net assets at opening rate and the results
of overseas operations at actual rate are recognised
in other comprehensive income and accumulated in
the foreign exchange reserve.
Exchange differences recognised in the profit or loss of
Group entities on the translation of long–term monetary
items forming part of the Group's net investment in the
overseas operation concerned are reclassified to other
comprehensive income and accumulated in the foreign
exchange reserve on consolidation.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
52
Midatech Pharma plc Annual Report & Accounts 2016
1 ACCOUNTING POLICIES CONTINUED
Foreign currency continued
On disposal of a foreign operation, the cumulative exchange
differences recognised in the foreign exchange reserve
relating to that operation up to the date of disposal are
transferred to the consolidated statement of comprehensive
income as part of the profit or loss on disposal.
Financial assets
The Group does not have any financial assets which it would
classify as fair value through profit or loss, available for
sale or held to maturity. Therefore, all financial assets are
classed as loans and receivables as defined below.
Loans and receivables
These assets are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active
market. They arise principally through the provision of
goods and services to customers (e.g. trade receivables),
but also incorporate other types of contractual monetary
asset. They are initially recognised at fair value plus
transaction costs that are directly attributable to their
acquisition or issue, and are subsequently carried at
amortised cost using the effective interest rate method,
less provision for impairment.
Impairment provisions are recognised when there is
objective evidence (such as significant financial difficulties
on the part of the counterparty or default or significant
delay in payment) that the Group will be unable to collect
all of the amounts due under the terms, the amount of such
a provision being the difference between the net carrying
amount and the present value of the future expected cash
flows associated with the impaired receivable.
For trade receivables, which are reported net; such
provisions are recorded in a separate allowance account
with the loss being recognised within administrative
expenses in the consolidated statement of comprehensive
income. On confirmation that the trade receivable will not
be collectable, the gross carrying value of the asset is
written off against the associated provision.
The Group's loans and receivables comprise trade and
other receivables and cash and cash equivalents in the
consolidated statement of financial position.
Cash and cash equivalents include cash in hand, deposits
held at call with original maturities of three months or less.
Financial liabilities
The Group classifies its financial liabilities into one of two
categories, depending on the purpose for which the liability
was acquired.
Fair value through profit and loss (“FVTPL”)
The Group assumed fully vested warrants and share
options on the acquisition of DARA Biosciences, Inc. The
number of ordinary shares to be issued when exercised
is fixed, however the exercise prices are denominated
in US Dollars being different to the functional currency
of the Parent Company. Therefore, the warrants and
share options are classified as equity settled derivative
financial liabilities through the profit and loss account. The
financial liabilities were valued using the Black–Scholes
option pricing model. Financial liabilities at FVTPL are
stated at fair value, with any gains or losses arising on re-
measurement recognised in profit or loss. The net gain or
loss recognised in profit or loss incorporated any interest
paid on the financial liability and is included in the ‘other
gains and losses’ line item in the income statement. Fair
value is determined in the manner described in note 22.
Other financial liabilities include the following items:
• Borrowings are initially recognised at fair value net of
any transaction costs directly attributable to the issue
of the instrument. Such interest-bearing liabilities
are subsequently measured at amortised cost using
the effective interest rate method, which ensures that
any interest expense over the period to repayment
is at a constant rate on the balance of the liability
carried in the consolidated statement of financial
position. Interest expense in this context includes initial
transaction costs and premium payable on redemption,
as well as any interest or coupon payable while the
liability is outstanding.
• Government loans received on favourable terms below
market rate are discounted at a market rate of interest.
The difference between the present value of the loan
and the proceeds is held as a government grant within
deferred revenue and is released to research and
development expenditure in line with when the asset
or expenditure is recognised in the income statement.
• Trade payables and other short-term monetary
liabilities are initially recognised at fair value and
subsequently carried at amortised cost using the
effective interest method.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 53
Share capital
Financial instruments issued by the Group are classified as
equity only to the extent that they do not meet the definition
of a financial liability or financial asset. The Group has two
classes of shares in existence:
• ordinary shares of £0.00005 each are classified as
equity instruments; and
• deferred shares of £1 each are classified as equity
instruments.
Retirement benefits: defined contribution schemes
Contributions to defined contribution pension schemes are
charged to the consolidated statement of comprehensive
income in the year to which they relate.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event,
it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation
and a reliable estimate can be made of the amount of
the obligation.
Share-based payments
The Group operates a number of equity–settled, share-
based compensation plans, under which the entity receives
services from employees as consideration for equity
instruments (options) of the Group. The fair value of the
employee services received in exchange for the grant of the
options is recognised as an expense. The total amount to be
expensed is determined by reference to the fair value of the
options granted:
•
including any market performance conditions (including
the share price);
• excluding the impact of any service and non-market
performance vesting conditions (for example,
remaining an employee of the entity over a specified
time period); and
•
including the impact of any non-vesting conditions (for
example, the requirement for employees to save).
Non-market performance and service conditions are
included in assumptions about the number of options that
are expected to vest. The total expense is recognised over
the vesting period, which is the period over which all of the
specified vesting conditions are to be satisfied. Where
vesting conditions are accelerated on the occurrence of a
specified event, such as a change in control or initial public
offering, such remaining unvested charge is accelerated to
the income statement.
In addition, in some circumstances employees may provide
services in advance of the grant date and therefore the
grant date fair value is estimated for the purposes of
recognising the expense during the period between service
commencement period and grant date.
At the end of each reporting period, the Group revises
its estimates of the number of options that are expected
to vest based on the non-market vesting conditions.
It recognises the impact of the revision to original
estimates, if any, in the income statement, with a
corresponding adjustment to equity. When the options
are exercised, the Company issues new shares.
The proceeds received net of any directly attributable
transaction costs are credited to share capital
(nominal value) and share premium.
Leased assets
Where substantially all of the risks and rewards incidental
to ownership of a leased asset have been transferred
to the Group (a "finance lease"), the asset is treated as
if it had been purchased outright. The amount initially
recognised as an asset is the lower of the fair value of the
leased property and the present value of the minimum
lease payments payable over the term of the lease. The
corresponding lease commitment is shown as a liability.
Lease payments are analysed between capital and interest.
The interest element is charged to the consolidated
statement of comprehensive income over the period of the
lease and is calculated so that it represents a constant
proportion of the lease liability. The capital element
reduces the balance owed to the lessor.
Where substantially all of the risks and rewards
incidental to ownership are not transferred to the Group
(an "operating lease"), the total rentals payable under
the lease are charged to the consolidated statement of
comprehensive income on a straight-line basis over the
lease term. The aggregate benefit of lease incentives is
recognised as a reduction of the rental expense over the
lease term on a straight-line basis.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
1 ACCOUNTING POLICIES CONTINUED
Deferred taxation
Deferred tax assets and liabilities are recognised where the
carrying amount of an asset or liability in the consolidated
statement of financial position differs from its tax base,
except for differences arising on:
• the initial recognition of goodwill;
• 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
or taxable profit; and
•
investments in subsidiaries and jointly controlled
entities where the Group is able to control the timing of
the reversal of the difference and it is probable that the
difference will not reverse in the foreseeable future.
Recognition of deferred tax assets is restricted to those
instances where it is probable that taxable profit will be
available against which the difference can be utilised.
The amount of the asset or liability is determined using
tax rates that have been enacted or substantively enacted
by the reporting date and are expected to apply when the
deferred tax assets or liabilities are recovered or settled.
Property, plant and equipment
Items of property, plant and equipment are initially
recognised at cost. As well as the purchase price, cost
includes directly attributable costs.
Depreciation is provided on all items of property, plant
and equipment so as to write off their carrying value over
their expected useful economic lives. It is provided at the
following rates:
Fixtures and fittings
Leasehold improvements
Computer equipment
Laboratory equipment
25% per annum straight line
10% per annum straight line
25% per annum straight line
15% per annum straight line
Inventories
Inventories are stated at the lower of cost or net realisable
value. Net realisable value is the market value. In
evaluating whether inventories are stated at the lower of
cost or net realisable value, management considers such
factors as the amount of inventory on hand and in the
distribution channel, estimated time required to sell such
inventory, remaining shelf life, and current and expected
market conditions, including levels of competition.
If net realisable value is lower than the carrying amount a
write down provision is recognised for the amount by which
the carrying value exceeds its net realisable value.
2 CRITICAL ACCOUNTING ESTIMATES
AND JUDGEMENTS
The preparation of these consolidated financial statements
requires the Group to make estimates, assumptions
and judgments that can have a significant impact on the
reported amounts of assets and liabilities, revenue and
expenses and related disclosure of contingent assets
and liabilities, at the respective dates of our financial
statements. The Group bases our estimates, assumptions
and judgments on historical experience and various
other factors that we believe to be reasonable under the
circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
Management evaluates estimates, assumptions and
judgments on a regular basis and makes changes
accordingly, and discusses critical accounting estimates
with the Board of Directors.
The following are considered to be critical accounting
policies because they are important to the portrayal of the
financial condition or results of operations of the Group and
they require critical management estimates and judgments
about matters that are uncertain.
Business combinations
The Directors determine and allocate the purchase
price of an acquired business to the assets acquired and
liabilities assumed as of the business combination date.
The purchase price allocation process requires the use
of significant estimates and assumptions, including the
estimated fair value of the acquired intangible assets.
While the Directors use their best estimates and
assumptions as part of the purchase price allocation
process to accurately value assets acquired and liabilities
assumed at the date of acquisition, our estimates and
assumptions are inherently uncertain and subject to
refinement. Examples of critical estimates in valuing
certain of the intangible assets we have acquired or may
acquire in the future include but are not limited to:
• future expected cash flows from in-process research
and development;
• the fair value of the property, plant and equipment; and
• discount rates.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 55
Share-based payments
The Group accounts for share-based payment transactions
for employees in accordance with IFRS 2 Share-based
payment, which requires us to measure the cost of
employee services received in exchange for the options on
our ordinary shares, based on the fair value of the award
on the grant date.
The Directors selected the Black–Scholes–Merton
option pricing model as the most appropriate method for
determining the estimated fair value of our share-based
awards without market conditions. For performance–based
options that include vesting conditions relating to the market
performance of our ordinary shares, a Monte Carlo pricing
model was used in order to reflect the valuation impact of
price hurdles that have to be met as conditions to vesting.
The resulting cost of an equity incentive award is
recognised as expense over the requisite service
period of the award, which is usually the vesting period.
Compensation expense is recognised over the vesting
period using the straight–line method and classified in
the consolidated statements of comprehensive income.
The assumptions used for estimating fair value for share-
based payment transactions are disclosed in note 29 to
our consolidated financial statements and are estimated
as follows:
• volatility is estimated based on the average annualised
volatility of a number of publicly traded peer companies
in the biotech sector;
• the estimated life of the option is estimated to be until
the first exercise period, which is typically the month
after the option vests; and
• the dividend return is estimated by reference to
our historical dividend payments. Currently, this is
estimated to be zero as no dividend has been paid
in the prior periods.
Judgement has also been applied in the distinction of an
asset purchase and business combination with regard
to the Zuplenz acquisition. Judgement was applied in
assessing the inputs, processes and outputs relevant
to the acquisition to arrive at the conclusion that the
treatment should be a business combination.
Impairment of goodwill and intangible assets not yet
ready for use
Goodwill and intangibles not yet ready for use are tested for
impairment at the cash generating unit level on an annual
basis at the year end and between annual tests if an event
occurs or circumstances change that would more likely
than not reduce the fair value of a cash generating unit
below its carrying value. These events or circumstances
could include a significant change in the business
climate, legal factors, operating performance indicators,
competition, or sale or disposition of a significant portion
of a reporting unit.
Application of the goodwill impairment test requires
judgment, including the identification of cash generating
units, assignment of assets and liabilities to such units,
assignment of goodwill to such units and determination
of the fair value of a unit and for intangible assets not yet
ready for use, the fair value of the asset. The fair value of
each cash generating unit or asset is estimated using the
income approach, on a discounted cash flow methodology.
This analysis requires significant judgments, including
estimation of future cash flows, which is dependent on
internal forecasts, estimation of the long-term rate of
growth for the business, estimation of the useful life over
which cash flows will occur and determination of our
weighted-average cost of capital. The carrying value of
our goodwill was £14.5 million and intangibles not yet
ready for use was £10.8 million as at 31 December 2016.
The estimates used to calculate the fair value of a cash
generating unit change from year to year based on
operating results and market conditions. Changes in these
estimates and assumptions could materially affect the
determination of fair value and goodwill impairment for
each such unit. Based on the analysis performed, there
was no impairment in the year ended 31 December 2016
or in 2015 for goodwill, however there was an impairment
charge of £11.4m against the Midatech Pharma US product
rights in 2016. An impairment charge of £1.8m was also
recognised against the IPRD of the Midatech Pharma
(Wales) Limited cash generating unit in the year ended
31 December 2014. See note 14.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
2 CRITICAL ACCOUNTING ESTIMATES
AND JUDGEMENTS CONTINUED
Income Taxes
Deferred tax assets are recognised for unused tax losses
to the extent that it is probable that taxable profit will
be available against which the losses can be utilised.
Significant management judgment is required to determine
the amount of deferred tax assets that can be recognised
based upon the likely timing and the level of future taxable
profits together with future tax planning strategies.
In 2016, there were £26.96million (2015: £23.29 million,
2014: £16.02 million)) of gross unutilised tax losses carried
forward. No deferred tax asset has been provided in
respect of these losses as there was insufficient evidence
to support their recoverability in future periods.
Intangible asset recognition
Research and development costs are charged to expense as
incurred and are typically made up of salaries and benefits,
clinical and pre-clinical activities, drug development and
manufacturing costs, and third–party service fees, including
for clinical research organisations and investigative sites.
Costs for certain development activities, such as clinical
trials, are periodically recognised based on an evaluation of
the progress to completion of specific tasks using data such
as patient enrolment, clinical site activations, or information
provided by vendors on their actual costs incurred.
Payments for these activities are based on the terms of
the individual arrangements, which may differ from the
pattern of costs incurred, and are reflected in the financial
statements as prepaid or accrued expenses.
3 SEGMENT INFORMATION
Gross sales
Gross sales of £8.66m in the year ended 31 December 2016
(2015: £0.91m; 2014: £0.03m) represents the full list price
of products shipped to wholesalers and other customers
before product returns, discounts, rebates and other
incentives based on the sales price.
Revenue
Geographical analysis of revenue by destination
of customer
United Kingdom
Turkey
Europe
United States
2016
£’000
2015
£’000
2014
£’000
491
–
35
5,850
6,376
–
73
25
677
775
25
–
–
–
25
In 2016, the Group had three customers, all in the
Commercial segment, that each accounted for at least 10%
of total revenue (2015: one customer in Pipeline R&D, 2014:
none):
Customer A
(Pipeline R&D)
Customer B
(Commercial)
Customer C
(Commercial)
Customer D
(Commercial)
2016
2015
2014
–
11%
20%
15%
10%
–
–
–
–
–
–
–
Following the acquisition of Midatech Pharma US, Inc.,
the Group contains two reportable operating segments
as follows:
• Pipeline Research and Development: The Pipeline
Research and Development (“Pipeline R&D”)
segment seeks to develop products using the
Group’s nanomedicine and sustained release
technology platforms.
• Commercial: The Commercial segment distributes
and sells the Group’s commercial products. Midatech
Pharma US promotes the Group’s commercial, cancer
supportive care products in the US market, in which
the Group has exclusive licenses to Soltamox, Oravig
and Zuplenz an exclusive license to distribute, promote
and market Gelclair, and a marketing agreement
to co-promote two other products: Ferralet 90 and
Aquoral. As and when new products are introduced the
Commercial segment will include revenues from the
marketing of these commercial products.
The accounting policies of the reportable segments are
consistent with the Group’s accounting policies described
in note 1. Segment result represents the result of each
segment without the allocation of head office expenses,
interest expense, interest income and tax.
No measures of segment assets and segment liabilities
are reported to the Group’s Board of Directors in order to
assess performance and allocate resources. There is no
intersegment activity and all revenue is generated from
external customers.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 57
Both the UK and Spanish entities meet the aggregation criteria and have therefore been presented as a single reportable
segment under Pipeline R&D. The research and development activities involve the discovery and development of
pharmaceutical products in the field of nanomedicine and Sustained Release Technology. The US operating company is
engaged in the sale and marketing of cancer supportive care products and is reported under the Commercial segment.
Segmented results for the year ended 31 December 2016
Pipeline R&D
£’000
Commercial
£’000
Consolidated
£’000
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Research and development costs
Distribution costs, sales and marketing
Administrative costs
Depreciation
Amortisation
Impairment
Segmental operating loss
Finance income
Finance expense
Loss before tax
Taxation
Loss after tax
776
547
1,323
776
547
1,323
(8)
(6,684)
(248)
(4,071)
(762)
(193)
–
(10,643)
7,883
–
7,883
5,600
–
5,600
(659)
–
(5,692)
(4,379)
(10)
(3,390)
(11,413)
(19,943)
8,659
547
9,206
6,376
547
6,923
(667)
(6,684)
(5,940)
(8,450)
(772)
(3,583)
(11,413)
(30,586)
1,337
(73)
(29,322)
9,160
(20,162)
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
3 SEGMENT INFORMATION CONTINUED
Revenue continued
Segmented results for the year ended 31 December 2015
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Research and development costs
Distribution costs, sales and marketing
Administrative costs
Depreciation
Amortisation
Segmental result/operating loss
Finance income
Finance expense
Loss before tax
Taxation
Loss after tax
Pipeline R&D
£’000
Commercial
£’000
Unallocated
Costs1
£’000
Consolidated
£’000
273
600
873
273
600
873
–
(5,811)
–
(3,983)
(500)
(5)
(9,426)
641
–
641
502
–
502
(70)
(109)
(374)
(218)
(1)
(231)
(501)
–
–
–
–
–
–
–
–
–
(2,991)
–
–
914
600
1,514
775
600
1,375
(70)
(5,920)
(374)
(7,192)
(501)
(236)
(2,991)
(12,918)
1,691
(5)
(11,232)
1,133
(10,099)
1
There were no unallocated costs in 2016. Unallocated costs in 2015 represent fees associated with the acquisitions of Midatech Pharma US, Inc.
and Zuplenz® in 2015.
For the year ended 31 December 2014 there was only one reportable segment being Pipeline R&D. The unallocated costs
in respect of 2014 were £1.216m.
Non-current assets by location of assets
Spain
United Kingdom
United States
2016
£’000
2,125
16,489
15,772
34,386
2015
£’000
1,433
14,019
28,258
43,710
2014
£’000
1,578
13,457
–
15,035
All material additions to non-current assets in 2016, 2015 and 2014 were in the Pipeline R&D segment.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 59
4 LOSS FROM OPERATIONS
Loss from operations is stated after charging/(crediting):
Changes in inventories of finished goods and work in progress
Write down of inventory to net realisable value
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of intangible assets
Fees payable to the Company’s auditor for the audit of the parent Company
Fees payable to the Company’s subsidiary auditors for the audits of the
subsidiary accounts
Fees payable to the Company’s auditor for:
Corporate finance services
Tax compliance
Tax advisory
Other services
Operating lease expense:
Property
Plant and machinery
Foreign exchange loss/(gain)
Acquisition costs (in addition to fees payable to the Company’s auditor)
Loss on disposal of property, plant and equipment
Gain on bargain purchase
Share based payment
2016
£’000
2015
£’000
2014
£'000
256
287
772
3,583
11,413
100
139
–
–
–
72
385
194
31
–
–
–
203
62
–
501
236
–
100
115
438
–
7
36
246
86
(23)
2,553
–
(165)
170
–
–
321
1
1,800
21
31
281
14
14
6
97
57
(37)
172
89
–
–
Acquisition costs relate to professional fees incurred on the acquisition of Midatech Pharma US, Inc. and Zuplenz®
in 2015 and Midatech Pharma (Wales) Limited in 2014.
Amortisation of product and marketing rights are included with distribution, sales and marketing expenses.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
60
Midatech Pharma plc Annual Report & Accounts 2016
5 STAFF COSTS
Staff costs (including Directors) comprise:
Wages and salaries
Defined contribution pension cost (note 28)
Social security contributions and similar taxes
Share based payment
Employee numbers
The average number of staff employed by the Group during the financial year amounted to:
Research and development
General and administration
Sales and marketing
2016
£’000
2015
£’000
2014
£’000
6,314
3,731
2,322
206
769
203
183
431
170
169
322
–
7,492
4,515
2,813
2016
£’000
2015
£’000
2014
£’000
57
19
8
84
45
22
7
74
28
10
–
38
Key management personnel compensation
Key management personnel are those persons having authority and responsibility for planning, directing and controlling
the activities of the Group, including the Directors of the Company listed on page 33, and the Chief Operating Officer.
Wages and salaries
Defined contribution pension cost
Payments made to third parties
Social security contributions and similar taxes
Benefits in kind
Share based payment
2016
£’000
1,054
59
142
152
2
184
2015
£’000
2014
£’000
850
59
223
88
7
170
546
36
184
78
36
–
880
1,593
1,397
Emoluments disclosed above include the following amounts in respect of the highest paid Director. Directors’ emoluments
are disclosed on page 27.
Salary
Total pension and other post–employment benefit costs
Benefits in kind
2016
£’000
2015
£’000
2014
£’000
448
28
1
477
347
24
6
377
323
22
–
345
None of the Directors has exercised share options during the year (2015: Nil, 2014: Nil).
During the year two Directors (2015: two) participated in a defined contribution pension scheme.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
61
6 FINANCE INCOME AND EXPENSE
Finance income
Interest received on bank deposits
Gain on equity settled derivative financial liability
Total finance income
2016
£’000
2015
£’000
2014
£’000
164
1,173
1,337
53
1,638
1,691
8
–
8
The gain on the equity settled derivative financial liability in 2016 has arisen due to the reduction in the share price and the
lapsing of warrants and options. The gain in 2015 arose due to the reduction in share price between the date of acquisition
of Midatech Pharma US, Inc. and 31 December 2015.
Finance expense
Bank loans
Other loans
Interest on convertible loans
Total finance expense
7 TAXATION
Current tax credit
Current tax credited to the income statement
Taxation payable in respect of foreign subsidiary
Deferred tax credit
Reversal of temporary differences
Total current tax and tax credit
2016
£’000
2015
£’000
2014
£’000
16
57
–
73
2
3
–
5
126
–
35
161
2016
£’000
2015
£’000
2014
£’000
1,936
(25)
1,911
7,249
9,160
1,002
–
1,002
131
1,133
663
(5)
658
360
1,018
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
7 TAXATION CONTINUED
The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the
United Kingdom applied to losses for the year are as follows:
Loss before tax
Expected tax credit based on the standard rate of United Kingdom
corporation tax at the domestic rate of 20.25% (2014: 21.49%, 2013:20%)
Fixed asset differences
Expenses not deductible for tax purposes
Adjustments to brought forward values
Additional deduction for R&D expenditure
Surrender of tax losses for R&D tax refund
Adjust deferred tax opening/closing rate
Income not taxable
Effects of other tax rates
Unrelieved tax losses and other deductions arising in the period
Foreign exchange differences
Deferred tax not recognised
Adjustment in respect of prior years
Total tax credited to the income statement
2016
£’000
2015
£’000
2014
£’000
(29,322)
(11,232)
(9,840)
(5,864)
(2,274)
(2,115)
–
1,022
–
4
(1,503)
–
–
(3,421)
(166)
712
491
(435)
9,160
–
185
(8)
(789)
406
–
–
–
(78)
–
1,425
–
12
385
33
(566)
419
59
(44)
–
(35)
–
834
–
(1,133)
(1,018)
The taxation credit arises on the enhanced research and development tax credits accrued for the respective periods.
The Finance Act 2013 includes provision for the main rate of corporation tax to reduce from 23% to 21% from 1 April 2014
and to 20% from 1 April 2015.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
63
8 LOSS PER SHARE
Numerator
Total
2016
£’000
Total
2015
£’000
As restated
Total
2014
£’000
Loss used in basic EPS and diluted EPS
(20,162)
(10,099)
(8,822)
Denominator
Weighted average number of ordinary shares used in basic EPS
36,072,752
28,229,814
9,026,347
Basic and diluted loss per share – pence
(56p)
(36p)
(98p)
The Group has made a loss in the current and previous years presented, and therefore the options and warrants are anti-
dilutive. As a result, diluted earnings per share is not provided for any of the periods presented.
9 PROPERTY, PLANT AND EQUIPMENT
At 1 January 2014
Additions
Acquired through acquisition of subsidiary
Exchange differences
Disposals
At 31 December 2014
Additions
Acquired through acquisition of subsidiary
Exchange differences
At 31 December 2015
Additions
Disposal
Transfer
Exchange differences
At 31 December 2016
Fixtures
and fittings
£'000
Leasehold
improvements
£'000
Computer
equipment
£'000
Laboratory
equipment
£'000
748
524
3
(42)
(31)
1,202
183
–
(66)
1,319
2
–
(1,125)
32
228
767
259
19
(41)
(124)
880
283
–
(51)
1,112
715
–
–
172
1,999
165
18
15
(3)
–
195
173
–
(14)
354
43
(1)
(122)
7
281
162
229
207
–
(15)
583
385
16
(1)
983
609
–
1,247
211
3,050
Total
£'000
1,842
1,030
244
(86)
(170)
2,860
1,024
16
(132)
3,768
1,369
(1)
–
422
5,558
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
64
Midatech Pharma plc Annual Report & Accounts 2016
9 PROPERTY, PLANT AND EQUIPMENT CONTINUED
Fixtures
and fittings
£'000
Leasehold
improvements
£'000
Computer
equipment
£'000
Laboratory
equipment
£'000
Accumulated depreciation
At 1 January 2014
Charge for the year
Exchange differences
Disposals
At 31 December 2014
Charge for the year
Exchange differences
At 31 December 2015
Charge for the year
Transfer
Exchange differences
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 31 December 2014
430
102
(22)
(31)
479
3
(24)
458
41
(369)
19
149
79
861
723
495
67
(33)
(50)
479
282
(28)
733
134
(96)
101
872
1,127
379
401
118
24
(2)
–
140
48
(8)
180
54
(118)
6
122
159
174
55
Total
£'000
1,158
321
(54)
(81)
1,344
501
(61)
1,784
772
–
236
115
128
3
–
246
168
(1)
413
543
583
110
1,649
2,792
1,401
570
337
2,766
1,984
1,516
The transfers between asset classes have arisen as a result of reallocation of acquired assets in 2015 to more appropriately
recognise their classification. Included within the total net book value of tangible fixed assets is £33k (2015: £266k and 2014:
£224k) in respect of assets held under finance leases and similar hire purchase contracts. The depreciation charge for the
year on these assets was £22k (2015: £26k and 2014: £79k). These assets were held as security in respect of their finance
lease obligations.
No other assets were held as security other than those on finance lease.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 65
10 INTANGIBLE ASSETS
Cost
At 1 January 2014
Acquired in business combinations
At 31 December 2014
Additions
Acquired in business combinations
Foreign exchange
At 31 December 2015
Additions
Acquired in business combinations
Foreign exchange
Disposals
At 31 December 2016
In-process
research and
development
£'000
Product and
marketing rights
£'000
Goodwill
£'000
IT/Website
costs
£'000
–
12,600
12,600
–
–
–
12,600
–
–
–
–
–
–
17,989
332
18,321
–
–
2,291
2,291
–
9,952
213
12,456
–
3,160
2,032
12,600
21,481
14,488
12
–
12
3
–
–
15
19
–
(8)
26
Total
£'000
12
14,891
14,903
3
27,941
545
43,392
19
5,192
(8)
48,595
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
66
Midatech Pharma plc Annual Report & Accounts 2016
10 INTANGIBLE ASSETS CONTINUED
Accumulated amortisation
At 1 January 2014
Amortisation charge for the year
Impairment charge for year
At 31 December 2014
Amortisation charge for the year
Foreign exchange
At 31 December 2015
Amortisation charge for the year
Impairment
Foreign exchange
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 31 December 2014
In-process
research and
development
£'000
Product and
marketing rights
£'000
Goodwill
£'000
IT/Website
costs
£'000
Total
£'000
–
–
1,800
1,800
–
–
1,800
–
–
–
1,800
10,800
10,800
10,800
–
–
–
–
235
8
243
3,578
11,413
374
15,608
5,873
18,078
–
–
–
–
–
–
–
–
–
–
–
14,488
12,456
2,291
8
1
–
9
1
–
10
5
–
15
11
5
3
8
1
1,800
1,809
236
8
2,053
3,583
11,413
374
17,423
31,172
41,339
13,094
The individual intangible assets, excluding goodwill, which are material to the financial statements are:
Midatech Pharma (Wales) Limited
acquired IPRD
Midatech Pharma US, Inc., product
and marketing rights
Zuplenz® – product and marketing rights
Carrying amount
Remaining amortisation period
2016
£’000
2015
£’000
2014
£’000
2016
(years)
2015
(years)
10,800
10,800
10,800
3,557
2,316
16,673
15,570
2,508
28,878
–
–
10,800
n/a in
process
Between
1 and 4
n/a in
process
Between
2 and 5
12
13
2014
(years)
n/a in
process
–
–
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
67
11 ACQUISITION OF Q CHIP LIMITED
On 8 December 2014, the Group acquired 100% of the voting equity of Q Chip Limited and its subsidiaries, a UK company
principally involved in design and development of the Q-SpheraTM drug encapsulation and delivery system and
underpinning microsphere manufacturing technology. On 20 January 2015 Q Chip Limited changed its name to Midatech
Pharma (Wales) Limited. The principal reason for this acquisition was to strengthen the Group’s technology and product
portfolios, and thereby diversify risk through the following:
a) Add controlled-release technology to Midatech gold nanoparticle and portfolio
b) Expand the number of development projects
c)
Q Chip’s product portfolio offered Midatech a lower risk profile than Midatech’s
own technology thereby mitigating against potential future failure
Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are:
Identifiable intangible assets:
In-process research and development
Property, plant and equipment
Receivables and other debtors
Payables and other liabilities
Deferred tax
Cash
Total net assets
Equity instruments (5,077,122 ordinary shares)
Deferred Equity instruments (299,624 deferred consideration shares held as shares to be issued)
Total consideration – non-cash movement
Goodwill on acquisition
Final fair
value £’000
12,600
244
314
(494)
(714)
115
12,065
13,556
800
14,356
2,291
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
11 ACQUISITION OF Q CHIP LIMITED CONTINUED
The main factors leading to the recognition of goodwill are the presence of certain intangible assets, such as the
assembled workforce of the acquired entity and the expected synergies of the enlarged Group which do not qualify for
separate recognition.
The goodwill and intangible assets recognised will not attract tax deductions.
The revenue and net loss included in the Consolidated Statement of Comprehensive Income since 8 December 2014
contributed by Midatech Pharma (Wales) Limited were nil and £0.3m respectively.
If the acquisition had occurred on 1 January 2014, Group revenue would have been £0.73m and Group loss for the period
would have been £11.01m.
The net cash inflow in the year in respect of acquisition comprised net cash acquired of £0.1m.
12 ACQUISITION OF MIDATECH PHARMA US, INC.
On 4 December 2015, the Group acquired 100% of the voting equity of DARA BioSciences, Inc. whose principal activity is
the sale and marketing of a portfolio of cancer supportive care pharmaceutical products. At completion of that transaction
DARA BioSciences, Inc. was merged into a wholly owned subsidiary of Midatech Pharma plc and the name of the merged
entity was changed to Midatech Pharma US, Inc. The principal reason for this acquisition was to acquire commercial
infrastructure and capability in the US market.
The revenue included in the consolidated statement of comprehensive income between 4 December 2015 and 31
December 2015 contributed by Midatech Pharma US, Inc was £502k. Midatech Pharma US, Inc contributed a net loss of
£238k over the same period. If the acquisition had occurred at 1 January 2015 Group revenue would have been £3.67m and
the Group loss for the period would have been £19.34m.
Acquisition related costs of £2.77m were incurred in relation to this acquisition and are included within (administrative
expenses) within the consolidated statement of comprehensive income for the period.
The main factors leading to the recognition of goodwill are the presence of certain intangible assets, such as the
assembled workforce of the acquired entity, its established commercial infrastructure and the expected synergies of the
enlarged Group which do not qualify for separate recognition.
In addition to the consideration outlined below, additional cash consideration may become payable (up to a maximum of
£3.85m/$5.7m) if specified sales milestones are achieved for the years ended 31 December 2016 and 2017. At 31 December
2016, these milestones are not expected to be achieved and therefore the fair value is nil. However, should they be
achieved then any further payments are expected to be self-financed by incremental milestone-generated cash flow.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 69
The goodwill and intangible assets recognised will not attract tax deductions.
Identifiable intangible assets:
Product and marketing rights
Property, plant and equipment
Receivables and other debtors
Stock
Payables and other liabilities
Deferred tax
Cash
Total net assets
Equity instruments (5,422,028 ordinary shares)
Deferred Equity instruments
Share options*
Warrants*
Preference share redemption**
Total consideration
Goodwill on acquisition
*
**
The share options and the warrants were valued using the Black Scholes model.
The preference share redemption was valued on a cash basis
The net cash inflow in the year in respect of the acquisition of the subsidiary comprised:
Cash paid on completion – preferred share redemption
Net cash acquired
Provisional
fair value
£’000
15,477
16
515
152
(4,150)
(6,191)
2,289
8,108
14,427
1,056
2,155
422
18,060
9,952
£’000
(422)
2,289
1,867
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Midatech Pharma plc Annual Report & Accounts 2016
12 ACQUISITION OF MIDATECH PHARMA US, INC. CONTINUED
Assumption of DARA BioSciences, Inc. share options and warrants
At the time of completion of the merger with DARA BioSciences, Inc. there were a number of outstanding and unexercised
options and warrants over common stock in DARA. Under the terms of the merger these options and warrants became
exercisable for a number of Midatech ordinary shares equal to the product of (A) the number of shares of DARA common
stock that were issuable upon exercise of the stock option or warrant immediately prior to the merger, multiplied by (B)
a factor of 0.272, that being the Exchange Ratio defined in the merger agreement, rounded down to the nearest whole
number of Midatech ordinary shares.
The per share exercise price for each Midatech ordinary share issuable upon exercise of each stock option or warrant
will be equal to (C) the exercise price per share of DARA common stock at which the DARA stock option or warrant was
exercisable divided by (D) the Exchange Ratio of 0.272, rounded up to the nearest whole cent. All other terms, notably
including expiration dates, remained materially the same.
As at 31 December 2016 there were DARA options outstanding over 300,728 Midatech ordinary shares (2015: 721,000)
with a weighted average exercise price of $7.19 per share (2015: $7.62), within a range of $2.54 to $770.59 (2015: $2.54 to
$770.59), and a weighted average remaining contractual life of 7.7 years (2015: 8.5 years). The risk-free rate ranged from
0.00% to 1.14% (2015: 0.63% to 1.81%), volatility from 60% to 77% (2015: 59% to 79%) and the expected life from 0.8 to 8.8
years (2015: 1.9 to 8.6 years). The exercise of all options would raise additional cash of $2.16m (2015: $5.50m).
Also at 31 December 2016 there were DARA warrants outstanding over 3,017,773 Midatech ordinary shares (2015:
3,034,437) with a weighted average exercise price of $9.44 per share (2015: $9.67), within a range of $3.06 to $27.58
(2015: $3.06 to $164.71), and a weighted average remaining contractual life of 2.1 years (2015: 3.1 years). The risk-free
rate ranged from 0.00% to 0.71% (2015: 0.44% to 1.63%), volatility from 60% to 66% (2015: 59% to 79%) and the expected
life from 0.1 to 5.9 years (2015: 0.1 to 7.0 years). The exercise of all warrants would raise additional cash of $28.48m
(2015: $29.33m).
The share options and warrants were valued using the Black Scholes model for the purpose of calculating the
consideration payable for the DARA business. These options and warrants are treated as an equity settled derivative,
held as a fair value through profit and loss instrument, see note 22.
13 ACQUISITION OF ZUPLENZ
On 24 December 2015, the Group acquired US sales and marketing rights to the product Zuplenz®, an FDA-approved,
marketed anti-emetic oral soluble film used in adult patients for the prevention of highly and moderately emetogenic
chemotherapy-induced nausea and vomiting, radiotherapy-induced nausea and vomiting and post-operative nausea
and vomiting. This acquisition was deemed to be a business combination following a review of the inputs, processes and
potential for a market participant to generate outputs using the assets and agreements acquired.
The goodwill recognised will not attract a tax deduction.
Identifiable intangible assets:
Product and marketing rights
Stock
Total net assets
Cash consideration
Contingent consideration*
Total consideration
Gain from bargain purchase on acquisition
Provisional
fair value
£’000
2,512
231
(2,743)
2,528
50
2,578
(165)
*
The contingent consideration relates to various milestone payments which are dependent on the quarterly sales achieved in calendar years 2016 and 2017 and
annual sales from 2018 to 2022 exceeding specified sales targets. The maximum amount payable is $26.0m however management does not consider it likely that
the associated very high sales targets will be achieved.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 71
No revenue or costs were contributed by Zuplenz in 2015. Acquisition related costs of £218k were incurred in relation to
this acquisition and are included within administrative expenses within the consolidated statement of comprehensive
income for 2015.
The gain from the bargain purchase of £165k was included within administrative costs in 2015 in the consolidated
statement of comprehensive income. It arose due to the seller of Zuplenz seeking to conclude the transaction as quickly
as possible.
We are unable to quantity the impact on the 2015 Group revenue and Group loss had the acquisition occurred on 1 January
2015 due to the seller of the product not providing separable accounting records.
The net cash outflow in the year in respect of the business acquisition comprised:
Cash paid on completion
£’000
2,528
14 IMPAIRMENT TESTING
Midatech Pharma (Wales) Ltd
Details of goodwill and IPRD allocated to the acquired cash generating unit and the valuation basis is as follows:
Name
CGU – Midatech
Pharma (Wales) Ltd
IPRD carrying amount
Goodwill carrying amount
Indefinite lived
2016
£’000
2015
£’000
2014
£’000
2016
£’000
2015
£’000
2014
£’000
Valuation
Basis
10,800
10,800
10,800
2,291
2,291
2,291
Value in use
The assets of the Midatech Pharma (Wales) Ltd (“MPW”) CGU were valued as at 31 December 2016 and 31 December
2015 and were found to support the IPRD and goodwill carrying amounts set out above. The IPRD was valued using 14-15
year (2015: 15–16 year), risk adjusted cash flow forecasts, in line with patent life, that have been approved by the Board.
A period longer than five years is appropriate on the basis that the investment is long term and the development and
commercialisation process is typically in excess of five years. Beyond the period from product launch and initial market
penetration, a long-term growth rate of 5% was used.
In 2014, an impairment charge of £1.8m and a related £0.36m deferred tax credit was recorded in the MPW CGU as a result
of the curtailment of an agreement with a commercial partner post acquisition. At the same time, the carrying value of
a component of IPRD, was reduced from £1.8m to nil. The resulting impairment charge was recorded in research and
development expenditure within the consolidated statement of comprehensive income in 2014.
As at 31 December 2014, the remaining assets of the cash generating unit were not identified as being materially different
to the fair values determined at the acquisition date on 8 December 2014.
The key assumptions used in the model include the following:
Assumptions
Pre-tax discount rate
2016 CGU –
Q Chip Limited
and subsidiaries
2015 CGU –
Q Chip Limited
and subsidiaries
2014 CGU –
Q Chip Limited
and subsidiaries
18.1%
17.7-19.5%
17.7-19.5%
Cumulative probability of success of projects
46% to 81%
46% to 69%
23% to 57%
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14 IMPAIRMENT TESTING CONTINUED
Midatech Pharma (Wales) Ltd continued
2016
If any one of the following changes were made to the above key assumptions, applied to all projects, the carrying value and
recoverable amount would be equal.
Pre-tax discount rate for all projects
Cumulative probability of success of all projects
2016
CGU – MPW
Limited and
subsidiaries
increase to 26.4%
53%
2015
If any one of the following changes were made to the above key assumptions, applied to all projects, the carrying value and
recoverable amount would be equal.
Pre-tax discount rate for all projects
Cumulative probability of success of all projects
2015
CGU – MPW
Limited and
subsidiaries
increase to 23.9%
44%
2014
The value in use calculations used to value the acquired intangibles and appraise the remaining carrying value of the
intangibles at 31 December 2014 were materially the same. This is because of the impairment test date and acquisition
date being only 23 days apart. Any increase in the discount rate or decrease in the probability of success of projects stated
above would result in an impairment.
Midatech Pharma US, Inc
Details of goodwill and intangibles allocated to the acquired cash generating unit and the valuation basis are as follows:
Definite lived
Indefinite lived
Product and
marketing rights
carrying amount
2016
£000
Product and
marketing rights
carrying amount
2015
£000
Goodwill
carrying amount
2016
£000
Goodwill
carrying amount
2015
£000
Valuation
basis
Name
CGU – Midatech Pharma US, Inc
3,557
15,477
12,197
10,165
Value in use
The change in the goodwill carrying value as at 31 December 2016 is due to the movement in the Sterling and US Dollar
exchange rate used to translate the underlying US Dollar value of goodwill, 2016: $1.2334 (at 31 December 2015: $1.4802).
Following the acquisition of Zuplenz® on 24 December 2015, the Group has considered Zuplenz® to be an asset of the
MPUS cash generating unit as from 1 January 2016. The Zuplenz® product is wholly integrated within the MPUS portfolio
of products and as such all related cash flows have been included with the value in use calculations of the CGU.
An impairment charge of £11.4m in relation to product and marketing rights and a related £4.6m deferred tax credit was
recorded in MPUS as at 31 December 2016. This arose as a result of the underperformance of Oravig in comparison to
forecast sales at the time of the acquisition. The carrying value of the product rights, was reduced from £11.4m to nil.
The resulting impairment charge is shown seperately within the consolidated statement of comprehensive income.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 73
The remaining assets of the MPUS CGU, including Zuplenz®, were valued as at 31 December 2016 and were found to
support the product and marketing rights and goodwill carrying amounts set out above. The product and marketing
rights were valued using 10-year cash flow forecasts, that have been approved by the Board. A period longer than 5 years is
appropriate on the basis that the product patents afford a certain amount of protection from competitors thereby providing
assurance that market share can be preserved throughout the period of patent life. A long-term growth rate of 5% was used.
As at 31 December 2015, the assets of the CGU were not identified as being materially different to the fair values
determined at the acquisition date on 4 December 2015.
The key assumptions used in the model include the following:
Assumptions
Pre-tax discount rate
Overall CGU 10-year growth rate
2015 CGU – Midatech Pharma US, Inc
24.7%
10.6%
The discount rate is an estimated market-based weighted average cost of capital for the MPUS business, determined
at the date of acquisition. The overall CGU 10-year growth rate is a composite of individual product forecasts, each
with particular forecast growth rates over the next 5-years followed by a further 5-year period utilising a 5% long-term
growth rate.
Assumptions
Pre-tax discount rate
2015 CGU – Midatech Pharma US, Inc
23.2%
2016
If any one of the following changes were made to the above key assumptions, applied to all projects, the carrying value and
recoverable amount would be equal.
Pre-tax discount rate for all projects
Overall CGU 10-year growth rate
2016 CGU – Midatech Pharma US, Inc
increase to 25.2%
10.5%
2015
The value in use calculations used to value the acquired intangibles and appraise the remaining carrying value of the
intangibles at 31 December 2015 were materially the same. This is because of the impairment test date and acquisition
date being only 27 days apart. Any increase in the discount rate or decrease in the probability of success of projects stated
above would result in an impairment.
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Midatech Pharma plc Annual Report & Accounts 2016
15 SUBSIDIARIES
The subsidiaries of Midatech Pharma plc, all of which are 100% owned, either directly or through subsidiaries where
indicated, and have been included in these financial statements in accordance with the details set out in the basis of
preparation and basis of consolidation note 1, are as follows:
Name
Registered office
Nature of business
Notes
Midatech Limited
Midatech Pharma (Espana) SL
PharMida AG
Midatech Pharma (Wales) Limited
Midatech Pharma US, Inc.
Dara Therapeutics, Inc.
Midatech Pharma PTY
65 Innovation Drive, Milton
Park, Milton, Abingdon,
Oxfordshire, OX14 4RQ
Parque Tecnológico de
Vizcaya, Edificio 800 Planta 2,
Derio, 48160, Vizcaya, Spain
Trading company
Trading company
(a)
c/o Kellerhals, Hirschgässlein
11, 4051 Basel, Switzerland
Dormant
(a) (b)
Oddfellows House, 19
Newport Road, Cardiff,
CF24 0AA
8601 Six Forks Road, Suite
160, Raleigh, North Carolina
27615, USA
8601 Six Forks Road, Suite
160, Raleigh, North Carolina
27615, USA
c/o Griffith Hack Consulting,
300 Queen Street, Brisbane,
QLD 4000, Australia
Trading company
Trading company
Dormant
Trading company
(c)
(d)
(e)
Notes:
(a) Wholly owned subsidiary of Midatech Limited
(b) PharMida AG became dormant in January 2016.
(c)
DARA Bio Sciences, Inc. was acquired on 4 December 2015 through a merger with a specially incorporated subsidiary of Midatech Pharma plc.
This merger subsidiary was renamed Midatech Pharma US, Inc. on 4 December 2015.
(d) Wholly owned subsidiary of Midatech Pharma US, Inc.
(e) Midatech Pharma PTY was incorporated on 16 February 2015.
16 JOINT ARRANGEMENTS
Name
Country of incorporation
Nature of business
Type of arrangement
Syntara LLC
USA
Dormant
MidaSol Therapeutics GP
Cayman Islands
Research and
development partner
Joint venture
Joint operation
The Group has a 50% (2015: 50%; 2014: 50%) interest in two joint arrangements: Syntara LLC and MidaSol Therapeutics.
The primary activity of these joint arrangements was to provide the partners with collaborative research and development
on drug delivery systems in the market, which is in line with the Group’s strategy to develop a safe and effective drug
delivery system.
Syntara LLC is a dormant joint venture where the Group has joint control over the separate legal entity. The Group equity
accounts for its interests in this arrangement; the results are immaterial to the financial statements.
MidaSol Therapeutics is a separate legal entity however no costs or revenues pass through it. The Group and its
collaborative partner incur costs in respect of research and development and periodically agree on a contribution from
either side to ensure that both parties have incurred 50% of the total costs. Contributions from their research partner are
netted against the costs to which they relate within research and development and the arrangement is accounted for as a
joint operation. Midasol operations effectively ceased during 2015.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 75
Research and development spend on MidaSol Therapeutics
Year–end receivable due from joint operation partner
17 TRADE AND OTHER RECEIVABLES
Trade receivables
Prepayments
Other receivables
Total trade and other receivables
Less: non-current portion (rental deposit and on bond)
Current portion
2016
£’000
–
–
2016
£’000
1,428
586
873
2,887
(448)
2,439
2015
£’000
776
219
2015
£’000
985
685
1,213
2,883
(387)
2,496
2014
£’000
248
–
2014
£’000
189
49
649
887
(425)
462
Trade and other receivables do not contain any impaired assets. The Group does not hold any collateral as security and
the maximum exposure to credit risk at the consolidated statement of financial position date is the fair value of each class
of receivable.
Book values approximate to fair value at 31 December 2016, 2015 and 2014.
18 CASH AND CASH EQUIVALENTS AND CASH FLOW SUPPORTING NOTES
Cash at bank available on demand
Share issues net of costs – cash transactions
Funds raised on Public Offering
Costs of raising funds on Initial Public Offering
Issue of shares in Midatech Limited pre flotation
19 INVENTORIES
Work in progress
Finished goods
Total inventories
2016
£’000
2015
£’000
2014
£’000
17,608
16,175
30,325
2016
£’000
16,673
(1,105)
–
15,568
2016
£’000
–
817
817
2015
£’000
–
–
–
–
2015
£’000
230
229
459
2014
£’000
32,000
(1,350)
3,202
33,852
2014
£’000
–
–
–
A reserve was established in December 2016 against Inventory that is not expected to be sold before its sell by date,
resulting in a charge to the comprehensive statement of income of £287k (2015: Nil).
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20 TRADE AND OTHER PAYABLES
Current
Trade payables
Other payables
Accruals
Total financial liabilities, excluding loans and borrowings,
classified as financial liabilities measured at amortised cost
Tax and social security
Deferred revenue
Total trade and other payables
2016
£’000
3,268
1,166
2,003
6,437
670
1,300
8,407
2015
£’000
2,285
35
3,101
5,421
183
1,480
7,084
2014
£’000
981
177
732
1,890
274
177
2,341
Book values approximate to fair value at 31 December 2016, 2015 and 2014.
All current trade and other payables are payable within three months of the period end date shown above.
Government grants
The Group received development grant funding from the European Union under the Horizon 2020 “Nanofacturing”
project, a European Union funded programme to develop a scalable manufacturing platform for the production of
nanopharmaceutical products. Midatech is participating in this programme, along with seven other entities, through
two Group companies, Midatech Pharma España (“MPE”), which is acting as project coordinator, and Midatech Limited
(“MTL”). The project commenced on 1st February 2015 and is scheduled to complete on 31st January 2019. £547k (2015:
£541k) of revenue has been recognised during the year in relation to this project and £1.24m (2015: £1.3m) of the deferred
revenue balance relates to funds received but not yet recognised.
Government grants/loans in Spain
Five tranches of government loans have been received by Midatech Pharma Espana SL (formerly Midatech Biogune SL)
for the finance of research, technical innovation and the construction of their laboratory. The loans are term loans which
carry an interest rate below the market rate, and are repayable over periods through to 2022. The loans carry default
interest rates in the event of scheduled repayments not being met. On initial recognition the loans are discounted at a
market rate of interest with the credit being classified as a grant within deferred revenue. The deferred grant revenue
is released to the consolidated statement of comprehensive income within research and development costs in the period
to which the expenditure is recognised.
The debt element of the government loans is designated within note 21 as borrowings, the gross contractual repayment of
the loans is disclosed in note 23.
21 LOAN AND BORROWINGS
Current
Bank loans
Finance lease
Government and research loans
Total
Non-current
Bank loans
Finance lease
Government and research loans
Total
2016
£’000
2015
£’000
2014
£’000
23
31
484
538
–
52
1,568
1,620
9
70
363
442
20
68
1,420
1,508
9
37
445
491
31
–
1,457
1,488
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 77
Book values approximate to fair value at 31 December 2016, 2015 and 2014.
Obligations under finance leases are secured by a fixed charge over the fixed assets to which they relate.
The Group had no undrawn committed borrowing facilities at any year end.
22 DERIVATIVE FINANCIAL LIABILITY – CURRENT
Equity settled derivative financial liability
At 1 January/on acquisition – 5 December 2015
Gain recognised in finance income within the consolidated statement of
comprehensive income
At 31 December
2016
£’000
400
1,573
(1,173)
400
2015
£’000
1,573
3,211
(1,638)
1,573
2014
£’000
–
–
–
Equity settled derivative financial liability is not a liability that is to be settled for cash. The Group assumed fully vested
warrants and share options on the acquisition of DARA Biosciences, Inc. The number of ordinary shares to be issued
when exercised is fixed, however the exercise prices are denominated in US Dollars being different to the functional
currency of the Parent Company. Therefore, the warrants and share options are classified as equity settled derivative
financial liabilities through the profit and loss account. The financial liabilities were valued using the Black–Scholes option
pricing model. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on re-measurement
recognised in profit or loss. The net gain or loss recognised in profit or loss incorporated any interest paid on the financial
liability and is included in the ‘other gains and losses’ line item in the income statement. Fair value is determined in the
manner described in note 23. A key input in the valuation of the instrument is the Company share price. The share price
of the Company reduced from £2.65 at the date of acquisition of DARA Biosciences, Inc. to £1.74 at 31 December 2015,
resulting in a gain of £1.64m on re-measurement which was being credited to finance income in 2015.
At 31 December 2016, some 398,315 options and 16,664 warrants had lapsed, as described in note 12. In addition, the
share price had fallen to £1.18, which resulted in a gain of £1.17m on re-measurement, which was credited to finance
income in 2016.
23 FINANCIAL INSTRUMENTS – RISK MANAGEMENT
The Group is exposed through its operations to the following financial risks:
• Credit risk;
• Foreign exchange risk; and
• Liquidity risk.
In common with all other businesses, the Group is exposed to risks that arise from its use of financial instruments. This
note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure
them. The Board does not believe that its risk exposure to financial instruments, its objectives, policies and processes for
managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note
has changed in the past year.
Principal financial instruments
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
• Trade and other receivables;
• Cash and cash equivalents;
• Trade and other payables;
• Accruals;
• Loans and borrowings; and
• Derivative financial liability.
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23 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED
A summary of the financial instruments held by category is provided below:
Financial assets – loans and receivables
Cash and cash equivalents
Trade receivables
Other receivables
Total financial assets
Financial liabilities – amortised cost
Trade payables
Other payables
Accruals
Loans and borrowings
Total financial liabilities – amortised cost
Financial liabilities – fair value through profit and loss – current
Equity settled derivative financial liability
2016
£’000
17,608
1,428
873
2015
£’000
2014
£’000
16,175
30,325
985
1,213
189
649
19,909
18,373
31,163
2016
£’000
3,268
1,166
2,003
2,158
8,595
2016
£’000
400
2015
£’000
2,285
35
3,101
1,950
7,371
2015
£’000
1,573
2014
£’000
981
177
732
1,979
3,869
2014
£’000
–
General objectives, policies and processes
The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and,
whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes
that ensure the effective implementation of the objectives and policies to the Group’s Management.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting
the Group’s competitiveness and flexibility. Further details regarding these policies are set out below:
Fair value hierarchy
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by
valuation technique:
• Level 1: quoted (unadjusted) prices in active markets for identical assets and liabilities;
• Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable,
either directly or indirectly; and
• Level 3: techniques which use inputs that have a significant effect on the recorded fair value that are not based
on observable market data.
The fair value of the Group’s financial liability is measured at fair value on a recurring basis.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
79
The following table gives information about how the fair value of this financial liability is determined, additional disclosure
is given in note 12:
Financial
liabilities
Equity settled
financial
derivative
liability
Fair value
as at
31/12/2016
Fair value
hierarchy
£400k
Level 3
Valuation
technique(s)
and key input(s)
Black Scholes
option pricing
model
Significant
unobservable input(s)
Volatility rates between a range
of 60% and 76% determined using
historical volatility of comparable
companies.
Relationship
of unobservable
inputs to fair value
The higher the volatility
the higher the fair value.
Expected life between a range of 0.1
and 8.6 years determined using the
remaining life of the share options.
The shorter the
expected life the lower
the fair value.
Risk–free rate between a range of
0.0% and 1.14% determined using the
expected life assumptions.
The higher the risk–free
rate the higher the fair
value.
If the above unobservable volatility input to the valuation model were 10% higher while all other variables were held
constant, the carrying amount of shares would increase by £94k (2015: £273k).
If the above unobservable expected life input to the valuation model were 1 year shorter while all other variables were held
constant, the carrying amount of shares would decrease by £133k (2015: £70k).
If the above unobservable risk free rate input to the valuation model were 10% higher while all other variables were held
constant, the carrying amount of shares would increase by £2k (2015: £5k).
There were no transfers between Level one and two in the period.
The financial liability measured at fair value on Level three fair value measurement represents consideration relating
to a business combination.
Credit risk
Credit risk is the risk of financial loss to the Group if a development partner or a counterparty to a financial instrument
fails to meet its contractual obligations. The Group is mainly exposed to credit risk from amounts due from collaborative
partners which is deemed to be low.
Credit risk also arises from cash and cash equivalents and deposits with banks and financial institutions. For banks
and financial institutions, only independently rated parties with high credit status are accepted.
The Group does not enter into derivatives to manage credit risk.
Quantitative disclosures of the credit risk exposure in relation to financial assets are set out in note 17. This includes
details regarding trade and other receivables, which are neither past due nor impaired.
The total exposure to credit risk of the Group is equal to the total value of the financial assets held at each year end
as noted above.
Cash in bank
The Group is continually reviewing the credit risk associated with holding money on deposit in banks and seeks to mitigate
this risk by holding deposits with banks with high credit status.
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23 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED
General objectives, policies and processes continued
Foreign exchange risk
Foreign exchange risk arises because the Group has a material operation located in Bilbao, Spain, and operations in the
US whose functional currencies are not the same as the functional currency of the Group. The Group’s net assets arising
from such overseas operations are exposed to currency risk resulting in gains or losses on retranslation into Sterling.
Given the levels of materiality, the Group does not hedge its net investments in overseas operations as the cost of doing
so is disproportionate to the exposure.
Foreign exchange risk also arises when individual Group entities enter into transactions denominated in a currency other
than their functional currency; the Group’s transactions outside the UK to the US, Europe and Australia drive foreign
exchange movements where suppliers invoice in currency other than sterling. These transactions are not hedged
because the cost of doing so is disproportionate to the risk.
The table below shows analysis of the Pounds Sterling equivalent of year-end cash and cash equivalent balances
by currency:
Cash and cash equivalents:
Pounds Sterling
US Dollar
Euro
Other
Total
2016
£'000
2015
£'000
2014
£'000
10,229
14,494
30,026
2,186
5,143
50
819
862
–
–
270
29
17,608
16,175
30,325
The table below shows the foreign currency exposure that give rise to net currency gains and losses recognised in the
consolidated income statement. Such exposures comprise the net monetary assets and monetary liabilities of the Group
that are not denominated in the functional currency of the relevant Group entity. As at 31 December 2016, these exposures
were as follows:
Net Foreign Currency Assets/(Liabilities):
US Dollar
Euro
Other
Total
2016
£'000
2015
£'000
2014
£'000
(206)
2,655
58
2,507
(1,691)
77
(8)
(1,622)
–
(460)
19
(441)
Foreign Currency Sensitivity Analysis
The most significant currencies in which the Group transacts, other than Pounds Sterling, are the US Dollar and the Euro.
The Group also trades in other currencies in small amounts as necessary.
The following table details the Group’s sensitivity to a 10% change in year-end exchange rates, which the Group feels is
the maximum likely change in rate based upon recent currency movements, in the key foreign currency exchange rates
against Pounds Sterling:
Year ended 31 December 2016
Loss before tax
Total equity
US Dollar
£'000
521
521
Euro
£'000
(73)
(73)
Other
£'000
(55)
(55)
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 81
In the years ended 31 December 2015 and 2014, this foreign currency exposure risk was not considered material. In
management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year-end
exposure does not reflect the exposure during the year.
Liquidity risk
Liquidity risk arises from the Group’s management of working capital. It is the risk that the Group will encounter difficulty
in meeting its financial obligations as they fall due. It is the Group’s aim to settle balances as they become due.
In Q1 2017, Midatech entered into a senior secured loan agreement for £6m with Silicon Valley Bank, thereby helping to
reduce its short to medium term funding risk.
The Group’s current financial position is such that the Board does not consider there to be a short-term liquidity risk
however the Board will continue to monitor long term cash projections in light of the development plan and will consider
raising funds as required to fund long term development projects. Development expenditure can be curtailed as
necessary to preserve liquidity.
The following table sets out the contractual maturities (representing undiscounted contractual cash-flows) of
financial liabilities:
2016
Trade and other payables
Bank loans
Finance leases
Government research loans
Total
2015
Trade and other payables
Bank loans
Finance leases
Government research loans
Total
2014
Trade and other payables
Bank loans
Finance leases
Government research loans
Total
Up to
3 months
£’000
Between
3 and 12 months
£’000
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
6,437
3
7
–
6,447
–
8
26
449
483
–
11
30
269
310
–
4
33
761
798
–
–
–
393
393
Up to
3 months
£’000
Between
3 and 12 months
£’000
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
5,421
2
7
36
5,466
–
7
71
352
430
–
9
27
195
231
–
13
56
644
713
–
–
–
755
755
Up to
3 months
£’000
Between
3 and 12 months
£’000
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
1,890
2
11
–
1,903
–
7
27
485
519
–
9
–
207
216
–
24
–
891
915
–
–
–
351
351
More details which regard to the line items above are included in the respective notes:
• Trade and payables – note 20
• Loans and borrowings – note 21
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
82
Midatech Pharma plc Annual Report & Accounts 2016
23 FINANCIAL INSTRUMENTS – RISK MANAGEMENT CONTINUED
Capital risk management
The Group monitors capital which comprises all components of equity (i.e. share capital, share premium, foreign
exchange reserve and accumulated deficit).
The Group’s objectives when maintaining capital are:
• to safeguard the entity’s ability to continue as a going concern, and
• to have sufficient resource to take development projects forward towards commercialisation.
The Group continues to incur substantial operating expenses. Until the Group generates positive net cash inflows from
the commercialisation of its products it remains dependent upon additional funding through the injection of equity capital
and government funding. The Group may not be able to generate positive net cash inflows in the future or to attract such
additional required funding at all, or on suitable terms. In such circumstances the development programmes may be
delayed or cancelled and business operations cut back.
The Group seeks to reduce this risk by keeping a tight control on expenditure, avoiding long–term supplier contracts
(other than clinical trials), prioritising development spend on products closest to potential revenue generation, obtaining
government grants (where applicable), maintaining a focused portfolio of products under development and keeping
shareholders informed of progress.
There have been no changes to the Group’s objectives, policies and processes for managing capital and what the Group
manages as capital, unless otherwise stated in this note, since the past year.
24 DEFERRED TAX
Deferred tax is calculated in full on temporary differences under the liability method using tax rates applicable in the tax
jurisdictions where the tax asset or liability would arise.
The movement on the deferred tax account is as shown below:
Liability at 1 January
Arising on business combination
Credited to income on impairment and amortisation of intangibles
Credited to income statement
Foreign exchange gain
Liability at 31 December
2016
£’000
6,547
–
(5,509)
(1,740)
702
–
(As restated)
2014
£’000
–
714
(360)
–
–
354
2015
£’000
354
6,191
–
(131)
133
6,547
A deferred tax liability has arisen due to deferred tax on intangible assets acquired in 2015. The liability recognised on the
2014 acquisition has tax losses in the acquired entity which qualifies for offset.
An intangible asset was impaired in the financial statements for the year ended 31 December 2014 by £1.8m and
consequently a £0.36m credit was recognised in the income statement. Furthermore, another intangible asset was
impaired by £11.4m in 2016 which resulted in a £4.6m tax credit being recognised in the income statement.
Unused tax losses carried forward, subject to agreement with local tax authorities, were as follows:
31 December 2014
31 December 2015
31 December 2016
Gross
losses
£’000
16,017
23,286
26,956
Unrecognised
deferred tax
asset
£’000
3,203
4,191
5,049
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 83
With the exception of the £3.67m (2015: £1.63m: 2014: £1.81m) deferred tax asset which qualifies for offset against the
deferred tax liabilities arising on the acquisitions of Midatech Pharma (Wales) Limited and Midatech Pharma US, the
remaining potential deferred tax asset (£8.1m) has not been provided in these accounts due to uncertainty as to the
whether the asset would be recovered.
Details of the deferred tax liability are as follows:
2016
Business Combinations
2015
Business Combinations
2014
Business Combinations
25 SHARE CAPITAL
Authorised, allotted and fully
paid – classified as equity
At 1 January
Asset
£’000
3,668
Asset
£’000
1,625
Asset
£’000
1,806
Liability
£’000
(3,668)
Liability
£’000
Net
£’000
–
Net
£’000
(8,172)
(6,547)
Liability
£’000
(2,160)
Net
£’000
(354)
2016
Number
2016
£
2015
Number
2015
£
2014
Number
2014
£
Ordinary shares of 0.005p each
48,699,456
2,435
33,467,504
1,673
27,794,258
1,390
Deferred shares of £1 each
1,000,001
1,000,001
1,000,001
1,000,001
1,000,001
1,000,001
Total
1,002,436
1,001,674
1,001,391
In accordance with the Articles of Association for the Company adopted on 13 November 2014, the share capital of the
Company consists of an unlimited number of ordinary shares of nominal value 0.005 pence each. Ordinary and Deferred
shares were recorded as equity.
Rights attaching to the shares prior to the incorporation of Midatech Pharma plc
Shares classified as equity
The holders of ordinary shares in the capital of the Company have the following rights:
(a) to receive notice of, to attend and to vote at all general meetings of the Company, in which case shareholders shall
have one vote for each share of which he is the holder.
(b) to receive such dividend as is declared by the Board on each share held.
The holders of Deferred Shares in the capital of the Company:
(a) shall not be entitled to receive notice of or to attend or speak at any general meeting of the Company or to vote on any
resolution to be proposed at any general meeting of the Company;
(b) shall not be entitled to receive any dividend or other distribution of out of the profits of the Company.
In the event of a distribution of assets, the Deferred shareholders shall receive the nominal amount paid up on such share
after the holder of each ordinary share shall have received (in cash or specie) the amount paid up or credited as paid up on
such ordinary share together with an additional payment of £100 per share. The Company has the authority to purchase
the Deferred Shares and may require the holder of the Deferred Shares to sell them for a price not exceeding 1p for all the
Deferred Shares.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
25 SHARE CAPITAL CONTINUED
Date of Issue
Type of Share Issue
2014
Ordinary
Shares
Number
A Preference
Shares
Number
B Preference
Shares
Number
C Preference
Shares
Number
Deferred
Shares
Number
Share
Price
£
Total
consideration
£’000
As at 1 January 2014
2,889,229
1,000,000
75,000
565,064
30 January 2014
Equalisation round
39,853
19 April 2014
Subscription option
244,881
13 June 2014
Subscription option
8,250
4 September 2014
Rights issue
105,314
12 September 2014 Share redemption
–
–
–
–
–
–
–
–
–
–
(75,000)
–
–
–
511,738
–
Total pre-
share for share
exchange –
Midatech Limited 3,287,527
1,000,000
–
1,076,802
12 September 2014 Subscriber share –
Midatech Pharma
plc
1
13 November 2014 Share for share
3,287,527
1,000,000
13 November 2014
exchange
Sub–division of
subscriber share
9,999
28 November 2014 Warrant exchange
628,356
share issue
28 November 2014
Share conversion
(10,000)
28 November 2014
Share conversion
1,076,802
Total ordinary
shares pre-
subdivision
4,992,685
28 November 2014
Share sub division
9,985,370
8 December 2014
8 December 2014
Share issue on
acquisition of
Q Chip Limited
Public offering
(costs shown in
note 18)
5,077,122
11,985,019
–
–
–
–
–
–
–
8 December 2014
Share conversion
746,747
(1,000,000)
27,794,258
–
–
–
–
–
–
–
–
–
–
–
1,076,802
–
–
–
(1,076,802)
–
–
–
–
–
–
–
–
–
–
–
–
–
1
–
–
–
–
–
–
0.15
0.15
5.13
–
1.0000
–
0.0001
0.0001
–
–
–
2.67
9,093
–
37
1
3,165
–
12,296
–
–
–
–
–
–
–
–
2.67
32,000
– 1,000,000
–
– 1,000,001
–
32,000
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
85
Date of Issue
Type of Share Issue
Ordinary
Shares
Number
A Preference
Shares
Number
B Preference
Shares
Number
C Preference
Shares
Number
Deferred
Shares
Number
Share
Price
£
Total
consideration
£’000
2015
As at 1 January 2015
24 April 2015
27,794,258
16,500
Exercise of
employee share
options
25 September 2015 Exercise of
10,000
4 December 2015
employee share
options
Share issue on
acquisition of DARA
BioSciences, Inc.
5,422,028
23 December 2015 Deferred
224,718
consideration
re-acquisition
of Q Chip Limited
As at 31 December 2015
33,467,504
1 July 2016
31 October 2016
Deferred
consideration
re-acquisition
of Q Chip Limited
Placing and Open
Offer (costs shown
in note 18)
74,908
15,157,044
–
–
–
–
–
–
–
–
–
–
–
–
– 1,000,001
32,000
–
–
–
–
– 0.00005
– 0.00005
–
–
–
–
2.63
14,240
2.67
600
– 1,000,001
46,840
2.67
200
1.10
16,673
As at 31 December 2016
48,699,456
–
–
– 1,000,001
63,713
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
26 RESERVES
The following describes the nature and purpose of each reserve within equity:
Reserve
Share premium
Merger reserve
Shares to be issued
Foreign exchange reserve
Accumulated deficit
27 LEASES
Description and purpose
Amount subscribed for share capital in excess of nominal value.
Represents the difference between the fair value and nominal value of shares
issued on the acquisition of subsidiary companies where the Company has elected
to take advantage of merger relief.
Shares for which consideration has been received but which are not yet issued
and which form part of consideration in a business combination.
Gains/losses arising on retranslating the net assets of overseas operations
into Sterling.
All other net gains and losses and transactions with owners (e.g. dividends) not
recognised elsewhere.
The Group had commitments under non-cancellable operating leases as set out below:
2016
Expiring In one year or less
Expiring Between one and five years
2015
Expiring In one year or less
Expiring Between one and five years
2014
Expiring In one year or less
Expiring Between one and five years
Land and
buildings
£'000
Other
£'000
371
449
820
7
28
35
Land and
buildings
£'000
Other
£'000
313
410
723
1
2
3
Land and
buildings
£'000
Other
£'000
150
159
309
79
–
79
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 87
28 RETIREMENT BENEFITS
The Group operates a defined contribution pension scheme for the benefit of its employees. The assets of the scheme
are administered by trustees in funds independent from those of the Group.
29 SHARE-BASED PAYMENTS
Share Options
The Group has issued options over ordinary shares under the 2014 Midatech Pharma plc Enterprise Management Incentive
Scheme, the Midatech Pharma plc 2016 U.S. Option Plan, which is a sub-plan of the approved UK plan, and unapproved
share options awarded to non-UK or non-US staff. In addition, certain share options originally issued over shares in
Midatech Ltd under the Midatech Limited 2008 unapproved share option scheme or Midatech Limited 2013 approved
Enterprise Incentive scheme were reissued in 2015 over shares in Midatech Pharma plc under the 2014 Midatech Pharma
plc Enterprise Management Incentive Scheme. Exercise of an option is subject to continued employment.
Details of all share options granted under the Schemes are set out below:
Date of grant
At 1 January 2016
2016 Exercised in 2016
Granted in
Forfeited in
2016
At 31 December
2016
Exercise
Price
31 December 2008
31 December 2008
1 April 2010
20 August 2010
13 September 2011
20 April 2012
9 May 2014
30 June 2014
11 July 2014
31 October 2016
31 October 2016
14 December 2016
14 December 2016
14 December 2016
14 December 2016
14 December 2016
14 December 2016
14 December 2016
15 December 2016
19 December 2016
26,122
15,500
25,110
41,766
3,000
35,796
200,000
880,000
5,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
50,000
607,600
8,000
10,000
3,000
3,000
3,000
40,000
40,000
197,000
1,110,000
–
–
–
–
–
–
–
–
–
–
(12,500)
–
–
–
–
–
(2,000)
26,122
3,000
25,110
41,766
3,000
35,796
200,000
880,000
3,000
50,000
607,600
8,000
10,000
3,000
3,000
3,000
40,000
40,000
197,000
1,110,000
£1.425
£3.985
£4.00
£4.19
£4.19
£4.19
£0.075
£0.075
£0.075
£1.710
£2.680
£1.550
£1.700
£1.710
£1.730
£1.740
£1.870
£1.880
£1.210
£1.210
1,232,294
2,071,600
–
(14,500)
3,289,394
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
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Midatech Pharma plc Annual Report & Accounts 2016
29 SHARE-BASED PAYMENTS CONTINUED
Options exercisable at 31 December 2016
Weighted average exercise price of outstanding options at 31 December 2016
Weighted average exercise price of options exercised in 2016
Weighted average exercise price of options forfeited in 2016
Weighted average exercise price of options granted in 2016
Weighted average remaining contractual life of outstanding options at 31 December 2016
468,194
£1.234
n/a
£3.446
£1.685
8.6 years
Date of grant
At 1 January 2015
2015 Exercised in 2015
Granted in
Forfeited in
2015
At 31 December
2015
Exercise
Price
31 December 2008
31 December 2008
1 April 2010
20 August 2010
13 September 2011
20 April 2012
3 April 2014
9 May 2014
30 June 2014
11 July 2014
26,122
15,500
25,110
59,666
3,000
35,796
26,500
200,000
880,000
11,000
1,282,694
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(26,500)
–
–
–
(26,500)
–
–
–
(17,900)
–
–
–
–
–
(6,000)
(23,900)
26,122
15,500
25,110
41,766
3,000
35,796
–
200,000
880,000
5,000
1,232,294
£1.425
£3.985
£4.00
£4.19
£4.19
£4.19
£0.075
£0.075
£0.075
£0.075
Options exercisable at 31 December 2015
Weighted average exercise price of outstanding options at 31 December 2015
Weighted average exercise price of options exercised in 2015
Weighted average exercise price of options forfeited in 2015
Weighted average exercise price of options granted in 2015
Weighted average remaining contractual life of outstanding options at 31 December 2015
366,044
£0.502
£0.075
£4.19
n/a
7.8 years
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016 89
Date of grant
At 1 January 2014
2014 Exercised in 2014
Granted in
Forfeited in
2014
At 31 December
2014
Exercise
Price
31 December 2008
31 December 2008
1 September 2009
13 November 2009
1 April 2010
20 August 2010
13 September 2011
20 April 2012
1 May 2013
3 April 2014
9 May 2014
30 June 2014
11 July 2014
44,622
15,500
12,500
25,000
25,110
59,666
3,000
47,796
100,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43,000
200,000
880,000
11,000
(16,500)
–
–
–
(18,500)
–
(12,500)
(25,000)
–
–
–
(12,000)
(100,000)
–
–
–
–
26,122
15,500
–
–
25,110
59,666
3,000
35,796
–
26,500
200,000
880,000
11,000
£1.425
£3.985
£3.985
£4.00
£4.00
£4.19
£4.19
£4.19
£6.85
£0.075
£0.075
£0.075
£0.075
333,194
1,134,000
(16,500)
(168,000)
1,282,694
Options exercisable at 31 December 2014
Weighted average exercise price of outstanding options at 31 December 2014
Weighted average exercise price of options forfeited in 2014
Weighted average exercise price of options granted in 2014
Weighted average remaining contractual life of outstanding options at 31 December 2014
125,847
£0.54
£5.43
£0.08
8.5 years
Options granted in 2014 relate to the Midatech Limited 2013 approved Enterprise Incentive scheme.
Of the 2,071,600 options granted during 2016, 1,981,600 options contain the following conditions:
• 25% (i.e. 495,400 options) vest on the first anniversary of the relevant date of grant; and
• A further 6.25% (i.e. 123,850 options) vest every three months following the first anniversary of the date of grant such
that by the fourth anniversary all 1,981,600 options shall have vested.
• 607,600 of these options related to 2015 but the acquisition of DARA BioSciences and other activities during that year
meant that there was insufficient time during Open periods to make the awards until 2016. However, the effective date
of grant and hence basis for vesting was in 2015. As a result, 151,900 of these options had vested by 31 December 2016.
The remaining 90,000 options granted during 2016 contain the following conditions:
• Vesting is conditional on the Midatech Pharma US, Inc. business achieving a revenue target for the year ended 31
December 2017;
• Subject to the achievement of the revenue target noted above, 25% (i.e. 22,500 options) vest on the first anniversary
of the relevant date of grant; and
• A further 6.25% (i.e. 5,625 options) vest every three months following the first anniversary of the date of grant such that
by the fourth anniversary, and subject to the achievement of the revenue target noted above, all 90,000 options shall
have vested.
Otherwise the main vesting condition of all share options is that the Director or employee remain employed with the Group
as at the date of exercise or continues to provide consultancy services as at the date of exercise.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
90
Midatech Pharma plc Annual Report & Accounts 2016
29 SHARE-BASED PAYMENTS CONTINUED
The following information is relevant in the determination of the fair value of options granted during the year 2016 under
the equity share based remuneration schemes operated by the Group.
Number of options
Option pricing models used
Share price
Exercise price of options issued in year
Contractual life
Expected life
Volatility
Expected dividend yield
Risk free rate
2016
2,071,600
Black Scholes
£1.143–£1.19*
£1.21–£2.68
10 years
5 years
40%**
0%
0.63%–0.74%
*
**
The share price used in the determination of the fair value of the options granted in 2016 was the average of the opening and closing share prices on the date
of grant.
Volatility was calculated with reference to the historic share price volatility of comparable companies measured over a five–year period.
The 200,000 options issued on 9 May 2014 contained the following conditions:
• 25,000 vested immediately;
• 25,000 vest on 1 May 2015, a further 25,000 on 1 May 2016 and a further 25,000 on 1 May 2017;
• 50,000 vest when the ordinary price of a share reaches £13.70;
• 50,000 vest when the ordinary price of a share reaches £27.40; and
• On the event of an initial public offering all of the remaining unvested options vest immediately and have therefore
vested due to the IPO in 2014.
The 880,000 and 11,000 share options granted on 9 May 2014 and 11 July 2014 only vest when the Company’s share price
achieves certain targets as follows:
• 50% vest when the share price reaches £5.31 per share;
• A further 25% vests when the share price reaches £13.72; and
• The remaining 25% when the share price reaches £18.86.
Otherwise the main vesting condition of all share options is that the Director or employee remain employed with the Group
as at the date of exercise or continues to provide consultancy services as at the date of exercise.
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2016
91
The following information is relevant in the determination of the fair value of options granted during the year 2014 under
the equity share based remuneration schemes operated by the Group. No share options were granted by the Company
in 2015, however a number of share options and warrants were assumed by the Company on the acquisition of Dara
BioSciences, Inc. (see note 12).
Number of options
Option pricing models used
Share price
Exercise price of options issued in year
Contractual life
Volatility
Expected dividend yield
Risk free rate
2014
1,134,000
Black Scholes/ Monte Carlo
£2.67*
7.5p
9 –10 years
60%**
0%
1.51%
*
**
The share price used in the determination of the fair value of the options granted in 2014 was the price of ordinary shares issued at initial public offering in December 2014.
Volatility was calculated with reference to the historic share price volatility of comparable companies measured over a four–year period.
All other share options relate to the Midatech Limited 2008 unapproved share option scheme.
30 CAPITAL COMMITMENTS
The Group had no capital commitments at 31 December 2016, 31 December 2015 and 31 December 2014.
31 RELATED PARTY TRANSACTIONS
Details of Directors’ remuneration are given on page 27 and in note 5.
Transactions with Monosol RX, LLC
The Directors consider Monosol RX, LLC (“Monosol”) to be a related party by virtue of the fact that Monosol is a
shareholder of the Company and a collaborative partner in the MidaSol Therapeutics joint operation.
During the period, due to cessation of activities within the MidaSol joint operation no monies were receivable from
Monosol (2015: £317K, 2014: £273k) for research services. Amounts receivable in prior years were credited to research
and development expenditure. The year-end receivable due from Monosol was nil (2015: £219K, 2014: nil). As a result of
the cessation of activities, Monosol ceased to be a related party on 2 May 2016.
Monosol is also the licensor of the Company’s Zuplenz® product. In this capacity, the Group incurred royalty costs up
to the date at which it ceased to be a related party of £187.7k, payable to Monosol (2015: nil). The year-end payable to
Monosol was £48.7k (2015: nil).
The Group has not made any allowances for bad or doubtful debts in respect of related party debtors nor has any
guarantee been given or received during 2016, 2015 or 2014 regarding related party transactions.
32 CONTINGENT LIABILITIES
The Group had no contingent liabilities at 31 December 2016, 31 December 2015 and 31 December 2014.
33 ULTIMATE CONTROLLING PARTY
The Directors do not consider that there is an ultimate controlling party.
34 POST BALANCE SHEET EVENTS
In Q1 2017, the Company entered into a senior secured loan agreement for £6m with Silicon Valley Bank. The loan is
available to be drawn down in three tranches of £2m each, the first being available following signing of the loan agreement
and the other two tranches dependent upon future research milestones.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
92
Midatech Pharma plc Annual Report & Accounts 2016
Company Balance Sheet
for the year ended 31 December 2016
Fixed assets
Intangible assets
Investments
Property, Plant & Equipment
Current assets
Inventory
Debtors
Cash at bank
Creditors: amounts due falling due within one year
Net current assets
Total assets less current liabilities
Capital and reserves
Called up share capital
Share premium account
Accumulated deficit
Total equity attributable to owners of the Parent Company
Note
2016
£'000
2016
£'000
2015
£'000
2015
£'000
–
22,093
11,957
34,050
(1,291)
4
5
6
7
8
9
10
14
14
2,357
7,405
285
10,047
32,759
42,806
1,002
47,211
(5,407)
42,806
230
8,874
14,324
23,428
(3,331)
2,561
7,405
335
10,301
20,097
30,398
1,002
31,643
(2,247)
30,398
The loss for the financial period, of the Company, as approved by the Board, was £3.34m (2015: £1.19m) (2014: £1.23m)
The financial statements on pages 93 to 99 were approved and authorised for issue by the Board of Directors on 3 April
2017 and were signed on its behalf by:
Nick Robbins-Cherry
Chief Financial Officer
The notes on pages 94 to 100 form part of these financial statements.
Company Statement of Changes in Equity
for the year ended 31 December 2016
93
At 1 January 2016
Loss for the year
Total comprehensive loss
Transactions with owners
Shares issued on exercise of share options
Share option charge
Total contribution by and distributions to owners
At 31 December 2016
At 1 January 2015
Loss for the year
Total comprehensive loss
Transactions with owners
Shares issued on exercise of share options
Share option charge
Total contribution by and distributions to owners
Share
capital
£'000
1,002
–
–
–
–
1
1,002
1,001
–
–
1
–
1
Share
Premium
£'000
31,643
–
–
15,568
–
15,568
47,211
31,643
–
–
–
–
–
Accumulated
deficit
£'000
(2,247)
(3,343)
(3,343)
–
183
183
(5,407)
(1,229)
(1,188)
(1,188)
–
170
170
Total
equity
£'000
30,398
(3,343)
(3,343)
15,568
183
15,751
42,806
31,415
(1,188)
(1,188)
1
170
171
At 31 December 2015
1,002
31,643
(2,247)
30,398
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
94
Midatech Pharma plc Annual Report & Accounts 2016
Notes Forming Part of the Company
Financial Statements
for the year ended 31 December 2016
1 ACCOUNTING POLICIES
Basis of preparation
Midatech Pharma plc is a company incorporated in England & Wales under the Companies Act. The address of the
registered office is given on the contents page and the nature of the Group’s operations and its principal activities are
set out in the strategic report. The financial statements have been prepared in accordance with FRS 102, the Financial
Reporting Standard applicable in the United Kingdom and the Republic of Ireland (‘FRS102’).
These financial statements are the first financial statements prepared under FRS 102. The preparation of financial
statements in compliance with FRS 102 requires the use of certain critical accounting estimates. It also requires Group
management to exercise judgement in applying the Group's accounting policies.
Parent Company disclosure exemptions
In preparing the separate financial statements of the Parent Company, advantage has been taken of the following
disclosure exemptions available in FRS 102:
• Only one reconciliation of the number of shares outstanding at the beginning and end of the period has been presented
as the reconciliations for the Group and the Parent Company would be identical;
• No cash flow statement has been presented for the Parent Company;
• Disclosures in respect of the Parent Company's financial instruments and share-based payment arrangements have
not been presented as equivalent disclosures have been provided in respect of the Group as a whole; and
• No disclosure has been given for the aggregate remuneration of the key management personnel of the Parent Company
as their remuneration is included in the totals for the Group as a whole.
The following principal accounting policies have been applied:
Valuation of investments
Investments in subsidiaries are measured at cost less accumulated impairment. Where merger relief is applicable,
the cost of the investment in a subsidiary undertaking is measured at the nominal value of the shares issued together
with the fair value of any additional consideration paid. Costs of acquisition of investments are capitalised.
Intangible assets
Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight line basis
over their useful economic lives where they are in use. The amortisation expense is included within the administrative cost
in the profit and loss account income.
The amounts ascribed to intangibles recognised on business combinations are arrived at by using appropriate
valuation techniques.
Goodwill
Goodwill represents the excess of the cost of a business combination over the fair value of the Group's share of the net
identifiable assets of the acquired business at the date of acquisition. Acquisition costs of a business are capitalised
within goodwill. Goodwill on acquisitions is included in ‘intangible assets'. Goodwill is carried at cost less accumulated
amortisation and accumulated impairment losses. Goodwill amortisation is calculated by applying the straight–line
method to its estimated useful life. If a reliable estimate cannot be made, the useful life of goodwill is presumed
to be five years. Goodwill is being amortised to ‘administrative expenses’ over a period of 5 years.
Inventories
Inventories are stated at the lower of cost or net realisable value. Net realisable value is the market value. In evaluating
whether inventories are stated at the lower of cost or net realisable value, management considers such factors as the
amount of inventory on hand and in the distribution channel, estimated time required to sell such inventory, remaining
shelf life, and current and expected market conditions, including levels of competition.
If net realisable value is lower than the carrying amount a write down provision is recognised for the amount by which
the carrying value exceeds its net realisable value.
95
Revenue
The income streams comprise milestone income from research and development contracts and the sale of goods.
Milestone income is recognised as revenue in the accounting period in which the milestones are achieved. Milestones
are agreed on a project by project basis and will be evidenced by set deliverables.
Impairment of goodwill and intangible assets
Where there is any indication that an asset may be impaired, the carrying value of the asset (or cash–generating unit to
which the asset has been allocated) is tested for impairment. An impairment loss is recognised for the amount by which
the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's (or
CGU's) fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the
lowest levels for which there are separately identifiable cash flows (CGUs). Non-financial assets that have been previously
impaired are reviewed at each reporting date to assess whether there is any indication that the impairment losses
recognised in prior periods may no longer exist or may have decreased.
Product marketing rights acquired in business combinations are recognised as assets and are amortised over their
useful life.
Product and marketing rights
Between two and seven years
Taxation
Current tax, including UK corporation tax is provided at amounts expected to be paid (or recovered) using the tax rates
and laws that have been enacted or substantively enacted by the balance sheet date.
A deferred tax asset in respect of unutilised tax losses has not been recognised on the basis that the future economic
benefit was not certain.
Going concern
Accounting standards require the Directors to consider the appropriateness of the going concern basis when preparing
the financial statements. The Directors are of the opinion that they consider the going concern basis will remain
appropriate. The Directors have taken notice of the Financial Reporting Council guidance 'Going Concern and Liquidity
Risk: Guidance for Directors of UK Companies 2010' which requires the reasons for this decision to be explained. The
Directors regard the going concern basis as remaining appropriate as the Group has adequate resources to continue
in operational existence for the foreseeable future. Thus the Directors continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Depreciation
Depreciation on assets is charged so as to allocate the cost of assets less their residual value over their estimated useful
lives, using the straight–line method. The estimated useful lives range as follows:
Leasehold Improvements
Computer Equipment and Software
Fixtures and Fittings
The term of the lease
four years
four years
The assets' residual values, useful lives and depreciation methods are reviewed, and adjusted prospectively if appropriate,
if there is an indication of a significant change since the last reporting date.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised
within ‘other operating income or losses' in the statement of comprehensive income.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
96
Midatech Pharma plc Annual Report & Accounts 2016
Notes Forming Part of the Company
Financial Statements continued
for the year ended 31 December 2016
2 STAFF COSTS
Staff costs (including Directors) comprise:
Wages and salaries
Defined contribution pension cost
Social security contributions and similar taxes
Share based payment
Employee numbers
The average number of staff employed by the Group during the financial year amounted to:
Research and development
General and administration
Sales and marketing
2016
£’000
2015
£’000
883
35
156
183
766
23
67
170
1,257
1,026
2016
£’000
2015
£’000
–
4
–
4
–
4
–
4
Please also refer to note 5 in the consolidated financial statements regarding Directors’ remuneration.
3 LOSS ATTRIBUTABLE TO SHAREHOLDERS
Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and
loss account. The loss for the financial period, of the holding Company, as approved by the Board, was £3.34m
(2015: £1.19m) (2014: £1.23m)
97
Product and
marketing rights
£'000
Goodwill
£'000
Total
£'000
2,512
–
2,512
4
193
197
53
–
53
–
11
11
2,565
–
2,565
4
204
208
2,315
42
2,357
Product and
marketing rights
£'000
Goodwill
£'000
Total
£'000
–
2,512
2,512
–
4
4
–
53
53
–
–
–
–
2,565
2,565
–
4
4
2,508
53
2,561
4
INTANGIBLES
Cost
At 1 January 2016
Additions
At 31 December 2016
Amortisation
At 1 January 2016
Charge for year
At 31 December 2016
NBV
At 31 December 2016
Cost
At 1 January 2015
Additions
At 31 December 2015
Amortisation
At 1 January 2015
Charge for year
At 31 December 2015
NBV
At 31 December 2015
In 2015 £165k of negative goodwill relating to the acquisition of Zuplenz ® arose in the consolidated financial statements
(see note 13). The treatment under FRS102 is different due to the capitalisation of acquisition costs of £218k.
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
98
Midatech Pharma plc Annual Report & Accounts 2016
Notes Forming Part of the Company
Financial Statements continued
for the year ended 31 December 2016
5
INVESTMENTS
Brought forward 1 January
Additions
Total investments at 31 December
2016
£’000
7,405
–
7,405
2015
£’000
1,001
6,404
7,405
At 31 December 2016, the Company held share capital in the following subsidiaries and joint arrangements:
Name
Midatech Limited
Registered office or
Country of Incorporation
Nature of
business
Proportion
held
Notes
65 Innovation Drive, Milton Park, Milton,
Abingdon, Oxfordshire, OX14 4RQ
Trading company
100%
Midatech Pharma (Espana) SL
Parque Tecnológico de Vizcaya, Edificio 800
Planta 2, Derio, 48160, Vizcaya, Spain
Trading company
100%
PharMida AG
c/o Kellerhals, Hirschgässlein 11, 4051 Basel,
Switzerland
Dormant
100%
Midatech Pharma (Wales) Limited
Oddfellows House, 19 Newport Road, Cardiff,
CF24 0AA
Trading company
100%
Midatech Pharma US, Inc
Dara Therapeutics, Inc.
Midatech Pharma PTY
8601 Six Forks Road, Suite 160, Raleigh,
North Carolina 27615, USA
8601 Six Forks Road, Suite 160, Raleigh,
North Carolina 27615, USA
c/o Griffith Hack Consulting, 300 Queen
Street, Brisbane, QLD 4000, Australia
MidaSol Therapeutics GP
Incorporated in the Cayman Islands
Syntara LLC
Incorporated in the United States
Trading company
100%
Dormant
100%
Trading company
100%
Dormant JV
Dormant JV
50%
50%
(a)
(a)
(b)
(c)
(d)
(e)
(a) Wholly owned subsidiary of Midatech Limited
(b) PharMida AG became dormant in January 2016.
(c) DARA Bio Sciences, Inc. was acquired on 4 December 2015 through a merger with a specially incorporated subsidiary
of Midatech Pharma plc. This merger subsidiary was renamed Midatech Pharma US, Inc. on 4 December 2015.
(d) Wholly owned subsidiary of Midatech Pharma US, Inc.
(e) Midatech Pharma PTY was incorporated on 16 February 2015.
99
6 PROPERTY, PLANT AND EQUIPMENT
Fixtures and
fittings
£'000
Leasehold
improvements
£'000
Computer
equipment and
software
£'000
Total
£'000
Cost
At 1 January 2016
Additions
At 31 December 2016
Depreciation
At 1 January 2016
Charge for year
At 31 December 2016
NBV
At 31 December 2016
Cost
At 1 January 2015
Additions
At 31 December 2015
Depreciation
At 1 January 2015
Charge for year
At 31 December 2015
NBV
At 31 December 2015
7
INVENTORIES
Work in progress
8 DEBTORS
Trade Debtors
Amounts due from Group companies
Other debtors
Prepayments
4
1
5
1
1
2
3
229
–
229
30
48
78
151
144
31
175
11
33
44
131
Fixtures and
fittings
£'000
Leasehold
improvements
£'000
Computer
equipment and
software
£'000
–
4
4
–
1
1
3
–
229
229
–
30
30
199
–
144
144
–
11
11
377
32
409
42
82
124
285
Total
£'000
–
377
377
–
42
42
133
335
2016
£’000
–
2016
£’000
27
21,631
191
244
22,093
2015
£’000
230
2015
£’000
172
8,161
276
265
8,874
OVERVIEWSTRATEGIC REPORTFINANCIAL STATEMENTSOTHER INFORMATIONGOVERNANCE
100
Midatech Pharma plc Annual Report & Accounts 2016
Notes Forming Part of the Company
Financial Statements continued
for the year ended 31 December 2016
9 CREDITORS: AMOUNTS DUE FALLING DUE WITHIN ONE YEAR
Trade creditors
Accruals
Other creditors
Derivative financial liability
2016
£’000
306
352
233
400
1,291
2015
£’000
1,087
599
72
1,573
3,331
Details of the derivative financial liability are provided in note 22 of the consolidated financial statements.
10 SHARE CAPITAL
Allotted and fully paid
Ordinary shares of 0.005p each
Deferred shares of £1 each
Total
2016
Number
2016
£’000
2015
Number
48,699,453
1,000,001
2
33,467,504
1,000,001
1,000
1,002
2015
£’000
2
1,000
1,002
Details of shares issued by the Company in the year are given in note 25 to the consolidated financial statements.
11 CAPITAL COMMITMENTS
The Company had no capital commitments at 31 December 2016 or at 31 December 2015.
12 CONTINGENT LIABILITIES
The Company had no contingent liabilities at 31 December 2016, or at 31 December 2015.
13 ULTIMATE CONTROLLING PARTY
There is not an ultimate controlling party.
14 RESERVES
The following describes the nature and purpose of each reserve within equity:
Reserve
Share premium
Accumulated deficit
Description and purpose
Amount subscribed for share capital in excess of nominal value.
All other net gains and losses and transactions with owners (e.g. dividends)
not recognised elsewhere.
Company information
Directors
Rolf Stahel
James Phillips
Nick Robbins-Cherry
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton
Sijmen de Vries
Secretary
Nick Robbins-Cherry
Registered office
65 Innovation Drive
Milton Park
Abingdon
Oxfordshire
OX14 4RQ
United Kingdom
Registered number
09216368
Auditor
BDO LLP
Kings Wharf
20–30 Kings Road
Reading
RG1 3EX
United Kingdom
101
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OVERVIEWSTRATEGIC REPORTGOVERNANCEFINANCIAL STATEMENTS
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Delivering
Growth and
Focused on
Value Creation
Annual Report
and Accounts 2016
Midatech Pharma
Registered office
65 Innovation Drive
Milton Park
Abingdon
Oxfordshire
OX14 4RQ
United Kingdom
Registered number
09216368