Midatech Pharma plc
Annual Report & Accounts
Poised for success
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Midatech Pharma
Registered office
65 Innovation Drive
Milton Park
Abingdon
Oxfordshire
OX14 4RQ
United Kingdom
Registered number
09216368
Midatech is an
international specialty
pharmaceutical company
focused on developing
and commercialising
products in oncology.
We are committed to improving
patients’ lives and are well-positioned
for delivering value for all of
our stakeholders.
Financial highlights
2017
2016
2015
£12.08m
£9.21m
2017
2016
£6.65m
£5.19m
£1.51m
2015
£0.50m
Total Gross Revenue1
£12.08m
US Product Net Sales
£6.65m
+31%
(2016: £9.21m)
+28%
(2016: £5.19m)
2017
2016
2015
£0.78m
£6.76m
£6.38m
2017
2016
2015
£13.20m
£17.61m
£16.18m
Statutory Revenue2
£6.76m
+6%
(2016: £6.38m)
Cash and Deposits
£13.20m
(2016: £17.61m)
• Net loss after tax of £16.06m (2016: £20.16m,
2015: £10.10m) with net cash outflow in the year
of £4.15m (2016: £0.97m inflow, 2015: £14.17m outflow).
• Tax credit receivable of £1.19m (2016: £1.44m, 2015: £1.20m).
• Entered into a senior secured $15.0m loan agreement
with MidCap Financial Trust in Q4 2017. $7.0m has been
received, the remaining $8.0m is dependent on clinical
development milestones.
1. Total gross revenues 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 and grant revenue
2. Statutory Revenue represents total gross revenue, excluding grant revenue and
after deductions for product returns, discounts, rebates and other incentives
Operational highlights
Contents
1 Overview
1
Highlights
2 Midatech at a Glance
4
Investment Proposition
6 Strategic Report
8
Business Model
10 Our Strategy
11 Our Vision
12 Our Development Pipeline
20
Chairman’s and Chief
Executive’s Statement
24 Financial Review
30 Risk Management
32 Governance
34 Board of Directors
36 Directors’ Remuneration Report
44 Corporate Governance
46 Directors’ Report
48 Financial Statements
50 Independent Auditor’s Report
56
57
58
59
61
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
108 Company Balance Sheet
109
Company Statement of Changes
in Equity
110
Notes Forming Part of the
Company Financial Statements
• MTD201 Q-Octreotide for carcinoid cancer: regulatory
117 Company Information
submission in EU for first in-human clinical trial; approval received
shortly after year-end, with data read-out expected H2 2018.
• MTX110 for DIPG childhood brain cancer: regulatory submission
to the US Food and Drug Administration for first in-human
clinical trial at University of California (San Francisco) and
Memorial Sloane Kettering (New York); approval received
shortly after year-end.
• MTD119 for HCC liver cancer: commenced IND enabling
toxicology programme with data readout expected H2 2018;
MTD119 was granted Orphan Drug Designation by the European
Medicines Agency in February 2018.
• Manufacturing: licence granted to the Group’s Bilbao
manufacturing operation by the Spanish Medicines Agency
(AEMPS), enabling the production of our sustained release
formulations for clinical and commercial use – a pivotal step on
the road to commercialising MTD201 Q-Octreotide.
• US commercial business as a standalone operation achieved
breakeven on an EBITDA basis for the second half of 2017.
For more information and the latest
share price, go to:
www.midatechpharma.com/investors
1
OverviewGovernanceStrategic ReportFinancial statements Midatech at a Glance
We have a balanced portfolio of commercialised oncology
products and exciting development programmes bringing
our own products to market, using proprietary platform
technologies to target diseases with unmet medical need.
Overview
We are focused on the research and development of a pipeline of medicines for oncology and
immunotherapy, utilising our proprietary platform technologies. Our established US commercial arm
currently markets four cancer supportive-care products and two further co-promoted products. The
business is operationally and financially in a stronger position and there are multiple catalysts ahead
that should serve to benefit patients and shareholders alike, in the short, medium and longer-term.
Listed on AIM and NASDAQ, Midatech is headquartered in the UK and employs 85 people across four countries in
Europe and the US.
We have R&D facilities in Cardiff and Abingdon, UK, and a manufacturing site in Bilbao, Spain. Midatech’s US
commercial operation is based in Raleigh, North Carolina.
Commercial footprint in US
and European facilities
Commercial
Raleigh, North Carolina, USA
R&D Cardiff, UK
R&D Abingdon, UK
Manufacturing
Bilbao, Spain
2
Midatech Limited formed in 200085employees across Europe and the US£2bnestimated Octreotide market (p.a)Grants patented 97 granted56 in progressMidatech Pharma plcAnnual Report & Accounts 2017 Right time, right place
R&D Pipeline
Our R&D activities are focused on three proprietary platform technologies, designed to allow
the delivery of existing therapeutic drugs to the right place or at the right time in the treatment
of rare or orphan diseases:
• Midacore™ gold nanoparticles
(‘GNPs’) to enable targeted
delivery of cancer therapeutics.
• Q-Sphera™ sustained release
(‘SR’) polymer microspheres to
enable controlled and prolonged
delivery of cancer therapeutics
and other products.
• Nano inclusion (‘NI’) to provide
local delivery of therapeutics,
initially for brain cancer.
We have three core programmes:
Intellectual Property
We have a strong intellectual property base, with 97 granted patents, 56 applications in process
and 34 patent families covering a range of technologies.
US Commercial
We have an established and stand-alone full-service US commercial operation through which we
market six oncology supportive care products, including two co-promoted products:
• Zuplenz®, an anti-emetic for the
treatment of post-chemotherapy
nausea.
• Oravig tablets for the treatment
of oral thrush associated with
chemo- or radiotherapy and HIV.
• Gelclair, oral gel for the
management and relief of pain
from oral mucositis caused by
chemo- or radiotherapy.
• Soltamox, the only liquid form of
tamoxifen, for the treatment of
metastatic breast cancer.
• Ferralet*, prescription iron tablets
for the treatment of anaemia.
• Aquoral*, artificial saliva spray
to provide relief from chemo- or
radiotherapy-induced dry mouth.
* co-promoted products
As well as providing a route to market through which to commercialise our own products, potentially from 2019,
our US operations provide cash flow to help fund our on-going R&D programmes.
3
MTD201 Q-Octerotideincorporating our SR Q-Sphera™ technology platform, for the treatment of hormone cancers such as carcinoid, and acromegaly. Page 15MTX110 for DIPGincorporating our NI technology, for the treatment of ultra-rare childhood brain tumours. Page 17MTD119 liver cancerincorporating our GNP technology, for the treatment of liver cancer. Page 19OverviewGovernanceStrategic ReportFinancial statements
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, energised and highly experienced leadership team and Board.
Investing in
the potential
4 Midatech Pharma plc
Annual Report & Accounts 2017
Overview
BALANCED
COMMERCIAL
FOCUSED
DELIVERING
VALUE
Differentiated
technology
The foundations of our IP are three platform
technologies from which we have multiple patent
filings. We actively manage our patent portfolio
and know-how in order to protect future revenues
and assets.
Page 03
Balanced risk/
reward profile
We have an established portfolio of marketed
oncology products, delivering strong growth, and
a balanced R&D pipeline comprising multiple high
value programmes with potential to reach the
market in the next few years.
Our platform technologies are drug delivery
mechanisms with the potential to improve
bio-distribution, safety and efficacy of
existing therapeutic agents, thus reducing our
development risk while at the same creating
compelling market opportunities.
Page 10
Attractive growth
prospects
Each of our niche cancer therapies has revenue
potential ranging from $50.0m to well over
$100.0m per year.
Our three high-value, lead programmes,
each incorporating one of our three platform
technologies, are expected to move through key
value-inflection points during 2018, with MTD201
and MTX110 expected to enter first-in-human
studies during 2018.
Our three platform technologies are also
powerful sources of future innovative
therapies extending beyond the current,
three lead programmes.
Our immuno-oncology programme is yielding
early but promising data for GNP-enabled cancer
vaccines for brain cancer in adults and children.
Pending positive data and regulatory support,
this could conceivably enter formal development
in 2019.
Our EU funded, immuno-therapy MTX102
diabetes vaccine Phase I study is ongoing and
data readout is planned by early 2019.
Our established commercial operation in the
US achieved break-even on an EBITDA basis for
H2 2017. This financial status is believed to be
sustainable by the Board of Midatech.
Page 12
Highly experienced management team
Our leadership team has more than 60 years of combined experience in the pharmaceutical industry
and has been recently enhanced with the promotion of Craig Cook to CEO with effect from June 2018.
Craig was previously Chief Operating Officer and Head of R&D for the Group.
Page 34
5
GovernanceStrategic ReportFinancial statements 6
Midatech Pharma plc
Annual Report & Accounts 2017
Strategic Report
8
Business model
10 Our Strategy
11 Our Vision
12 Our Development Pipeline
14 Q-Octerotide
16 MTX110
18 MTD119
20 Chairman and CEO’s statement
24 Financial review
30 Risk management
“ Combining Midatech’s
impressive Q-Sphera sustained
release technology with the
pharmacologically active agent
octreotide promises a much-needed
product for treating acromegaly
and endocrine tumours.”
Professor Shlomo Melmed
Dean of Medical Faculty, Cedars-Sinai Medical Centre, Los Angeles
7
GovernanceFinancial statementsOverviewGovernanceFinancial statements Our Business Model
Our vertically integrated business model is built on diversified
revenue streams from licensed and in-house targeted therapies
for diseases in the cancer area with unmet medical need.
Our in-house development pipeline is amplified
by our US commercial infrastructure
Strong R&D
product pipeline
Three technology
platforms
Sustained Release
Nano Inclusion
Gold Nanoparticle
Oncology
Brain cancer
Liver cancer
Immuno-therapy
Brain cancer
We research and develop
R&D facilities in labs in Abingdon and Cardiff, UK with 31 scientific personnel
We manufacture
Licensed in-house manufacturing facility in Bilbao, Spain producing
nanoparticle, nano-inclusion and sustained release products
• A rich R&D pipeline with close-to-market programmes.
• Three proprietary platform technologies, the basis of a rich pipeline
of targeted therapies for major diseases with unmet medical need.
• Scope to work with partners for R&D collaborations and/
or licensing and royalty deals.
8
Balanced businessVertically integrated operationsValue creationMidatech Pharma plcAnnual Report & Accounts 2017
Overview
Strategic Report
Governance
Financial statements
Governance
Financial statements
The road to
high value markets
Commercialisation
capability
Sales channel and portfolio of
cancer supportive care products
Marketed products
Co-promoted products
Zuplenz
Gelclair
Oravig
Soltamox
Ferralet
Aquoral
We market and sell
Own sales and marketing infrastructure in the US, comprising 20 reps
and five field sales managers, reaching 2,400 primary call points
• A stand-alone commercial arm in the US: sales channel generates
revenue, and higher margin capture as development products
reach market.
9
Balanced businessVertically integrated operationsValue creation Our Strategy
We have made significant progress on our path to building
a valuable organisation with significant R&D prospects,
supported by a profitable US commercial organisation.
Two of our core programmes MTD201 and MTX110 advanced during
the year to regulatory submission for approval of commencing first in
human clinical trials. Both trials have since been given the go-ahead
by regulators. We also received a manufacturing regulatory approval
that enables us to produce clinical and commercial grade batches of Q
Octreotide in our Spanish facility.
In June 2017, we signed a global licensing agreement with Novartis
for the use of oncology compound panobinostat, which we are
developing for the treatment of DIPG with our MTX110 programme,
and potentially for Glioblastoma.
We are generating some income in the UK from the compassionate
use of our MTX110 programme for DIPG.
10
Our strategic prioritiesProgress in 2017Priorities for 2018PROGRESS DEVELOPMENT OF IN-HOUSE ONCOLOGY PRODUCTSMTD201: We anticipate being able to complete both components of the MTD201 development programme – an exploratory initial phase, and confirmatory pivotal phase – for our MTD201 Q-Octreotide programme during 2018. This will be followed, pending favourable data, by a potential filing for marketing approval in early 2020 once commercial scale production is complete, investment for which will be triggered by supportive clinical data.MTX110: We expect initial safety results from the Phase I component of our MTX110 first in human study for childhood brain cancer.MTR111 and MTR116 Immunotherapy: We expect to complete animal proof-of-concept studies for our immuno-therapy GNP based vaccines for brain cancer in adults and children.MTD119: Our IND enabling programme for MTD119 in liver cancer is expected to read out, prior to possible IND submission for clinical trial approval.In February 2018, the MTD119 drug candidate was granted Orphan Drug Designation by the European Medicines Agency.MTX102: We are looking to generate an initial data readout on the Phase I clinical study evaluating our immuno-tolerising GNP based peptide vaccine for Type 1 diabetes. Midatech Pharma plcAnnual Report & Accounts 2017 Strategic Report
Our Vision
To profitably use our proprietary platform
technologies to improve patients’ lives and,
in so doing, create value for all stakeholders.
After a slow start to 2017, Midatech Pharma
US (MPUS) performed strongly in H2 2017,
generating gross sales up 41% vs. 2016, and
achieving financial break-even, on an EBITDA
basis, for the first time in H2 2017.
We received approval in December to
trial the use of Gelclair in bone marrow
transplant patients. This new data for
Gelclair could double the size of its
addressable market.
Our relationship with Emergex had a
productive first year, preparing GNP-
conjugated constructs for Emergex’s
tropical disease GNP-based vaccination
programme. The Ophthotech
collaboration in the US came to an
end after Ophthotech discontinued
development of the relevant APIs.
11
GROW US COMMERCIAL ORGANISATIONDRIVE DEVELOPMENT OF PARTNER PROGRAMMESMPUS will continue to focus 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.Our primary focus remains the advancement of our in-house products towards commercialisation. Notwithstanding this, we will continue to evaluate prospective partnerships where these can add value to our Group without distracting from the priority in-house R&D programmes.GovernanceFinancial statementsOverviewGovernanceFinancial statements Our Development Pipeline
We are advancing the development of multiple, high value, therapies, and 2018 is expected
to see the first in-human studies for two of our lead programmes: MTD201 for carcinoid
cancer using our sustained release technology, and MTX110 for childhood brain cancer
based on our nano-inclusion technology. We also expect to progress towards the clinic for
our gold Nanoparticle based programmes, MTD119 for liver cancer and our brain cancer
immunotherapy programmes MTR111 and MTR116.
Development of multiple high-value, targeted therapies for major
diseases with unmet medical need.
Cancer
Research
DIPG pontine glioma MTX110/MTR111
already in compassionate use
First in-human study Q4 2017
Q-Octreotide carcinoid/acromegaly MTD201
First in-human study Q4 2017
Liver hepatocellular carcinoma MTD119
First in-human study H2 2018
Glioblastoma
Three key oncology programmes planned to enter clinic
2017-2018
Immuno-Oncology Programmes
Immuno-oncology vaccine
Immuno-oncology TAM
Legacy Programmes
Type 1 diabetes vaccine MTX102
to be out-licensed
12
Midatech Pharma plcAnnual Report & Accounts 2017
Strategic Report
Development of multiple high-value, targeted therapies for major
diseases with unmet medical need.
DIPG pontine glioma MTX110/MTR111
already in compassionate use
First in-human study Q4 2017
Q-Octreotide carcinoid/acromegaly MTD201
First in-human study Q4 2017
Liver hepatocellular carcinoma MTD119
First in-human study H2 2018
Glioblastoma
Pre-clinical
Clinical / Regulatory Phases NDA Filing Target
Three key oncology programmes planned to enter clinic
2017-2018
Type 1 diabetes vaccine MTX102
to be out-licensed
Midatech’s three lead programmes all
utilise one of the Group’s proprietary
platform technologies
Key
Uses gold Nanoparticle technology
Uses polymer microsphere technology
Uses nano-inclusion technology
13
20202020c2022GovernanceFinancial statementsOverviewGovernanceFinancial statements
14
Midatech Pharma plc
Annual Report & Accounts 2017
Strategic Report
Spotlight on Key Programmes
Q-Octreotide
Long-acting formulation
of octreotide, using
Midatech’s sustained release
Q-SpheraTM technology for
the treatment of carcinoid
cancer and acromegaly.
The targeted profile of
Q-Octreotide is as follows:
•
Interchangeable with the market
leading Sandostatin LAR®, the
current Standard of Care (SoC).
Streamlined manufacturing
process in Midatech’s Bilbao
facility:
• Terminal sterilisation aseptic
manufacture.
• Faster to reconstitute than SoC,
• High-throughput process producing
which will reduce nurse time and
patient waiting times.
‘printed’ microspheres.
• Transferable to future Q-Sphera™
• Simpler to reconstitute than SoC,
projects.
reducing the need for nurse training
and the risk of error.
•
Improved reconstituted product
stability and simpler process will
reduce the risk of wastage of
doses, the need to repeat part of
the reconstitution process, or the
occurrence of injection blockages
and partial doses, all of which can
be significant problems with current
competitor products.
• Reduced need to perform two-
week test period, as is required for
competitor products .
For more information visit:
http://www.midatechpharma.com/r-d/
clinical-studies.html
Next steps
• Human studies to commence in
H1 2018.
• 505(b)(2) submission in the US
anticipated H1 2020.
• US marketing authorisation
anticipated in 2020.
• Launch anticipated in 2020-21.
15
Estimated global market in excess$2bndominated by Sandostatin® and Somatuline®GovernanceFinancial statementsOverviewGovernanceFinancial statements 16
Midatech Pharma plc
Annual Report & Accounts 2017
Strategic Report
MTX110 for DIPG
Treatment for ultra-rare
childhood brain tumour
(DIPG), with delivery of
therapeutic constructs
directly into tumour using
Midatech’s nano-inclusion
technology.
• Less than 1,000 cases per
year worldwide.
• Universally fatal, with median
survival time of nine months.
• No effective current
treatment; surgical resection
is not possible.
• The chosen delivery technique
allows elevated drug
concentrations of solubilised
MTX110 to be infused directly
into the tumour, while
minimising systemic toxicity
and peripheral side-effects.
• Compassionate use/named
patient programme in UK
& US:
– Six patients treated to date
– Treatments have thus far
been well tolerated
• Utilises panobinostat API,
licensed from Novartis in
June 2017, and demonstrated
very high potency against
DIPG tumour cell lines in
the laboratory and in animal
studies.
Next steps
• Build on the high level of regulatory
support received in 2017.
• US and/or EU studies estimated
to commence in H1 2018.
• Potential for orphan drug
designation and paediatric
extensions.
• Product could receive fast track
approval and be commercially
available as early as 2020/21.
17
Estimated addressable global market around $100mGovernanceFinancial statementsOverviewGovernanceFinancial statements 18
Midatech Pharma plc
Annual Report & Accounts 2017
Strategic Report
MTD119 for liver cancer
Targeted therapy
treatment for liver cancer
using Midatech’s gold
Nanoparticle technology
• Second leading cause of
• Initial animal data to be
cancer deaths worldwide;
around 800,000 affected
– 95% non-curable, non-
operable and median survival
less than one year
– Successful outcomes with
chemotherapy are rare and
generally short lived.
• MTD119 focus is to increase
tolerability to an otherwise
lethal dose of the active drug,
mertansine, and to generate
higher anti-tumour efficacy
through improved bio-
distribution of the active.
confirmed in IND enabling
studies, suggests peak
reduction in tumour growth
is better than the current
standard of care (Sorafenib),
and improved survival, with
clear dose response.
• MTD119 drug candidate
granted Orphan Drug
Designation by the
European Medicines
Agency in February 2018.
Next steps
• Data readout from further
Pre-clinical and IND enabling
toxicology studies, which may lead
to an informed decision to proceed
to formal clinical development.
• First in-human study planned for
2019, pending supportive data.
• Potential for orphan designation in
other territories.
For more information visit:
http://www.midatechpharma.com/oncology
19
Estimated addressable global market $1bnby 2024GovernanceFinancial statementsOverviewGovernanceFinancial statements Chairman’s and Chief Executive’s Statement
The Group’s hard work in 2017, dealing successfully with some significant
challenges, means Midatech is well-positioned to reach key value inflection
points in our lead development projects during 2018 and beyond, and
for the first time, we forecast that our US marketing operation will be
profitable on an EBITDA basis for a full year in 2018.
In 2017 we made crucial progress
with our lead assets. As we continue
developing our R&D pipeline towards
commercialisation, we are excited
about the potential for our therapies to
improve patients’ lives and create value
for our stakeholders.”
20
Midatech Pharma plcAnnual Report & Accounts 2017 Strategic Report
Introduction
2017 saw Midatech make important
progress towards achieving our
objective of creating significant
shareholder value through
advancing our three key R&D
projects for rare cancers and by
profitably commercialising our
cancer supportive care products.
As a fully integrated business,
we have made great strides with
our development programmes,
scale-up of our manufacturing
capabilities, and also with our
commercial organisation as we
start to prepare our in-house
products for launch.
Progress against strategy
In-house oncology products
Q-Octreotide
During the past year, Midatech
has completed the formulation of
Q-Octreotide, its Pre-clinical testing
phase as well as manufacture for
the forthcoming clinical trial. This
followed a lengthy but valuable and
comprehensive liaison with the US
Food and Drug Administration (‘FDA’)
regarding the clinical trial design, in
order to optimise the conduct of the
clinical trial. We also satisfactorily
addressed manufacturing challenges
which was necessary prior to
commencement of the study. The
initial clinical trial application was
submitted in October 2017. The study
received Polish regulatory approval
in January 2018, and is expected to
commence in April 2018. The trial
programme has two components, an
initial exploratory phase, which should
complete during the first half of the
year, and a second confirmatory phase
expected to be completed by the end
of 2018.
Whilst our existing manufacturing
capability is sufficient to meet
anticipated early demand, the next
stage of development would require
further investment in full commercial
scale manufacturing capacity ahead
of filing for marketing authorisation. If
the product shows interchangeability
with Sandostatin LAR, the Company
expects to file for marketing
authorisation with the FDA in 2020.
MTX110
Our licence deal with Novartis, signed
in 2017, gave us access to a highly
potent drug, panobinostat, to use in
our children’s brain tumour product,
MTX110. Midatech’s nano-inclusion
technology platform enables local
delivery of panobinostat directly to
the tumour via a catheter system
called Convection Enhanced Delivery,
diffusing the drug into and around
the tumour. This technique allows
for elevated drug concentrations to
be delivered to the tumour, while at
the same time minimizing systemic
toxicity and peripheral side effects.
Following comprehensive and
constructive discussion with the FDA
regarding the clinical trial design,
the Investigative New Drug (‘IND’)
application was submitted to the FDA
in Q4 2017 and approval was granted in
January 2018. We were then required
to obtain ethics approval for the trial,
which is expected to be granted in April
2018. The study is expected to formally
commence Q2 2018.
The study, a combined Phase I/II in
up to 43 patients, will be conducted
at the University of California San
Francisco and at Memorial Sloan
Kettering Cancer Centre in New York.
It is expected to take up to two years
to complete but, as it is open label, if
encouraging results are seen as the
study progresses, then discussions
with the FDA can be accelerated
to enable greater patient access
through compassionate use and/or
accelerated approval.
21
$2bnEstimated global market for MTD201 Q-Octreotide2 yearsDelivering products to treat and help cancer patientsGovernanceFinancial statementsOverviewGovernanceFinancial statements Chairman’s and Chief Executive’s Statement continued
MTD119
The pre-clinical programme for
MTD119, comprising the anti-cancer
compound maytansine bound to
GNP, was completed in July 2017,
with studies demonstrating potent
anti-tumour activity. Peak reduction
in tumour growth due to MTD119
suggests that it has the potential to
be more effective than the standard
of care, Sorafenib. Improved
tolerability may reflect specific
targeting of maytansine to tumour
cells by MTD119.
Midatech has now entered
formal IND enabling studies, with
completion of the first pilot animal
studies in the first half of 2018,
and completion of the remainder
of the studies expected in the
fourth quarter of 2018 or early 2019.
These studies will allow Midatech
to review the data for efficacious
dose levels versus toxic dose levels
and optimise the dosing regime for
a potential future first in-human
study. Assuming favourable data,
Midatech hopes to complete an IND
submission to the FDA H1 2019, for
first-in-human studies in H2 2019.
On 22 February 2018, Midatech
announced that the European
Medicines Agency granted orphan
drug designation for MTD119.
and Cardiff. Some significant upscaling
challenges were overcome and the
upgraded facility was signed off by
the Spanish Medicines Agency to
GMP (Good Manufacturing Practice)
standard in the second half of the year.
US commercial organisation
The US commercial arm of the
organisation has reached a significant
point in its development. During
the first half of 2017, increased
discounting pressure in the market
had some impact on margins.
However, we had a strong second
half of the year, and for H2 2017,
despite the above challenges, the US
commercial business on a standalone
basis has broken even, on an EBITDA
basis, for the first time.
We recently initiated a market
expansion study – a Phase 4 clinical
trial – for one of our marketed
products in the US, Gelclair. This
study received approval in December,
and we will be testing the product
for use in patients undergoing bone
marrow transplants over the next
12 months. If that study shows the
product to be as effective for treating
oral mucositis as it is in current users
undergoing chemo- or radiotherapy,
we would expect to see a significant
expansion of use.
Manufacturing operations
Partnerships
A highlight of 2017 was the upscaling
of our manufacturing capability
in Bilbao, Spain, enabling us to
produce our sustained release
microcapsule formulations for clinical
and commercial use. This includes
the required clinical grade batches
of Q-Octreotide (MTD201) allowing
that key programme to commence.
The upgrade involved a €1.6m
investment during 2016 and 2017,
and considerable effort in process
development from our teams in Bilbao
The Emergex collaboration, signed
during 2016, had a positive first
year with the successful application
of Midatech know-how to rapidly
deliver multiple, novel, peptide-
bearing gold Nanoparticles for
application as vaccines against a
variety of infectious diseases. As
communicated previously, our
collaboration with Ophthotech in the
US came to an end during the year
due to Ophthotech’s internal issues.
Financing
In October, we undertook a £6.0m
fund raise and placing of shares
to existing and new investors, the
proceeds of which are being used to
drive forward the clinical development
programmes. In conjunction with the
fund raise, the Group went through
a cost reduction exercise, including
decreasing the costs of the Board and
senior management team.
This equity fundraise was followed, in
December, by the Company entering
into a four-year senior secured loan
agreement with MidCap Financial of
up to $15.0m. $7.0m was drawn on
closing and provides the necessary
working capital to reach the value-
driving inflection points in our product
development programmes in 2018.
Drawdown of the remaining $8.0m is
dependent on clinical development
milestones. This agreement was also
a strong, independent validation of the
progress the business has made.
Risk management
Our development programmes,
targeted at new delivery
mechanisms for approved therapies,
are complemented by our balanced
portfolio of commercialised products
which serves to mitigate risk. The
Board monitors risks on an ongoing
basis, and during 2017 put in place
a formal Compliance Committee,
which reports to the Board.
People
Across the business, the entire
Midatech team has worked
continuously to meet difficult
deadlines and challenging targets.
On behalf of ourselves and the rest
of the Board, we would like to thank
colleagues for their dedication and
contributions during 2017 that has
enabled the Group to achieve a
strong platform on which to build
for the future.
22
Midatech Pharma plcAnnual Report & Accounts 2017 Strategic Report
Total Gross Revenue1
£12.08m
+31%
(2016: £9.21m)
US Product Sales
£6.65m
+28%
(2016: £5.19m)
Statutory Revenue2
£6.76m
+6%
(2016: £6.38m)
In recognition of our employees’
commitment to the business, the
Board introduced a share save
scheme, the Midatech Pharma Share
Incentive Plan, allowing employees
to invest in Midatech through
the acquisition of shares and to
participate in the future success of
the Group.
the Group since IPO. The Board has
appointed Dr Craig Cook (currently
Chief Operating Officer and Head of
Research & Development) to succeed
Dr Phillips as CEO and proposed Board
member from 1 June 2018, following
a transition period of approximately
three months in order to ensure a
smooth handover.
On behalf of the Board, we would
like to thank all of Midatech staff,
investors, clinicians and patients for
their continued support during 2017.
Rolf Stahel
Dr Jim Phillips
Chairman
Chief Executive
20 April 2018
Outlook
Looking forward, we expect important
advances in all areas of the business
during 2018. Positive clinical trial
readouts for Q-Octreotide would
accelerate the path to product
registration. Early data from the
MTX110 children’s brain tumour study
will be an important indicator of the
product’s efficacy and may also lead
to early registration for this ultra-rare
indication in children. The Gelclair
study readouts later in the year could
widen the product’s application and
as a result have a significant impact on
sales and growth potential. Beyond
our internal priorities, we continue
to look for prospective partnerships
to take on commercial rights for our
own development projects. We will
be pursuing multiple opportunities in
the coming months, and look forward
with cautious optimism to a pivotal
year ahead.
On 15 March 2018, the Company
announced that Dr Jim Phillips would
step down as CEO at the end of May
2018 after having served the Company
for five years. On behalf of the Board,
we thank Jim for his contribution to
Dr Cook, who joined Midatech in
April 2014, has more than 20 years
of international experience in the
pharmaceutical, biomedical and high
technology sectors including roles
across a range of therapeutic areas
covering both drug development
and medical affairs. The Company is
fortunate that, in Dr Cook we have
an internal candidate who can take
over responsibility as CEO, ensuring
continuity and a controlled handover.
He will provide strong leadership,
demonstrated expertise, a deep
understanding of the business, and
a relentless focus on delivery of key
value-driving programmes to take
Midatech into its next phase of value
creation. The Board is also evaluating
options for obtaining non-dilutive
funding, that would enable the Group
to deliver on its key value-driving
programmes and to take Midatech
into its next phase of value creation
without a reliance in the short-term
on equity finance. We have every
confidence that Dr Cook, together
with his senior management team, will
drive Midatech to a successful future.
23
GovernanceFinancial statementsOverviewGovernanceFinancial statements Financial Review
A year of solid financial performance, driven
by top line growth of US product sales and
reduced operating costs compared to 2016.
Our results for 2017 illustrate the
continued financial health of the
business. With the funding secured
earlier in the year, a robust balance
sheet, and tight cost control, we are
well-resourced to execute our strategic
priorities for 2018.”
Introduction
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’).
The Company was admitted to AIM
on 8 December 2014, raising £32.0m
before costs in new capital.
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’).
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’).
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.
On 28 October 2016, the Company
announced that at a General Meeting,
shareholders had approved the
issuance of 15,157,044 new Ordinary
24
Midatech Pharma plcAnnual Report & Accounts 2017 Strategic Report
Key performance indicators
Total gross revenue1
£12.08m
2017
2016
+31%
£12.08m
£9.21m
Statutory revenue
£6.76m
2017
2016
+6%
£6.76m
£6.38m
US commercial revenue
£6.65m
2017
2016
+18%
£6.65m
£5.60m
(2016 restated: £9.21m)
(2016 restated: £6.38m)
(2016 restated: £5.60m)
US commercial revenue as
% of Statutory Revenue
98%
2017
2016
98%
88%
(2016 restated: 88%)
R&D costs
(2016 reclassified)
£10.19m
2017
2016
+31%
£10.19m
£7.80m
(2016 restated: £7.80m)
R&D as % of operating costs2
(2016 reclassified)
45%
2017
2016
45%
31%
(2016 restated: 31%)
Loss from operations before
intangible asset impairment charges2
Net cash inflow/(outflow)
for the year
Average headcount
(£16.08m)
(£4.15m)
2017
2016
-16%
£16.08m
£19.17m
2017
2016
£4.15m
£0.97m
(2016 restated: £0.97m)
85
2017
2016
+1%
85
84
(2016 restated: (£19.17m))
(2016 restated: 84)
Shares following a 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.
On 16 October 2017, the Company
announced that at a General
Meeting, shareholders had approved
the issuance of a further 12,314,679
new Ordinary Shares following
a Placing to new and existing
institutional shareholders and
additional Open Offer. This raised
proceeds of £6.16m before expenses
and the new shares were admitted to
AIM on 17 October 2017.
On 2 January 2018, the Company
announced that it had entered into
a four-year senior secured loan
agreement with MidCap Financial
(‘MidCap’) of up to $15.0m. As at
31 December 2017, an initial tranche
of $7.0m had been received.
Drawdown of the remaining $8.0m
is dependent on achieving certain
clinical development milestones.
Reclassification of 2015
and 2016 comparative
operating costs
Management has reviewed how
costs are presented on the income
statement, allocated between:
• Research and development costs;
• Distribution costs, sales and
marketing; and
• Administrative costs.
In order to give a clearer and more
meaningful picture of activity within
the business, certain costs, previously
shown within administrative costs
have been reclassified to either
research and development costs,
or distribution costs, sales and
marketing. Comparative figures for
2016 and 2015 have been reclassified
using the same allocation basis as the
2017 results.
Research and development costs
Distribution costs, sales and marketing
Administrative costs
2016
reclassified
2016
original
2015
reclassified
2015
original
£’000
7,796
12,510
5,123
25,429
£’000
6,684
9,523
9,222
25,429
£’000
8,710
605
4,908
14,223
£’000
5,920
374
7,929
14,223
1 Total gross revenues 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 plus grant revenue.
2 Total operating costs used to calculate R&D as a percentage of operating costs is stated before intangible asset impairment charge of £1.50m (2016: £11.41m).
25
GovernanceFinancial statementsOverviewGovernanceFinancial statements Financial Review continued
Financial analysis
Midatech’s KPIs focus on the
key areas of sales revenue, R&D
spend, operating results and cash
management. These measures
provide information on both the
commercial operation and also the
key R&D development programmes.
Additional financial and non-financial
KPIs, including further KPIs in respect
of the research and development
programmes, are being considered
and may be adopted in due course.
For the year ended 31 December
2017, Midatech generated
consolidated total gross revenues(1)
of £12.08m (2016: £9.21m), an
increase of 31% on the prior year
and in-line with market expectation.
Included in this figure are gross
product sales generated by the US
commercial business of £11.13m
(2016: £7.47m), an increase of 49%.
Statutory Revenue for the year also
increased, by 6%, to £6.76m (2016:
£6.38m).
As part of the MPW acquisition,
Midatech acquired the in-process
research and development relating
to various product development
programmes including Q Octreotide,
one of Midatech’s lead programmes,
and Opsisporin. Opsisporin is a
sustained release treatment for
uveitis, an inflammatory condition
of the eye. Whilst Pre-clinical
proof of concept studies have
been completed for the product,
Opsiporin is outside of Midatech’s
strategic focus and as a result the
decision was made not to continue
with the programme at this point.
The product still has merit and
when the Group has the available
resources, development may be
continued. The absence, however,
of an immediate opportunity to
commercialise the asset has lead
management to conclude that it
has become impaired, resulting in
a charge to the Income Statement
of £1.50m.
In 2016, management concluded
that, whilst overall performance
of the MPUS business had been
good, sales of Oravig® has been
disappointing and, as a result,
the value of this element of the
intangible assets acquired with
the DARA business has become
impaired, resulting in a charge of
£11.41m to the Income Statement.
The performance of the other MPUS
products, including Zuplenz, enabled
us to support the carrying value of
goodwill in the MPUS business.
Net cash outflows for the year were
£4.15m (2016: inflow of £0.97m). This
reflected the share issue in October
2017 where £5.73m was raised after
costs and receipt of the first tranche
of debt finance from MidCap of
£5.24m. Stripping out the share issue
and debt proceeds, the adjusted
outflow of £15.11m (2016: £14.67m)
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 £0.93m (2016: £0.67m), an increase
of 39% and broadly in line with the
increase in gross product sales.
Research and development
expenditure
Research and development costs
increased on the previous year to
£10.19m (reclassified 2016: £7.80m)
reflecting ongoing investment in
Midatech’s R&D programmes.
Activities in the year included:
• Oncology: progress oncology
assets toward the clinic, with
submission of regulatory filings for
MTD201 Q-Octreotide and MTX110
for DIPG, for first-in-human studies
to commence 2018; as well as IND
enabling programme progress for
MTD119 liver cancer;
• Immunotherapy: established and
progressed R&D immunotherapy
projects for oncology from
experimental proof of concept
into formal Pre-clinical programme
for MTR103 and MTR111/6 brain
cancer in adults and children
respectively; and
• Development of in house
capacity, capability, processes and
systems to support manufacture
of portfolio products and
technologies at clinical scale.
Distribution costs, sales
and marketing
Distribution costs, sales and
marketing decreased to £9.42m
(reclassified 2016: £12.51m). This
includes amortisation of intangible
assets acquired as part of the
acquisition of DARA/MPUS resulting
in a charge of £1.38m (2016: £3.39m).
The reduction in amortisation arose
as a result of the impairment of
Oravig in 2016.
Administrative costs
Midatech’s administrative costs
decreased significantly on the prior
year to £3.15m (reclassified 2016:
£5.12m). The decrease is, in part,
reflective of one-off costs incurred
in 2016, including £1.10m associated
with the departure of three former
senior executives in the US, as well
as reduced Directors’ remuneration
in 2017.
26
Midatech Pharma plcAnnual Report & Accounts 2017 Impairment charge
As noted above, this relates to
the write down by £1.50m of the
Opsisporin in-process research and
development. In 2016, a charge of
£11.41m resulted from the write
down of the product sales and
marketing rights of Oravig.
Staff costs
During the year, the average number
of staff employed grew by 1% to 85
(2016: 84), however, the payroll cost
fell by 12% to £6.60m (2016: £7.49m).
Included in the 2016 figures was
£1.1m of settlement costs relating to
former, senior DARA management
who left during 2016. Share-based
payment charges increased to £520k
(2016: £203k).
Capital expenditure
During the year, cash expenditure
on intangible fixed assets was
£0.78m (2016: £0.02m).
The total cash expenditure on
property plant and equipment
in 2017 was £0.71m (2016:
£1.35m), principally reflecting
continued investment in Spain in
the manufacturing capability of
Midatech’s sustained release (‘SR’)
platform technology in advance of
the Q-Octreotide first-in-human
clinical trial programme.
Movement in total assets
Total assets saw a reduction to
£49.22m at 31 December 2017 (2016:
£56.69m). This reduction includes
the £1.50m impairment of the
Opsisporin IPRD discussed above.
Amortisation of intangible assets
(£1.58m) was further increased
by a foreign exchange loss in USD
denominated assets (£1.44m), as
set out in Note 10.
Property plant and equipment
decreased by £0.24m, with additions
of £0.71m, largely in respect of the
manufacturing facility in Bilbao,
noted above, and depreciation of
£0.98m, as set out in Note 9.
Cash and cash equivalents,
decreased by £4.40m as a result of
trading losses, offset by cash raised
from the fundraise that completed in
October 2017, and the first tranche
of the MidCap loan.
Movement in total liabilities
Total liabilities increased to £14.55m
(2016: £10.97m). The largest
movement was in borrowings which
increased from £2.16m in 2016 to
£6.55m as at 31 December 2017. This
reflected the addition of the MidCap
debt of £5.24m, discussed above.
The balance owed relates to soft
loans in Midatech Pharma España,
which decreased as a result of
repayments made during the year.
Other comprehensive income
Other comprehensive income
comprises £1.23m foreign exchange
loss (2016: gain – £3.23m) arising on
retranslation of Midatech Pharma
US operations.
Cash flow
Net cash outflow from operating
activities for the year was £12.96m
(2016: £13.09m). There was,
however, a net cash inflow from
financing activities of £10.23m (2016:
inflow of £15.26m) which, along with
the capital expenditure in the year,
resulted in a net cash outflow for
the year of £4.15m (2016: inflow of
£0.97m). This resulted in the year
end cash balance decreasing to
£13.20m (2016: £17.61m).
Capital structure
As noted above, 12,314,679 new
Ordinary Shares were issued on
16 October 2017 to subscribers in a
Placing and additional Open Offer.
This raised proceeds of £6.16m
before expenses and the new shares
were admitted to AIM on 17 October
2017. In addition, two share issues
were made to the Midatech Pharma
Share Incentive Plan, an employee
share incentive trust; 20,000 on 19
May 2017 and a further 50,000 on
7 November 2017. No other new
shares were issued during the year.
As at 31 December 2017 Midatech
Pharma plc had in issue 61,084,135
Ordinary Shares of 0.005 pence each
and 1,000,001 deferred shared of £1.
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.
27
GovernanceFinancial statementsOverviewGovernanceStrategic ReportFinancial statements Financial Review continued
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
for these products was issued
in late 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.
Midatech’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,
this platform has the potential for
improved drug delivery kinetics and
manufacturing efficiency.
The Group’s Nano-Inclusion
technology is employed for
increasing the aqueous solubility of
small molecule cancer therapeutics
to enable parenteral administration.
This platform relies on internal
know-how that uniquely applies
prevailing chemistry techniques to
enhance the solubility of certain
insoluble agents.
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.
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, sustained
release and solubility enhancement
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.
28
Midatech Pharma plcAnnual Report & Accounts 2017
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.
In the United States, President
Trump has proposed or sought to
implement 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 this 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.
Nick Robbins-Cherry
Chief Financial Officer
20 April 2018
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 21.
Funding risk
The Group continues to incur
substantial operating expenses.
The IPO in December 2014 and
subsequent fundraises in October
2016 and October 2017, as well as
the recently secured debt facility
with MidCap, generated sufficient
cash to advance the pipeline R&D
programmes towards future value
inflection points. However, until the
Group generates positive net cash
inflows from the commercialisation
of its products it may be required
to seek additional funding,
whether through the injection of
further equity capital from share
issues, further debt finance or by
monetising such assets as the
Group has for which there may be a
market. 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. The process of
negotiation with EU member states
in order to determine the future
terms of the UK’s relationship with
the EU is ongoing. 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
29
GovernanceFinancial statementsOverviewGovernanceStrategic ReportFinancial statements Risk Management
The Group has formal procedures to monitor and mitigate risk.
Some of the principal risks facing the Group include:
Some of the principal risks facing the Group include:
Risk
Description
Mitigation
Change
• Fundamentals such as executing the strategy,
achieving sales targets, improving R&D
productivity, achieving product approvals and
containing costs will drive shareholder value
that both satisfies current shareholders and
attracts new shareholders in the future.
• Dual NASDAQ and AIM listings will likely provide
access to additional funding sources.
Increased
risk
• 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 Group’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.
No
change
No
change
Until the Group generates
positive net cash inflows
from the commercialisation
of its products it may be
required to seek additional
funding, whether through
the injection of further
equity capital from share
issues, further debt finance
or by monetising such assets
as the Group has for which
there may be a market.
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.
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.
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.
Availability
of funding
Competition/
technological
progression
Obtaining /
maintaining
regulatory
approval
30
Midatech Pharma plcAnnual Report & Accounts 2017
Risk
Description
Commercial
viability of
products
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 and by
access to appropriate sales
channels and infrastructure in
individual countries where we
plan to operate.
Mitigation
1. R&D:
• Maintain a detailed understanding of GNP, SR
and NI 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 20 April 2018 and signed on its behalf.
Change
No
change
Reduced
risk
Reduced
risk
Nick Robbins-Cherry
Chief Financial Officer
31
GovernanceFinancial statementsOverviewGovernanceStrategic ReportFinancial statements
32 Midatech Pharma plc
Annual Report & Accounts 2017
Governance
34 Board of Directors
36 Directors’ Remuneration Report
44 Corporate Governance
46 Directors’ Report
“ DIPG is a devastating childhood brain
cancer with virtually no long-term
survivors, and for which there are
no current therapies other than
palliative treatments.
Midatech’s MTX110 has shown
promise as one of the most
potent compound against DIPG
brain tumour cells in laboratory
experiments, and has also been
well tolerated in compassionate
use treatments to date.”
Professor Sabine Mueller
Paediatric Neuro-Oncologist, Benioff Children’s Hospital,
University of California San Francisco
33
Financial statementsOverviewStrategic ReportFinancial statements Board of Directors
As at 31 December 2017 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.
1.
2.
1. James (Jim) Phillips
2. Craig Cook
Chief Executive Officer (55)
Chief Executive Officer Designate (51)
Dr Cook has more than 15 years of international
experience in the pharma, biomedical and high
technology sectors including roles across a
range of therapeutic areas, such as neurology,
inflammatory, immunology, and endocrine,
covering both drug development and medical
affairs. He has established and led several
healthcare initiatives, and held increasingly
senior appointments at Johnson & Johnson,
Eli Lilly, Novartis Pharma, and Serono Biotech.
Dr Cook is lead adviser for Ippon Capital SA’s
life sciences practice.
He is a qualified physician, has a BSc in
Pharmacology, Diploma in Anaesthesiology,
and MBA from the London Business School.
He joined Midatech in 2014 as Chief Operating
Officer and Chief Medical Officer.
Dr Phillips has a strong background in company
leadership and business development, and is a
physician by training. He founded Talisker Pharma
in 2004, which was the first and cornerstone
acquisition of EUSA Pharma in 2006. As President
of Europe and Senior Vice President, Corporate
Development of EUSA Pharma Inc., Dr Phillips led
the strategy resulting in the acquisition of OPI and
its ultimate acquisition by Jazz Pharmaceuticals
in 2012. Dr Phillips is currently a Non-Executive
Director of Herantis Pharma plc (listed in Helsinki)
and of PreciHealth SA. He resigned as a Non-
Executive Director of Insense Ltd (a private spin-
out from Unilever) during 2017, and, until joining
Midatech, Dr Phillips was Chairman of Prosonix
Limited, guiding its successful transformation
into a respiratory focused business.
Dr Phillips initially held senior positions
at Johnson & Johnson and Novartis
Pharmaceuticals. At Novartis, he was in
Clinical & Business Development and was a
Board Director of the $1.3bn Arthritis, Bone,
Gastrointestinal, Haematology and Infectious
Diseases business unit and a member of the
company’s Clinical Leadership Team.
On 15 March 2018, the Company announced that
Dr Phillips will step down as CEO at the end of
May 2018, after having served the Company for
five years, and will be replaced by Dr Craig Cook.
6. Simon Turton
Senior Independent Non Executive
Director (50)
Dr Turton previously headed Warburg Pincus’
healthcare investing activities in Europe and
was a principal at Index Ventures in Geneva.
He has over ten 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
group of dental clinics in the UK.
3.
4.
5.
6.
7.
8.
9.
34
Midatech Pharma plcAnnual Report & Accounts 2017 3. Nicholas (Nick) Robbins-Cherry
4. Rolf Stahel
5. John Johnston
Chief Financial Officer (48)
Non Executive Chairman (74)
Senior Non-Executive Director (59)
Mr Robbins-Cherry 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. Mr Robbins-Cherry has a strong track
record in mergers and acquisitions and of
managing complex multi-national businesses.
He qualified with Coopers & Lybrand (now
PricewaterhouseCoopers) and 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 (United
Kingdom, Switzerland and United States) and
private life science companies registered in
Europe, the United States and Asia. Mr Stahel
joined Shire as CEO in 1994 following a 27-year
career at Wellcome plc (now GlaxoSmithKline).
He 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 is currently a Non-Executive
Director of Action Hotels plc and MaxCyte
Inc. He held the position of Non-Executive
Director of Flowgroup plc from August 2013 and
was Non Executive Chairman from June until
October 2017, guiding the company through
a successful fundraise and transition into a
pure energy business. He also served as Non
Executive Chairman of Constellation Healthcare
Technologies Inc. through 2016 until the
successful sale of the company on 30 January
2017. Prior to this he was Managing Director of
Institutional Sales at Nomura Code and from
2008 to 2011 he was Director of Sales and Trading
at Seymour Pierce. In 2003, Mr. Johnston founded
Revera Asset Management, where he oversaw
an investment trust, a unit trust and a hedge
fund, which he ran until 2007. He joined Legg
Mason Investors for three years as director of
Small Companies Technology and Venture Capital
Trusts, from 2000 to 2003, having previously
spent two years as Head of Small Companies
with Murray Johnstone from 1992 to 1997,
Mr. Johnston was Head of Small Companies
at Scottish Amicable, before spending a year
at Ivory and Sime. Mr. Johnston began his
investment career at the Royal Bank of Scotland.
7. Sijmen de Vries
8. Pavlo Protopapa
9. Michele Luzi
Non-Executive Director (58)
Non-Executive Director (51)
Non-Executive Director (60)
Dr de Vries has extensive senior level experience
in both the pharmaceutical and biotechnology
industry. He is currently CEO of Pharming
group N.V., the Euronext-listed pharmaceutical
company. Dr de Vries was previously CEO
of both Switzerland-based 4-Antibody and
Morphochem AG, and 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 MD degree
from the University of Amsterdam and a
MBA 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 has previously served as a Non-
Executive Director and lead investor of Socure
Inc, a US based SaaS-based internet security
company. Pavlo 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.
35
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Directors’ Remuneration Report
On behalf of the Board, I
am pleased to present the
Remuneration Report for the
year ended 31 December 2017,
which sets out the remuneration
policy for the Directors and the
amounts earned during the year.
The Remuneration Committee
welcomes feedback on any
aspect of Group remuneration
and remuneration policy as
disclosed in this report.
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 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.
During 2016, the Remuneration
Committee implemented a more
structured and consistent approach
to the incentivisation of Midatech
employees, including bonuses and
share-based compensation and this
approach was continued in 2017:
(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.
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
2017 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.
36
Midatech Pharma plcAnnual Report & Accounts 2017 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;
• Quarters of profitability delivered
by the US commercial business
unit; and
• Specific measures linked to key
R&D programmes and business
development.
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 medium
and long-term improvements in
stakeholder value.
(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
(the ‘UK Plan’);
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
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. The quantum of any
award made since 2016 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.
(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
37
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Directors’ Remuneration Report continued
In addition, as part of a broader
commitment to reduce costs
across the business during 2017,
the Board of Directors also
discussed and unanimously agreed
to significantly reduce the base
salaries for the Executive Directors
and remuneration for the Non-
Executive Directors, effective from
1 October 2017. As result of this, the
base salary for the Chief Executive
was reduced by 16%, and the base
salaries for the Chief Financial Officer
and Chief Operating Officer were
reduced by 12%. The remuneration
of the Non-Executive Directors was
reduced by 20%. These reductions
will be reversed at such time as the
Company’s share price reaches £1.00.
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 2017. This reflects the
voluntary reduction in salaries
discussed above.
Policy on Executive Directors’
remuneration continued
(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.
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.
Review of Executive remuneration
Whilst significant progress was
made during the year, with two of
the key pipeline R&D programmes
advancing to the point where
human clinical trial applications
were submitted and with the US
commercial business breaking even
on an EBITDA basis for the second
half of 2017, some of the major
commercial corporate objectives
were not achieved. As result of
this, the remuneration committee
proposed, and the Board of
Directors unanimously agreed that
no pay-out of any cash bonus would
be warranted.
Chief Executive Officer
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
100%
0%
93%
100%
Actual
Maximum
Non-Performance Related
Performance Related
Chief Financial Officer
700,000
600,000
500,000
400,000
300,000
200,000
0%
100%
100,000
0
92%
100%
Actual
Maximum
Non-Performance Related
Performance Related
38
Midatech Pharma plcAnnual Report & Accounts 2017 Service contracts
Relative importance of spend on pay
The total amount paid by the Group in remuneration to all employees is
as follows:
Remuneration
2017
£’000
6,559
2016
£’000
7,492
2015
£’000
4,515
No dividends to shareholders have yet been paid.
Chief Executive Officer remuneration
The total remuneration paid to Dr Jim Phillips, the Chief Executive Officer is
as follows:
Remuneration
2017
£’000
310
2016
£’000
477
2015
£’000
377
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 4.0 times (2016: 5.5 times) the
average amount paid to staff in the Midatech Group.
The total remuneration, including bonus, paid to the Chief Executive Officer
in the current year represents a decrease of 35% compared to the prior year
(2016: increase of 26%). The corresponding decrease in the average amount
paid per employee in the same period is 18% (2016: increase of 46%).
No performance related share options vested during the year.
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 (‘AGM’) 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. On 15 March 2018, the
Company announced that Dr Jim
Phillips would step down as CEO at
the end of May 2018.
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 AGM held on 3 May
2017 during which he was re-elected
by the Company’s members. His
appointment is terminable upon six
months’ notice.
39
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Directors’ Remuneration Report continued
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.
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). Mr Protopapa
retired by rotation prior to the
Company’s AGM held on 3 May 2017
during which he was re-elected
by the Company’s members. 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 AGM 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.
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
retired by rotation prior to the
Company’s AGM 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.
In conjunction with the reduction
in the salaries of the Executive
Directors, as part of a drive to reduce
costs across the business, the Non-
Executive Directors agreed to take a
20% reduction in their remuneration
with effect from 1 October 2017.
Service contracts continued
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 13
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. Mr
Stahel retired by rotation prior to
the Company’s AGM held on 3 May
2017 during which he was re-elected
by the Company’s members. The
appointment is 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 AGM 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 AGM
40
Midatech Pharma plcAnnual Report & Accounts 2017 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. 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
Executive Directors
Jim Phillips(1)
Nick Robbins-Cherry(1)
Directors’ remuneration
Salary
and fees
£
99,980
36,100
36,100
36,100
36,100
36,100
299,157
177,350
756,987
Bonus
£
Pensions
£
2017
£
2016
£
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
99,980
36,100
36,100
36,100
36,100
36,100
10,000
11,000
21,000
309,157
188,350
777,987
100,000
38,000
38,000
38,000
38,000
38,000
476,000
225,600
991,600
(1) Following changes to the annual allowance for tax free pension contributions, the Executive Directors both receive part of their contractual pension
entitlement in the form of a taxable payment with salary.
Share-based payment expense of £388k in respect of the Directors was charged to the income statement during the
year (2016: £184k). In addition to the amounts stated above, Dr Jim Phillips received a benefit in kind of £1k (2016: £1k).
Details of the payments to other related parties are disclosed in Note 30.
Directors’ interests in shares
Non-Executive Directors
Rolf Stahel(1)
John Johnston
Michele Luzi
Pavlo Protopapa
Simon Turton
Sijmen de Vries
Executive Directors
Jim Phillips
Nick Robbins-Cherry
31 December 2017
31 December 2016
Beneficial
Interests
Non-
Beneficial
Interests
Beneficial
Interests
Non-
Beneficial
Interests
599,942
54,981
131,344
–
–
550,572
14,981
–
–
69,328
121,344
69,328
60,000
1,649,334
–
1,649,334
269,413
38,802
59,896
500
–
209,413
–
59,150
8,802
59,150
–
–
46,896
500
–
–
(1) At 31 December 2017, 367,322 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 1 March 2018.
b. 122,440 shares become unrestricted when the market capitalisation of the Company achieves £155.0m.
c. 122,440 shares become unrestricted when the market capitalisation of the Company achieves £213.0m.
41
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Directors’ Remuneration Report continued
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.
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 2017
Options Held over
Ordinary Shares
31 December 2016
Options Held over
Ordinary Shares
–
–
–
–
18,796
18,796
–
–
–
–
17,000
17,000
1,740,000
555,000
1,340,000
353,000
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 28) are set out below:
Grant Date
Number
Awarded
Exercise
Price/ Share
Vesting Criteria
Expiry Date
Non-Executive Directors
Michele Luzi (1)
Sijmen de Vries
Executive Directors
Jim Phillips
20/04/2012
31/12/2008
20/04/2012
30/06/2014
18,796
3,000
4,000
10,000
09/05/2014
200,000
30/06/2014
400,000
31/10/20164
19/12/2016
250,000
490,000
4.19
1.425
4.19
0.075
0.075
0.075
2.68
1.21
Fully vested
20/04/2022
Fully vested
31/12/2018
Fully vested
20/04/2022
Share price2
30/06/2024
Fully vested
01/05/2023
Share price2
30/06/2024
Time based3
02/12/2025
Time based3
07/12/2026
15/12/2017
400,000
0.46 Time and above price based5
15/12/2027
42
Midatech Pharma plcAnnual Report & Accounts 2017 Executive Directors continued
Nick Robbins-Cherry
Grant Date
Number
Awarded
Exercise
Price/ Share
Vesting Criteria
Expiry Date
30/06/2014
31/10/20164
19/12/2016
15/12/2017
60,000
125,000
168,000
202,000
0.075
2.68
1.21
0.46
Share price2
30/06/2024
Time based3
02/12/2025
Time based3
07/12/2026
Time and price based5
15/12/2027
(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.
(5) 25% of the options become eligible to vest 12 months after the grant date, followed by 12 equal quarterly tranches becoming eligible to vest, over a
subsequent three-year period. All vesting subject to the 20-VWAP share price reaching £1 at any time during the life of the option.
Total shareholder return performance
The graph below illustrates the daily movements of the Company’s AIM share price compared to the value of the
Datastream 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
Mar 17
Jun 17
Sep 17
Dec 17
Mar 18
Midatech Pharma plc
Datastream UK Pharma & Bio
Source: Thomson Reuters Datastream 06.03.18
Sijmen de Vries
Chairman of the Remuneration Committee
43
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Corporate Governance
Board of Directors
As at 31 December 2017 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. Michele Luzi and Sijmen de
Vries both hold share options granted
by Midatech Limited, prior to the
incorporation of Midatech Pharma plc
in 2014.
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.
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 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, a qualified
accountant, and its other members
are Simon Turton and John Johnston.
The Audit Committee meet not less
than twice a year. During 2017, the
Audit Committee met twice.
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.
44
Midatech Pharma plcAnnual Report & Accounts 2017 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. There is regular dialogue
with financial stakeholders with the
intention of providing transparent
communication. The Chief Executive
and Chief Financial Officer meet with
institutional shareholders following
interim and final results and the Non
Executive Chairman and Senior Non-
Executive Director are encouraged
to interact with shareholders on an
ongoing basis. 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
20 April 2018
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 and the robustness
of the Group’s accounting and
business management systems,
that an internal audit function was
not required, however this remains
a matter for ongoing review.
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 46 the Group financial
statements have been prepared
on the going concern basis as the
Directors believe that the Group
will be able to access adequate
resources to continue in operational
existence for the foreseeable
future. In addition to utilising the
existing cash reserves, the Directors
are evaluating a number of near-
term funding options available to
the Group and are confident that
additional working capital will
become available in the timeframe
required and on terms acceptable
to the Board and shareholders.
Therefore, after considering the
uncertainties the Directors consider
it is appropriate to continue to adopt
the going concern basis in preparing
the financial statements.
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
45
Financial statementsOverviewGovernanceStrategic ReportFinancial statements Directors’ Report
The Directors present their report
and the consolidated financial
statements of the Group for the
year ended 31 December 2017.
Directors
The Directors during the year were:
• Rolf Stahel.
• John Johnston.
• Michele Luzi.
• Pavlo Protopapa.
• Simon Turton.
• Sijmen de Vries.
• James 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 22
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
Directors’ responsibilities
On 15 March 2018, the Company
announced that Dr James Phillips will
step down as Chief Executive Officer
at the end of May 2018, after having
served the Company for five years,
and will be replaced by Dr Craig
Cook, the current Chief Operating
Officer and Chief Medical Officer.
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.
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.
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. 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).
46
Midatech Pharma plcAnnual Report & Accounts 2017 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.
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
20 April 2018
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.
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.
47
Financial statementsOverviewGovernanceStrategic ReportFinancial statements 48 Midatech Pharma plc
Annual Report & Accounts 2017
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017 Overview
Strategic Report
Governance
Financial statements
Financial statements
50
56
57
58
59
61
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
108 Company Balance Sheet
109 Company Statement of Changes in Equity
110 Notes Forming Part of the Company Financial Statements
Other Information
117 Company Information
” MTD201’s interchangeability with
Octreotide LAR, as well as the
opportunity for simpler reconstitution,
fewer errors and wastage, and
improved patient experience, would
be a welcome addition to the limited
choice of therapies currently available.
Achieving such a unique product
equivalent to Octreotide LAR would be
advantageous for patients, physicians,
and payors.”
Professor Shlomo Melmed
Dean of Medical Faculty, Cedars-Sinai Medical Centre, Los Angeles
49
OverviewGovernanceStrategic Report Independent Auditor’s Report
to the members of Midatech Pharma plc
Opinion
We have audited the financial
statements of Midatech Pharma
plc (the ‘Parent Company’) and
its subsidiaries (the ‘Group’) for
the year ended 31 December 2017
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 notes to the financial
statements, including a summary
of significant accounting policies.
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 the preparation
of the Parent Company financial
statements is applicable law and
United Kingdom Accounting
Standards, including Financial
Reporting Standard 102, The
Financial Reporting Standard in the
United Kingdom and Republic of
Ireland (United Kingdom Generally
Accepted Accounting Practice).
In our opinion:
• the financial statements give a
true and fair view of the state of
the Group’s and of the Parent
Company’s affairs as at 31
December 2017 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 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 complying with its
legal obligation to apply 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 give a true and fair view
of the consolidated financial position
of the Group as at 31 December
2017 and of its consolidated financial
performance and its consolidated
cash flows for the year then ended in
accordance with IFRSs as issued by
the IASB.
Basis for opinion
We conducted our audit in
accordance with International
Standards on Auditing (UK)
(ISAs (UK)) and applicable law.
Our responsibilities under those
standards are further described in the
Auditor’s responsibilities for the audit
of the financial statements section
of our report. We are independent of
the Group and the Parent Company
in accordance with the ethical
requirements that are relevant to our
audit of the financial statements in
the UK, including the FRC’s Ethical
Standard as applied to listed entities,
and we have fulfilled our other ethical
responsibilities in accordance with
these requirements. We believe that
the audit evidence we have obtained
is sufficient and appropriate to
provide a basis for our opinion.
Material uncertainty related to
going concern
We draw attention to Note 1 to the
financial statements concerning the
Group and Parent Company’s ability
to continue as a going concern. The
matters explained in Note 1 relating
to the uncertainty of additional
future funding being made available
to the Group and Parent Company,
indicates the existence of a material
uncertainty which may cause
significant doubt over the Group
and Parent Company’s ability to
continue as a going concern. These
financial statements do not include
the adjustments that would result
if the Group and Parent Company
were unable to continue as a going
concern. Our opinion is not modified
in respect of this matter.
We have highlighted going concern
as a key audit matter based on our
assessment of the significance
of the risk and the effect on our
audit strategy.
As at 31 December 2017 the Group
had cash reserves of £13.2m. As set
out in Note 1 the cash flow forecasts
prepared by the Directors indicate
that the Group will require additional
funding during the course of the next
12 months. As described above this
indicates a risk over going concern.
Our audit procedures in response to
this key audit matter included:
• A review of management’s
assessment that going
concern is an appropriate basis
of preparation.
• A review of the latest available
cash flow forecasts for the Group
which included the 12 months
from the date of approval of these
financial statements.
50
Midatech Pharma plcAnnual Report & Accounts 2017 • Challenging and corroborating management’s assumptions included in the cash flow forecasts and discussing
with management their future plans for the Group.
• Discussing with management how they intend to raise the funds necessary for the Parent Company and Group
to continue as a going concern, in the required timeframe.
• Reviewing the terms of the Group’s current debt facility including historical compliance and expected future
compliance with covenants.
Use of our report
This report is made solely to the Parent 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 Parent 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 Parent
Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
Key audit matters
In addition to the matter described in the material uncertainty related to going concern section, key audit matters
are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether
or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy,
the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
Revenue recognition
Key audit matter
See also Note 1 (Accounting policies) for further
details.
The Group’s commercial subsidiary, based in the
US, sells to customers under various commercial
contracts that include rebates, discounts and other
similar customer arrangements and, in some cases,
the right to provide a right of return on certain
products, for which unsettled amounts are provided
at the year end.
The number and variety of arrangements with
customers can make it complex to determine
the correct accounting treatment, giving rise
to management judgement and scope for error
in the recognition and classification for such
arrangements in the income statement and for
establishing an appropriate accrual for rebates or
estimated returns.
Response
Our audit procedures included:
• Reviewing a sample of customer contracts and discussing
customer arrangements in place with management to obtain
an understanding of the more significant arrangements in
place. We considered and challenged management in relation
to the accounting for such arrangements.
• Testing a sample of revenue entries to agreed arrangements
with customers to evidence that the correct accounting
treatment had been applied.
• Testing a sample of revenue entries to invoices, shipping
documents, price lists and related customer arrangements to
customer contracts for evidence of the existence and valuation
of revenue.
• Reviewing the level of returns provision made to historical
actual levels of returns and returns received after the balance
sheet date.
• Assessing the adequacy of the accounting policy for revenue
and related disclosures in the financial statements.
Observations
Our testing of Revenue for the commercial subsidiary in the US
did not identify any material misstatements in relation to revenue
recognition or in the accounting for customer arrangements.
51
OverviewGovernanceStrategic ReportFinancial statements Independent Auditor’s Report continued
to the members of Midatech Pharma plc
Key audit matters continued
Carrying value of goodwill and intangible assets
Key audit matter
Response
Our audit procedures included:
• Reviewing management’s assessment of whether any IAS
36 ‘Impairment of Assets’ indicators had been identified and
performance of our own assessment of such based on our
knowledge of the Group’s business and activities and from
discussion with management;
• Gaining an understanding, through discussion with
management and non-financial personnel, of the underlying
stage of development and future opportunities for the IPRD
intangible assets;
• Evaluating and sceptically challenging management’s
assumptions used in assessing the recoverability of the
intangible assets, in particular, revenue, profit margins, the
timing and quantum of cash flows, discount rates used
and the probability of obtaining regulatory approval for
products in trial;
• Performing sensitivity analysis on the impairment
models prepared by management to support the
intangible asset valuations;
• Reviewing the mechanics of the models used in order to ensure
they are appropriate for the purpose of the assessment of
the carrying value of the intangible assets recorded on the
statement of financial position;
• Reviewing corroborating support for management’s decision to
cease development of Opsisporin and reviewing the related cash
flow forecasts supporting full impairment of the related IPRD.
• Assessing the adequacy of the related accounting policies and
disclosures in the Group’s financial statements.
Observations
We consider management’s estimates and judgements applied
in the assessment of the carrying value of intangible assets
and goodwill to appropriately reflect the inherent degree of
subjectivity in those estimates and judgements. We consider that
the accounting policies and disclosures for goodwill and intangible
assets are appropriate.
See also Note 1 (Accounting policies), Note 2
(Critical estimates and judgements), Note 10
(Intangibles) and Note 11 (Impairment testing)
for further details.
The Group has £14.2m of intangible assets (2016:
£16.7m), comprising In Process R&D (‘IPRD’) and
product and marketing rights. In addition, the
Group has £13.4m (2016: £14.5m) of goodwill at
the year end.
The products to which the IPRD relate are not yet
ready for use and are therefore required, along
with the goodwill, to be tested for impairment
on an annual basis. The product and marketing
rights, which are in use, must be assessed for any
indicators of impairment.
For IPRD, the impairment assessment requires
management to make certain key assumptions
and judgements on the clinical, technical and
commercial viability of the products to which
the intangible assets relate. For such products
in development, the main risk for the Group
is the outcome of clinical trials and obtaining
required clinical and regulatory approvals for
commercialisation. The assessment of the carrying
value of IPRD is therefore based on forecasting and
discounting future cash flows, which are inherently
highly judgemental.
Management have taken the decision to cease
development of Opsisporin and, as a result, booked
a full impairment of £1.5m against the carrying
value of the related IPRD.
The sales for two product lines during the year
were behind forecast, resulting in an indicator of
impairment in respect of the related product and
marketing rights.
The impairment reviews for the product and
marketing rights contain significant judgements
and estimates including revenue growth, profit
margins and discounts rates. Changes in these
assumptions could lead to an impairment of the
carrying value of intangible assets and goodwill.
52
Midatech Pharma plcAnnual Report & Accounts 2017 Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of
misstatements. For planning, we consider materiality to be the magnitude by which misstatements, including
omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial
statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we
also take account of the nature of identified misstatements, and the particular circumstances of their occurrence,
when evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as follows:
Overall materiality
£750,000 (2016: £750,000)
£425,000 (2016: £350,000)
Group
Parent company
How we determined it
Rationale for benchmark applied
Materiality was based on 3% of total
operating expenses (2016: based on
5% of loss before tax).
Materiality for the Parent Company
financial statements was based on
3% of net assets.
Total operating expenses is considered the
most appropriate measure in assessing the
performance of the Group given its pre-tax
loss position, stage of development and
level of activities during the year.
We considered an asset based
measure to best reflect the nature
of the Parent Company which acts
as a parent holding company for
the Group.
In considering individual account balances and classes of transactions we apply a lower level of materiality
(performance materiality) in order to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceed materiality. Performance materiality was set at £525,000
(2016: £525,000) for the Group, representing 70% of materiality. The level was set taking into account a number
of factors including our past experience of adjusted and unadjusted errors, complexity of the audit and controls
within the Group. The same percentage was applied to each component materiality including the Parent Company.
Where financial information from components was audited separately, component materiality levels were set for
this purpose at lower levels varying from 15% to 57% of group materiality.
We agreed with the Audit Committee that we would report to the committee all individual audit differences in
excess of £30,000 (2016: £35,000), being 4% (2016: 5%) of group materiality. We also agreed to report differences
below this threshold that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit
Our Group audit scope focussed on the Group’s principal operating locations and legal structure. The Group has
operating entities based in the UK, Spain, the US and Australia. The UK, US and Spanish entities were deemed
significant components.
The UK subsidiaries were subject to full scope audits by the Group auditor.
For the US component the BDO network firm in the US completed a full scope audit reporting to the Group auditor.
We determined our level of involvement in the US component to require a visit from the Group audit partner to
review the audit work papers and attend the component clearance meeting along with the component auditor,
local and Group management.
The Spanish component was subject to a full scope audit by the Group auditor. The Group audit team were assisted
by staff from the BDO network firm in Spain who performed audit procedures on behalf of the Group audit team.
53
OverviewGovernanceStrategic ReportFinancial statements
Independent Auditor’s Report continued
to the members of Midatech Pharma plc
Other information
The Directors are responsible for the other information. The other information comprises the information included
in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the
financial statements does not cover the other information and, except to the extent otherwise explicitly stated in
our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. If, based on the work
we have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
Opinions 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 the Directors’ report for the financial year for which the financial
statements are prepared is consistent with the financial statements; and
• the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
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 in relation to which 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.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as
the Directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent
Company or to cease operations, or have no realistic alternative but to do so.
54
Midatech Pharma plcAnnual Report & Accounts 2017 Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our
auditor’s report.
Christopher Pooles (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
Reading
20 April 2018
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
55
OverviewGovernanceStrategic ReportFinancial statements Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Gross profit
Research and development costs (reclassified)
Distribution costs, sales and marketing (reclassified)
Administrative costs (reclassified)
Impairment of intangible assets
Loss from operations before intangible asset impairment charges, listing
costs and acquisition expenses
Note
2017
£’000
2016
£’000
2015
£’000
3
3
11,239
8,659
840
12,079
6,758
840
7,598
547
9,206
6,376
547
6,923
(926)
(667)
914
600
1,514
775
600
1,375
(70)
6,672
6,256
1,305
(10,185)
(7,796)
(8,710)
(9,417)
(12,510)
(605)
(3,148)
(5,123)
(4,908)
13
(1,500)
(11,413)
–
(16,078)
(19,173)
(9,927)
Impairment of intangible assets
(1,500)
(11,413)
–
Listing and acquisition expenses – included in administrative costs
–
–
(2,991)
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 (loss)/income, net of tax
4
6
6
7
(17,578)
(30,586)
(12,918)
415
(166)
1,337
1,691
(73)
(5)
(17,329)
(29,322)
(11,232)
1,265
9,160
1,133
(16,064)
(20,162)
(10,099)
(1,233)
(1,233)
3,228
3,228
399
399
Total comprehensive loss attributable to the owners of the parent
(17,297)
(16,934)
(9,700)
Loss per share
Basic and diluted loss per ordinary share – pence
8
(31p)
(56p)
(36p)
56
Midatech Pharma plcAnnual Report & Accounts 2017 Consolidated Statement of Financial Position
At 31 December 2017
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
2017
£’000
2016
£’000
2015
£’000
9
10
16
18
16
2,529
2,766
1,984
27,647
31,172
41,339
465
448
387
30,641
34,386
43,710
941
3,242
1,196
817
2,439
1,439
459
2,496
1,201
17
13,204
17,608
16,175
18,583
22,303
20,331
49,224
56,689
64,041
20
23
19
20
21
24
25
25
25
25
25
6,185
1,620
–
–
1,508
6,547
6,185
1,620
8,055
8,002
8,407
361
–
538
400
7,084
442
1,573
8,363
9,345
9,099
14,548
10,965
17,154
1,003
1,002
1,002
52,939
47,211
31,643
53,003
53,003
52,803
–
–
2,385
3,618
200
390
(74,654)
(59,110)
(39,151)
34,676
45,724
46,887
49,224
56,689
64,041
The financial statements were approved and authorised for issue by the Board of Directors on 20 April 2018 and
were signed on its behalf by:
Nick Robbins-Cherry
Chief Financial Officer
The notes form an integral part of these consolidated financial statements.
57
OverviewGovernanceStrategic ReportFinancial statements Consolidated Statement of Cash Flows
For the year ended 31 December 2017
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 intangible assets
Gain on bargain purchase
Share-based payment expense
Taxation
Note
2017
£’000
2016
£’000
2015
£’000
(16,064)
(20,162)
(10,099)
9
10
6
13
12
5
7
983
1,577
27
772
3,583
–
501
236
–
(249)
(1,264)
(1,686)
1,500
11,413
–
520
–
203
–
(165)
170
(1,265)
(9,160)
(1,133)
Cash flows from operating activities before changes in working capital
(12,971)
(14,615)
(12,176)
Increase in inventories
Increase in trade and other receivables
(Decrease)/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
Share issues net of costs
Net cash generated from/(used in) financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Exchange (losses)/gains on cash and cash equivalents
9
10
11
12
17
(202)
(968)
(267)
(237)
(242)
358
(62)
(1,540)
711
(14,408)
(14,736)
(13,067)
1,455
1,650
646
(12,953)
(13,086)
(12,421)
(707)
(778)
(1,347)
(19)
(922)
(3)
1,867
(2,528)
–
–
164
53
–
–
15
(1,470)
(1,202)
(1,533)
(111)
(25)
(552)
5,237
5,728
(74)
(69)
(235)
65
15,568
(5)
(49)
(165)
–
–
10,277
15,255
(219)
(4,146)
967
(14,173)
17,608
16,175
30,325
(258)
466
23
Cash and cash equivalents at end of year
17
13,204
17,608
16,175
The notes form an integral part of these consolidated financial statements.
58
Midatech Pharma plcAnnual Report & Accounts 2017 Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
At 1 January 2017
Loss for the year
Foreign exchange translation
Total comprehensive loss
Shares issued on 16 October 2017 – Note 17
Costs associated with share issue – Note 17
Share option charge
Total contribution by and
distributions to owners
At 31 December 2017
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Foreign
exchange
reserve
£’000
Accumulated
deficit
£’000
Total
Equity
£’000
1,002
47,211
53,003
3,618
(59,110)
45,724
–
–
–
1
–
–
1
–
–
–
6,157
(429)
–
5,728
–
–
–
–
–
–
–
–
(16,064)
(16,064)
(1,233)
(1,233)
–
(1,233)
(16,064)
(17,297)
–
–
–
–
–
–
520
520
6,158
(429)
520
6,249
1,003
52,939
53,003
2,385
(74,654)
34,676
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Shares
to be
issued
£’000
Foreign
exchange
reserve
£’000
Accumulated
deficit
£’000
Total
equity
£’000
1,002
31,643
52,803
200
–
–
–
–
–
–
–
–
–
–
–
16,673
(1,105)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
200
(200)
15,568
200
(200)
390
–
3,228
3,228
(39,151)
46,887
(20,162)
(20,162)
–
3,228
(20,162)
(16,934)
–
–
–
–
–
–
–
203
–
16,673
(1,105)
203
–
203
15,771
At 1 January 2016
Loss for the year
Foreign exchange translation
Total comprehensive loss
Transactions with owners
Shares issued on 31 October 2016 –
Note 17
Costs associated with share issue –
Note 17
Share option charge
Shares issued as deferred
consideration for business
combination
Total contribution by and
distributions to owners
At 31 December 2016
1,002
47,211
53,003
–
3,618
(59,110)
45,724
59
OverviewGovernanceStrategic ReportFinancial statements Consolidated Statement of Changes in Equity continued
For the year ended 31 December 2017
Share
capital
£’000
Share
premium
£’000
Merger
reserve
£’000
Shares to
be issued
£’000
1,001
31,643
37,776
800
Foreign
exchange
reserve
£’000
Accumulated
deficit
£’000
Total
equity
£’000
(9)
–
399
399
(29,222)
41,989
(10,099)
(10,099)
–
399
(10,099)
(9,700)
–
–
–
–
–
–
–
1
14,427
170
–
170
–
170
14,598
–
–
–
–
–
–
(600)
–
–
–
1
–
–
–
1
–
–
–
–
–
–
–
–
–
14,427
–
600
–
–
–
15,027
(600)
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
At 31 December 2015
1,002
31,643
52,803
200
390
(39,151)
46,887
The notes form an integral part of these consolidated financial statements.
60
Midatech Pharma plcAnnual Report & Accounts 2017 Notes Forming Part of the Financial Statements
for the year ended 31 December 2017
1 Accounting policies
General information
Midatech Pharma plc (the ‘Company’) is a company registered and 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 The NASDAQ Capital Market.
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.
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.
Reclassification of 2016 and 2015 comparative operating costs
As the nature of the operations of the Group have changed over the last two years management has reviewed
how costs are presented on the income statement, allocated between:
• Research and development costs;
• Distribution costs, sales and marketing; and
• Administrative costs.
In order to give a clearer and more meaningful picture of activity within the business, certain costs, previously
shown within administrative costs have been reclassified as either research and development costs, or distribution
costs, sales and marketing. Comparative figures for 2016 and 2015 have been reclassified using the same allocation
basis as the 2017 results to provide consistency.
Research and development costs
Distribution costs, sales and marketing
Administrative costs
2016
reclassified
£’000
2016
original
£’000
2015
reclassified
£’000
7,796
12,510
5,123
6,684
9,523
9,222
8,710
605
4,908
2015
original
£’000
5,920
374
7,929
25,429
25,429
14,223
14,223
61
OverviewGovernanceStrategic ReportFinancial statements 1 Accounting policies continued
Adoption of new and revised standards
The Company has performed an assessment of the
impact of IFRS 15 and has concluded that:
A number of new standards, amendments to standards,
and interpretations are not effective for 2017, and
therefore have not been applied in preparing these
financial statements.
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 Group to record expected credit
losses on all of its debt securities, loans and trade
receivables, either on a 12-month or lifetime basis. The
Group expects to apply the simplified approach and
record lifetime expected losses on all trade receivables.
The Group plans to adopt the new standard on
the required effective date. The Company expects
no significant impact on its operating results or
financial position.
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
recognised 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.
IFRS 15 Revenue from contracts with customers amends
revenue recognition requirements and establishes
principles for reporting information regarding the
nature, amount, timing and uncertainty of revenue
and cash flows arising from contracts with customers.
The standard replaces IAS 18 Revenue and IAS 11
Construction contracts and related interpretations.
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 Group plans to adopt the new
standard on the required effective date.
• The Group’s ‘Revenue’ is largely derived from the
sale of pharmaceutical products and services, where
control transfers to customers and performance
obligations are satisfied at the time of shipment to
receipt of the products by the customer or when the
services are performed. There is no expectation for
IFRS 15 to significantly change the timing or amount
of revenue recognised under these arrangements.
• Grant Revenue is outside the scope of IFRS 15.
The Group will implement the new standard from
1 January 2018 and will apply the modified retrospective
method, which requires the recognition of the
cumulative effect of initially applying IFRS 15 as at
1 January 2018, to retained earnings and not restate prior
years. However, since the results of the Group’s impact
assessment indicates that IFRS 15 is not expected to
significantly change the amount or timing of revenue
recognition in 2017 or prior periods, an insignificant
cumulative adjustment to increase retained earnings
will be made.
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. 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 recognise 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
recognise the interest expense on the lease liability and
the depreciation expense on the right-of-use asset.
62
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 24 December 2015.
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)
PharMida AG
Midatech Pharma (Wales) Limited
(formerly Q Chip Limited)
Ultimate holding
company
Trading company
Trading company
Dormant
Trading company
Midatech Pharma US, Inc. (formerly
DARA Biosciences, Inc.)
Trading company
Dara Therapeutics, Inc.
Dormant
Midatech Pharma Pty
Trading company
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 recognise the amount of the re-measurement
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. 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 Group assessed the potential effect of
IFRS 16 on its consolidated financial statements. Refer
to Note 26 for further information on the Group’s
operating leases.
The current undiscounted operating lease commitments
of £848k as of 31 December 2017 and disclosed in Note
26 provide, subject to the provision of the standard, an
indicator of the impact of the implementation of IFRS 16
on the Group’s consolidated balance sheet.
Upon adoption of the new standard, a portion of the
annual operating lease costs, which is currently fully
recognised as a functional expense, will be recorded as
interest expense. In addition, the portion of the annual
lease payments recognised in the cash flow statement
as a reduction of the lease liability will be recognised as
an outflow from financing activities. Given the leases
involved and assuming the current low interest rate
environment continues, the Group does not currently
expect these effects to be significant.
There are no other IFRS standards or interpretations
not currently effective that would be expected to have
a material impact on the Group.
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.
63
OverviewGovernanceStrategic ReportFinancial statements 1 Accounting policies continued
Going concern
The Group and Parent Company are 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 2017 the Group had total equity of £34.7m
which includes an accumulated deficit of £74.7m, it
incurred a net loss for the year to 31 December 2017 of
£16.1m and used cash in operating activities of £13.0m
for the same period. As at 31 December 2017, the Group
had cash and cash equivalents of £13.2m.
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 and
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
the next five years. These forecasts show that further
financing is likely to be required during the course of the
next 12 months, assuming, inter alia, that all development
programmes continue as currently planned. This
requirement for additional financing represents a material
uncertainty that may cast significant doubt upon the
Group’s and Parent Company’s ability to continue as a
going concern, however, the Board is examining a range
of non-dilutive financing options to meet this near-term
cash need that, if successful, would enable the Group to
deliver on these key value-driving programmes without
requiring equity finance in the short-term.
If the Directors conclude that such funding is unlikely to
be available within the required timeframe, expenditure,
particularly in respect of the development programmes,
could be delayed, thereby extending the cash runway
beyond the period of 12 months from the date of
approval of these financial statements. Therefore, after
considering the uncertainties the Directors consider it is
appropriate to continue to adopt the going concern basis
in preparing these financial statements.
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. These criteria are considered to be met when
the goods are delivered to the buyer. Revenue 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.
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 programmes. 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.
64
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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.
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 distribution costs,
sales and marketing 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.
65
OverviewGovernanceStrategic ReportFinancial statements 1 Accounting policies continued
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 US Food and
Drug Administration: Zuplenz, Gelclair®, Oravig®
and Soltamox®.
The significant intangibles recognised by the Group
and their useful economic lives are as follows:
Goodwill
IPRD
– Indefinite life
– In process, not yet amortising
IT and website costs
– 4 years
Product and marketing rights – Between 2 and 13 years
The useful economic life of IPRD will be determined
when the in-process research projects are completed.
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.
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.
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 £1.5m was recognised in 2017 against the IPRD of
the Midatech Pharma (Wales) Ltd cash generating unit.
An impairment charge of £11.4m was recognised in
2016 against the product rights of Oravig, a product of
Midatech Pharma US.
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 2017 had two cash
generating units (2016: two, 2015: two), see Note 13.
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.
66
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 subsidiary 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 presentational currency of the Group 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.
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.
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 no profit and loss
impact during 2017 (2016: nil, 2015: nil).
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.
67
OverviewGovernanceStrategic ReportFinancial statements 1 Accounting policies continued
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
agreed 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.
68
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 share 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.
69
OverviewGovernanceStrategic ReportFinancial statements 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
–
25% per annum straight line
Leasehold improvements –
10% per annum straight line
Computer equipment
Laboratory equipment
–
–
25% per annum straight line
15%–25% 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.
Inventory is valued at the lower of cost or market value
using the FIFO method. Inventory is charged to the
income statement as cost of sales as it is sold.
2 Critical accounting estimates and
judgements
The preparation of these consolidated financial
statements requires the Group to make estimates,
assumptions and judgements 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 its
estimates, assumptions and judgements 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 judgements 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 judgements about matters that are uncertain.
70
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 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.
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.
The carrying value of acquired product and marketing
rights as at 31 December 2017 was £4.1m (Note 10).
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 goodwill was £13.4 m and
intangibles not yet ready for use was £10.1 m as
at 31 December 2017 (Note 10).
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 of goodwill in the year ended 31 December
2017 or in 2016, however there was an impairment charge
of £1.5m against the IPRD of Midatech Pharma (Wales) Ltd
cash generating unit. (2016: £11.4m against the Midatech
Pharma US product rights). See Note 13.
Share-based payments
The Group accounts for share-based payment
transactions for employees in accordance with IFRS 2
Share-based Payment, which requires the measurement
of 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.
71
OverviewGovernanceStrategic ReportFinancial statements 2 Critical accounting estimates and
judgements continued
3 Segment information
Gross sales
Gross sales of £11.24m in the year ended 31 December
2017 (2016: £8.66m, 2015: £0.91m) 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
Rest of Europe
United States
2017
£’000
2016
£’000
2015
£’000
79
–
70
6,609
6,758
491
–
35
5,850
6,376
–
73
25
677
775
In 2017, the Group had three customers, all in the
Commercial segment, that each accounted for at least
10% of total revenue (2016: three customers, 2015: one
customer in Pipeline R&D):
Customer A
(Pipeline R&D)
Customer B
(Commercial)
Customer C
(Commercial)
Customer D
(Commercial)
2017
2016
–
–
2015
11%
20%
20%
17%
15%
13%
10%
–
–
–
The assumptions used for estimating fair value for
share-based payment transactions are disclosed in
Note 28 to our consolidated financial statements and
are estimated as follows:
• Volatility is estimated based on the average
annualized 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.
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 judgement 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 2017, there were approximately £38.4m of gross
unutilised tax losses carried forward (2016: £27.0m 2015:
£23.3m). 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 preclinical activities,
drug development and manufacturing costs, and
third-party service fees, including for clinical research
organizations 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.
72
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 results represent 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.
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 2017
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
Loss from operations
Finance income
Finance expense
Loss before tax
Taxation
Loss for the year
Pipeline R&D
£’000
Commercial
£’000
Consolidated
£’000
108
840
948
108
840
948
–
(9,830)
(744)
(1,685)
(974)
(193)
(1,500)
11,131
–
11,131
6,650
–
6,650
(926)
(355)
(7,096)
(480)
(9)
(1,384)
–
11,239
840
12,079
6,758
840
7,598
(926)
(10,185)
(7,840)
(2,165)
(983)
(1,577)
(1,500)
(13,978)
(3,600)
(17,578)
415
(166)
(17,329)
1,265
(16,064)
73
OverviewGovernanceStrategic ReportFinancial statements 3 Segment information continued
Segmented results for the year ended 31 December 2016
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Research and development costs (reclassified)
Distribution costs, sales and marketing (reclassified)
Administrative costs (reclassified)
Depreciation
Amortisation
Impairment
Loss from operations
Finance income
Finance expense
Loss before tax
Taxation
Loss for the year
Pipeline R&D
restated
£’000
Commercial
restated
£’000
Consolidated
restated
£’000
776
547
1,323
776
547
1,323
(9)
(7,786)
(396)
(2,279)
(762)
(193)
–
7,883
–
7,883
5,600
–
5,600
(658)
(10)
(8,531)
(2,072)
(10)
(3,390)
(11,413)
8,659
547
9,206
6,376
547
6,923
(667)
(7,796)
(8,927)
(4,351)
(772)
(3,583)
(11,413)
(10,102)
(20,484)
(30,586)
1,337
(73)
(29,322)
9,160
(20,162)
74
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 Segmented results for the year ended 31 December 2015
Pipeline R&D
£’000
Commercial
£’000
Unallocated
Costs(1)
£’000
Consolidated
£’000
Gross sales
Grant revenue
Total gross revenues
Revenue
Grant revenue
Total revenue
Cost of sales
Research and development costs (reclassified)
Distribution costs, sales and marketing (reclassified)
Administrative costs (reclassified)
Depreciation
Amortisation
Loss from operations
Finance income
Finance expense
Loss before tax
Taxation
Loss for the year
273
600
873
273
600
873
–
(8,601)
–
(1,151)
(500)
(5)
(9,384)
641
–
641
502
–
502
(70)
(109)
(369)
(265)
(1)
(231)
(543)
–
–
–
–
–
–
–
–
(2,991)
–
–
914
600
1,514
775
600
1,375
(70)
(8,710)
(369)
(4,407)
(501)
(236)
(2,991)
(12,918)
1,691
(5)
(11,232)
1,133
(10,099)
(1) There were no unallocated costs in 2017 or 2016. Unallocated costs in 2015 represent fees associated with the acquisitions of Midatech Pharma US, Inc. and
Zuplenz in 2015.
Non-current assets by location of assets
Spain
United Kingdom
United States
2017
£’000
2,154
2016
£’000
2,125
2015
£’000
1,433
15,331
16,489
14,019
13,156
15,772
28,258
30,641
34,386
43,710
All material additions to non-current assets in 2017, 2016 and 2015 were in the Pipeline R&D segment.
75
OverviewGovernanceStrategic ReportFinancial statements 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 – product and marketing rights
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 advisory
– Other services
Operating lease expense:
– Property
– Plant and machinery
Foreign exchange(gain)/loss
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
2017
£’000
2016
£’000
2015
£’000
202
–
983
1,577
1,500
110
140
–
–
100
277
–
(39)
–
27
–
256
287
772
3,583
11,413
100
139
–
–
72
385
194
31
–
–
–
520
203
62
–
501
236
–
100
115
438
7
36
246
86
(23)
2,553
–
(165)
170
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 costs, sales and marketing expenses.
5 Staff costs
Staff costs (including Directors) comprise:
Wages and salaries
Defined contribution pension cost (Note 27)
Social security contributions and similar taxes
Share-based payment
2017
£’000
2016
£’000
2015
£’000
5,278
6,314
3,731
158
643
520
206
769
203
183
431
170
6,599
7,492
4,515
76
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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
(reclassified)
2015
(reclassified)
2017
62
17
6
85
57
19
8
84
45
22
7
74
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 34, 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
2017
£’000
811
68
142
97
3
388
2016
£’000
1,054
59
142
152
2
184
2015
£’000
850
59
223
88
7
170
1,509
1,593
1,397
Emoluments disclosed above include the following amounts in respect of the highest paid Director. Directors’
emoluments are disclosed on page 41.
Salary
Total pension and other post-employment benefit costs
Benefits in kind
2017
£’000
299
10
1
310
2016
£’000
448
28
1
477
2015
£’000
347
24
6
377
None of the Directors have exercised share options during the year (2016: Nil, 2015: Nil).
During the year, two Directors (2016: two, 2015: two) participated in a defined contribution pension scheme.
77
OverviewGovernanceStrategic ReportFinancial statements 6 Finance income and expense
Finance income
Interest received on bank deposits
Gain on equity settled derivative financial liability
Total finance income
2017
£’000
2016
£’000
2015
£’000
15
400
415
164
1,173
1,337
53
1,638
1,691
The gain on the equity settled derivative financial liability in 2017 has arisen due to the reduction in the share price
and the lapsing of warrants and options as it did in 2016.
Finance expense
Bank loans
Other loans
Arrangement Fees
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 (Note 23)
Total tax credit
2017
£’000
2016
£’000
2015
£’000
18
91
57
166
16
57
–
73
2
3
–
5
2017
£’000
2016
£’000
2015
£’000
1,253
1,936
1,002
–
(25)
–
1,253
1,911
1,002
12
1,265
7,249
9,160
131
1,133
78
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 19.25% (2016: 20.25%, 2015:20.25%)
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
Reversal of deferred tax on impairment
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
2017
£’000
2016
£’000
2015
£’000
(17,329)
(29,322)
(11,232)
(3,336)
(5,864)
(2,274)
412
1,022
–
–
–
4
(1,196)
(1,503)
–
(3,421)
(156)
(84)
3,095
(166)
712
491
–
(435)
185
(8)
(789)
406
–
(78)
–
1,425
–
(1,265)
(9,160)
(1,133)
The taxation credit arises on the enhanced research and development tax credits accrued for the respective periods.
8 Loss per share
Numerator
2017
£’000
2016
£’000
2015
£’000
Loss used in basic EPS and diluted EPS
(16,064)
(20,162)
(10,099)
Denominator
Weighted average number of Ordinary Shares used in basic EPS
51,317,320 36,072,752 28,229,814
Basic and diluted loss per share – pence
(31p)
(56p)
(36p)
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 the same for all of the periods presented.
79
OverviewGovernanceStrategic ReportFinancial statements 9 Property, plant and equipment
At 1 January 2015
Additions
Acquired through acquisition of subsidiary
Exchange differences
At 31 December 2015
Additions
Disposal
Transfer
Exchange differences
At 31 December 2016
Additions
Disposal
Exchange differences
At 31 December 2017
Accumulated depreciation
At 1 January 2015
Charge for the year
Exchange differences
At 31 December 2015
Charge for the year
Transfer
Exchange differences
At 31 December 2016
Charge for the year
Disposals
Exchange differences
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 31 December 2015
At 1 January 2015
Total
£’000
2,860
1,024
16
(132)
3,768
1,369
(1)
–
422
5,558
707
(41)
151
Total
£’000
1,344
501
(61)
1,784
772
–
236
Fixtures
and fittings
£’000
Leasehold
improvements
£’000
Computer
equipment
£’000
Laboratory
equipment
£’000
1,202
183
–
(66)
1,319
2
–
(1,125)
32
228
18
–
6
252
880
283
–
(51)
1,112
715
–
–
172
1,999
41
–
72
195
173
–
(14)
354
43
(1)
(122)
7
281
57
–
4
583
385
16
(1)
983
609
–
1,247
211
3,050
591
(41)
69
2,112
342
3,669
6,375
Fixtures
and fittings
£’000
Leasehold
improvements
£’000
Computer
equipment
£’000
Laboratory
equipment
£’000
479
3
(24)
458
41
(369)
19
149
43
–
4
196
56
79
861
723
479
282
(28)
733
134
(96)
101
872
330
–
36
1,238
874
1,127
379
401
140
48
(8)
180
54
(118)
6
122
68
–
2
192
150
159
174
55
246
168
(1)
413
543
583
110
1,649
2,792
542
(14)
43
983
(14)
85
2,220
3,846
1,449
1,401
570
337
2,529
2,766
1,984
1,516
Included within the total net book value of tangible fixed assets is £63k (2016: £33k, 2015: £266k) in respect of assets
held under finance leases and similar hire purchase contracts. The depreciation charge for the year on these assets
was £62k (2016: £22k, 2015: £26k). 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.
80
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 10 Intangible assets
Cost
At 1 January 2015
Additions
Acquired in business combinations
Foreign exchange
At 31 December 2015
Additions
Foreign exchange
Disposals
In-process
research and
development
£’000
Product and
marketing
rights
£’000
Goodwill
£’000
IT/Website
costs
£’000
12,600
–
–
–
12,600
–
–
–
–
–
17,989
332
18,321
–
3,160
–
2,291
–
9,952
213
12,456
–
2,032
–
12
3
–
–
15
19
–
(8)
26
–
1
27
At 31 December 2016
12,600
21,481
14,488
Additions
Foreign exchange
At 31 December 2017
778
–
–
–
(1,625)
(1,044)
13,378
19,856
13,444
Accumulated amortisation
At 1 January 2015
Amortisation charge for the year
Foreign exchange
At 31 December 2015
Amortisation charge for the year
Impairment
Foreign exchange
At 31 December 2016
Amortisation charge for the year
Impairment
Foreign exchange
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 31 December 2015
At 1 January 2015
In-process
research and
development
£’000
Product and
marketing
rights
£’000
Goodwill
£’000
IT/Website
Costs
£’000
1,800
–
–
1,800
–
–
–
1,800
–
1,500
–
3,300
10,078
10,800
10,800
10,800
–
235
8
243
3,578
11,413
374
15,608
1,574
–
(1,443)
15,739
4,117
5,873
18,078
–
–
–
–
–
–
–
–
–
–
–
–
–
13,444
14,488
12,456
2,291
9
1
–
10
5
–
–
15
3
–
1
19
8
11
5
3
Total
£’000
14,903
3
27,941
545
43,392
19
5,192
(8)
48,595
778
(2,668)
46,705
Total
£’000
1,809
236
8
2,053
3,583
11,413
374
17,423
1,577
1,500
(1,442)
19,058
27,647
31,172
41,339
13,094
81
OverviewGovernanceStrategic ReportFinancial statements 10 Intangible assets continued
The individual intangible assets, excluding goodwill, which are material to the financial statements are:
Carrying amount
Remaining amortisation period
2017
£’000
2016
£’000
2015
£’000
2017
(years)
2016
(years)
2015
(years)
Midatech Pharma (Wales) Limited acquired IPRD
9,300
10,800
10,800
n/a in
process
n/a in
process
n/a in
process
Midatech Pharma US, Inc., product and
marketing rights
Zuplenz product and marketing rights
MTX110 acquired IPRD
1,995
3,557
15,570 Between
1 and 3
Between
1 and 4
Between
2 and 5
2,122
778
2,316
2,508
11
–
–
n/a in
process
12
–
13
–
14,195
16,673
28,878
11 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 have become payable (up to a
maximum of £3.85m/$5.7m) if specified sales milestones had been achieved for the years ended 31 December 2016
and 2017, however, these milestones were not met.
82
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 2015 in respect of the acquisition of the subsidiary comprised:
Cash paid on completion – preferred share redemption
Net cash acquired
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
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.
83
OverviewGovernanceStrategic ReportFinancial statements 11 Acquisition of Midatech Pharma US, Inc. continued
As at 31 December 2017 there were DARA options outstanding over 134,670 Midatech Ordinary Shares (2016:
300,728, 2015: 721,000) with a weighted average exercise price of $6.69 per share (2016: $7.19, 2015: $7.62), within
a range of $2.54 to $644.12 (2016: $2.54 to $770.59, 2015: $2.54 to $770.59), and a weighted average remaining
contractual life of 6.7 years (2016: 7.7 years, 2015: 8.5 years). The risk-free rate ranged from 0.00% to 1.08% (2016:
0.00% to 1.14%, 2015: 0.63% to 1.81%), volatility of 42.5% (2016: 60% to 77%, 2015: 59% to 79%) and the expected
life from 0.3 to 7.8 years (2016: 0.8 to 8.8 years, 2015: 1.9 to 8.6 years). The exercise of all options would raise
additional cash of $0.90m (2016: $2.16m, 2015: $5.50m).
Also at 31 December 2017 there were DARA warrants outstanding over 2,528,455 Midatech Ordinary Shares (2016:
3,017,773, 2015: 3,034,437) with a weighted average exercise price of $7.45 per share (2016: $9.44, 2015: $9.67),
within a range of $3.05 to $24.08 (2016: $3.06 to $27.58, 2015: $3.06 to $164.71), and a weighted average remaining
contractual life of 1.4 years (2016: 2.1 years, 2015: 3.1 years). The risk-free rate ranged from 0.00% to 0.71% (2016:
0.00% to 0.71%, 2015: 0.44% to 1.63%), volatility of 42.5% (2016: 60% to 66%, 2015: 59% to 79%) and the expected
life from 0.1 to 4.9 years (2016: 0.1 to 5.9 years, 2015: 0.1 to 7.0 years). The exercise of all warrants would raise
additional cash of $18.84m (2016: $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 21.
12 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
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 was $26.0m however, the 2016 and 2017 sales targets were
not achieved and management does not consider it likely that the 2018 to 2022 sales targets will be achieved either.
84
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 quantify 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
13 Impairment testing
Midatech Pharma (Wales) Ltd
£’000
2,528
Details of goodwill and IPRD allocated to the acquired cash generating unit and the valuation basis are as follows:
Indefinite lived
IPRD carrying amount
Goodwill carrying amount
Name
2017
£’000
2016
£’000
2015
£000
CGU – Midatech Pharma (Wales) Ltd
9,300
10,800
10,800
2017
£’000
2,291
2016
£’000
2,291
2015
£000
Valuation
Basis
2,291 Value in use
The assets of the Midatech Pharma Wales Ltd (‘MPW’) CGU were valued as at 31 December 2017 and 31 December
2016 and were found to support the IPRD and goodwill carrying amounts set out above. The IPRD was valued using
13–14 year (2016: 14–15 year, 2015: 15–16 years), risk adjusted cash flow forecasts, in line with patent life, that have
been approved by the Board. A period longer than 5 years is appropriate on the basis that the investment is long-term
and the development and commercialisation process is typically in excess of 5 years. Beyond the period from product
launch and initial market penetration, a long-term growth rate of 5% was used.
In 2017 an impairment charge of £1.5m was recorded in the MPW CGU as a result of the impairment of the
Opsisporin IPRD, primarily due to a strategic review concluding that the product is outside of Midatech’s strategic
focus and as a result the decision was made not to continue with the programme at this point. At the same time
the carrying value of a component of IPRD was reduced from £1.5m to nil. The resulting charge was recorded in
research and development expenditure within the consolidated statement of income.
The key assumptions used in the valuation model examining the MPW Ltd cash generating unit include
the following:
Assumptions
Pre-tax discount rate
Cumulative probability of success of projects
2017
17.9%
2016
2015
18.1% 17.7% to 19.5%
81% 46% to 81% 46% to 69%
The discount rate is an estimated market-based weighted average cost of capital for the MPW business, determined
at the date of acquisition. Cumulative probability of success of projects is the product of the probability of success
of each remaining major phase of development for each individual IPRD component. These phase probabilities were
determined by management with reference to the risks associated with each remaining development stage.
85
OverviewGovernanceStrategic ReportFinancial statements 13 Impairment testing continued
Sensitivity analysis
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.
Assumptions
Pre-tax discount rate for all projects
Cumulative probability of success of projects
Midatech Pharma US, Inc
2017
2016
2015
increase
to 21.0%
increase
to 26.4%
increase
to 23.9%
57%
53%
44%
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
Goodwill carrying amount
Name
CGU – Midatech Pharma US, Inc
2017
£’000
1,995
2016
£’000
3,557
2015
£’000
15,477
2017
£’000
11,152
2016
£’000
2015
£’000
Valuation
Basis
12,197
10,165
Value in use
The change in the goodwill carrying value as at 31 December 2017 is due to the movement in the Sterling and US
Dollar exchange rate used to translate the underlying US Dollar value of goodwill, 2017: $1.349, (2016: $1.233).
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 separately within the consolidated statement of
comprehensive income.
The remaining assets of the MPUS CGU, including Zuplenz, were valued as at 31 December 2017 and 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 3% was used for all assets except Zuplenz where 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 examining the Midatech Pharma US, Inc. cash generating unit include
the following:
Assumptions
Pre-tax discount rate
Overall CGU 10-year growth rate
2017
19.7%
26.4%
2016
24.7%
10.6%
The increase in the overall growth rate reflects the addition of the Group’s development products, Q Octreotide and
MTX110 into the MPUS portfolio once they have been approved and launched.
86
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 3% long-term growth rate, or 5% for Zuplenz.
Sensitivity analysis
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.
Assumptions
Pre-tax discount rate
Overall CGU 10-year growth rate
2017
2016
increase to 53.7%
increase to 25.2%
5.0%
10.5%
The sensitivity analysis assumes that Q Octreotide and MTX110 are not added into the MPUS portfolio and the
resulting 2017 growth rate of 5%, required for the carrying value and recoverable amount to be equal, is derived
exclusively from the current product portfolio.
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.
14 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
Midatech Limited
Registered Office
Nature of Business
Notes
65 Innovation Drive, Milton Park, Milton,
Abingdon, Oxfordshire, OX14 4RQ
Trading company
Midatech Pharma (Espana) SL
PharMida AG
Parque Tecnológico de Vizcaya, Edificio
800 Planta 2, Derio, 48160, Vizcaya, Spain
c/o Kellerhals, Hirschgässlein 11, 4051
Basel, Switzerland
Trading company
(a)
Dormant
(a) (b)
Midatech Pharma (Wales) Limited Oddfellows House, 19 Newport Road,
Trading company
Cardiff, CF24 0AA
Midatech Pharma US, Inc.
8601 Six Forks Road, Suite 160, Raleigh,
North Carolina 27615, USA
Trading company
Dara Therapeutics, Inc.
Midatech Pharma PTY
8601 Six Forks Road, Suite 160, Raleigh,
North Carolina 27615, USA
Dormant
c/o Griffith Hack Consulting, 300 Queen
Street, Brisbane, QLD 4000, Australia
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.
87
OverviewGovernanceStrategic ReportFinancial statements 15 Joint arrangements
Name
Syntara LLC
Country of
incorporation
USA
Nature of business
Type of arrangement
Dormant
Joint venture
MidaSol Therapeutics GP
Cayman Islands
Research and development partner
Joint operation
The Group has a 50% (2016: 50%; 2015: 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.
Research and development spend on MidaSol Therapeutics
Year-end receivable due from joint operation partner
16 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
2017
£’000
2016
£’000
–
–
–
–
2017
£’000
2,232
627
848
2016
£’000
1,428
586
873
2015
£’000
776
219
2015
£’000
985
685
1,213
3,707
2,887
2,883
(465)
(448)
(387)
3,242
2,439
2,496
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 2017, 2016 and 2015.
88
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 17 Cash and cash equivalents and cash flow supporting notes
Cash and cash equivalents for purposes of the consolidated statement of cash flows comprises:
Cash at bank available on demand
There were no significant non-cash transactions during the year.
2017
£’000
13,204
2016
£’000
17,608
2015
£’000
16,175
During the year, cash inflows arose from an equity financing transaction, included within financing activities on the
face of the cash flow statement.
Funds raised on Public Offering
Costs of raising funds on Public Offering
2017
£’000
6,157
(429)
5,728
2016
£’000
16,673
(1,105)
15,568
The following changes in liabilities arose as a result of financing activities during the year:
At 1 January 2017
Cash Flows
Foreign Exchange
At 31 December 2017
18 Inventories
Work in progress
Finished goods
Total inventories
Non-current
liabilities,
borrowings
£’000
Current
liabilities,
borrowings
£’000
–
5,249
(42)
5,207
2017
£’000
–
941
941
23
(12)
–
11
2016
£’000
–
817
817
2015
£’000
–
–
–
Total
£’000
23
5,237
(42)
5,218
2015
£’000
230
229
459
A reserve is maintained against inventory that is not expected to be sold before its sell by date. The resulting charge
to the comprehensive statement of income for the year was £151k (2016: £287k, 2015: Nil).
89
OverviewGovernanceStrategic ReportFinancial statements 19 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
2017
£’000
2,271
1,141
3,090
6,502
359
1,141
2016
£’000
3,268
1,166
2,003
6,437
670
1,300
8,002
8,407
2015
£’000
2,285
35
3,101
5,421
183
1,480
7,084
Book values approximate to fair value at 31 December 2017, 2016 and 2015.
All current trade and other payables are payable within 3 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 in February 2015 and is scheduled to complete in January 2019. £840k
(2016: £547k) of revenue has been recognised during the year in relation to this project and £1.11m (2016: £1.24m)
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 20 as borrowings, the gross contractual
repayment of the loans is disclosed in Note 22.
90
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 20 Borrowings
Current
Bank loans
Finance lease
Government and research loans
Total
Non-current
Bank loans
Finance lease
Government and research loans
Total
2017
£’000
2016
£’000
2015
£’000
11
39
311
361
5,207
29
949
6,185
23
31
484
538
–
52
1,568
1,620
9
70
363
442
20
68
1,420
1,508
Book values approximate to fair value at 31 December 2017, 2016 and 2015.
Obligations under finance leases are secured by a fixed charge over the fixed assets to which they relate.
The Group had $8.0m of undrawn committed borrowing facilities at year end.
Midcap Loan Facility
In December 2017, Midatech Pharma entered into a secured loan agreement with Midcap Financial Trust (MidCap).
The total facility is for $15.0m to be drawn down in three separate tranches. Interest is charged on the outstanding
balance of the loan at an annual rate of LIBOR plus 7.5% subject to a LIBOR floor of 1.25%. MidCap was granted
247,881 warrants to purchase shares which was equal to 2% of the amount funded divided by the Exercise Price of
£0.42. The Exercise Price was calculated as the average closing price for the 30-day period prior to the date of grant.
The loan is secured against the assets of the Group.
The first tranche of $7.0m was drawn down on 28 December 2017 and is disclosed under bank loans.
91
OverviewGovernanceStrategic ReportFinancial statements 21 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
2017
£’000
–
400
2016
£’000
400
1,573
2015
£’000
1,573
3,211
(400)
(1,173)
(1,638)
–
400
1,573
Equity settled derivative financial liability is a liability that is not 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 22. 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 credited to finance income in 2015.
At 31 December 2016, some 398,315 options and 16,664 warrants had lapsed, as described in Note 11. 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.
At 31 December 2017 a further 166,058 options and 489,318 warrants had lapsed and the share price had fallen to
£0.36 which results in a gain of £0.40m on re-measurement which was credited to finance income during 2017.
22 Financial instruments – risk management
The Group is exposed through its operations to the following financial risks:
• Credit risk.
• Foreign exchange risk.
• 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.
92
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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.
• Derivative financial liability.
A summary of the financial instruments held by category is provided below:
Financial assets – loans and receivables
2017
£’000
2016
£’000
2015
£’000
13,204
17,608
16,175
2,232
848
1,428
873
985
1,213
16,284
19,909
18,373
2017
£’000
2,271
1,141
3,090
6,546
2016
£’000
3,268
1,166
2,003
2,158
2015
£’000
2,285
35
3,101
1,950
7,371
2015
£’000
1,573
Cash and cash equivalents
Trade receivables
Other receivables
Total financial assets
Financial liabilities – amortised cost
Trade payables
Other payables
Accruals
Borrowings
Total financial liabilities – amortised cost
13,048
8,595
Financial liabilities – fair value through profit and loss – current
Equity settled derivative financial liability
General objectives, policies and processes
2017
£’000
–
2016
£’000
400
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.
93
OverviewGovernanceStrategic ReportFinancial statements 22 Financial instruments – risk management continued
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 derivative financial liability is measured at fair value on a recurring basis.
The following table gives information about how the fair value of this financial liability is determined, additional
disclosure is given in Note 11:
Financial
liabilities
Equity
settled
financial
derivative
liability.
Fair
value as at
31/12/2017
–
Fair value
hierarchy
Level 3
Valuation
technique(s)
and key input(s) Significant unobservable input(s)
Black Scholes
option pricing
model.
Volatility rate of 42.5% 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.
Given that the fair value of the equity settled financial derivative liability is nil, it is not sensitive to changes in
volatility or expected life. In 2016, if the above unobservable volatility input to the valuation model had been 10%
higher while all other variables were held constant, the carrying amount of shares would have increased by £94k.
If the above unobservable expected life input to the valuation model had been 1 year shorter while all other
variables were held constant, the carrying amount of shares would have decreased by £133k.
Changing the unobservable risk free rate input to the valuation model by 10% higher while all other variables were
held constant, would not impact the carrying amount of shares (2016: increase by £2k).
There were no transfers between Level 1 and 2 in the period.
The financial liability measured at fair value on Level 3 fair value measurement represents consideration relating
to a business combination.
94
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 16. 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.
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
2017
£’000
2016
£’000
2015
£’000
6,116
5,362
1,632
94
10,229
14,494
2,186
5,143
50
819
862
–
13,204
17,608
16,175
95
OverviewGovernanceStrategic ReportFinancial statements 22 Financial instruments – risk management continued
The table below shows the foreign currency exposure that give rise to net currency gains and losses recognised
in the consolidated statement of comprehensive income. 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 2017, these exposures were as follows:
Net Foreign Currency Assets/(Liabilities):
US Dollar
Euro
Other
Total
2017
£’000
2016
£’000
2015
£’000
4,459
(206)
(1,691)
(362)
2,655
95
58
77
(8)
4,192
2,507
(1,622)
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 2017
Loss before tax
Total equity
Year ended 31 December 2016
Loss before tax
Total equity
US Dollar
£’000
Euro
£’000
Other
£’000
307
307
(89)
(89)
–
–
US Dollar
£’000
Euro
£’000
Other
£’000
521
521
(73)
(73)
(55)
(55)
In the year ended 31 December 2015, 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.
96
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 Q4 2017, as disclosed in Note 20, Midatech entered into a secured loan agreement with MidCap to reduce its
short to medium-term funding risk. This loan is secured against all assets of the Group.
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:
2017
Trade and other payables
Bank loans
Finance leases
Government research loans
Total
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
Up to 3
months
£’000
6,502
120
16
43
6,681
Up to 3
months
£’000
6,437
3
7
–
6,447
Up to 3
months
£’000
5,421
2
7
36
5,466
Between
3 and 12
months
£’000
–
359
25
268
649
Between
3 and 12
months
£’000
–
8
26
449
483
Between
3 and 12
months
£’000
–
7
71
352
430
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
–
2,201
30
467
2,698
–
3,926
–
545
4,471
–
–
–
47
47
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
–
11
30
269
310
–
4
33
761
798
–
–
–
393
393
Between
1 and 2 years
£’000
Between
2 and 5 years
£’000
Over
5 years
£’000
–
9
27
195
231
–
13
56
644
713
–
–
–
755
755
97
OverviewGovernanceStrategic ReportFinancial statements 22 Financial instruments – risk management continued
More details with regard to the line items above are included in the respective notes:
• Trade and other payables – Note 19.
• Loans and borrowings – Note 20.
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.
98
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 23 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
2017
£’000
–
–
–
–
–
–
2016
£’000
6,547
–
(5,509)
(1,740)
702
–
2015
£’000
354
6,191
–
(131)
133
6,547
The movement on the deferred tax account in 2017 is Nil as the net credit arising on the amortisation of intangible
assets and other timing differences has been matched by a reduction in the deferred tax asset recognised on the
losses offsetting the liability remaining.
A deferred tax liability has arisen due to deferred tax on intangible assets acquired in 2015.
An intangible asset was impaired in the financial statements for the year ended 31 December 2016 by £11.4m 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 2015
31 December 2016
31 December 2017
Unrecognised
deferred tax
asset
£’000
4,191
5,049
6,639
Gross losses
£’000
23,286
26,956
38,377
With the exception of the £2.6m (2016: £3.7m: 2015: £1.6m) 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 of £9.5m (2016: £8.1m) has not been provided in these accounts due to
uncertainty as to the whether the asset would be recovered.
99
OverviewGovernanceStrategic ReportFinancial statements 23 Deferred tax continued
Details of the deferred tax liability are as follows:
2017
Business Combinations
2016
Business Combinations
2015
Business Combinations
24 Share Capital
Authorised, allotted
and fully paid – classified
as equity
At 1 January
Ordinary Shares
of £0.00005 each
Asset
£’000
2,599
Asset
£’000
3,668
Asset
£’000
1,625
Liability
£’000
(2,599)
Liability
£’000
(3,668)
Liability
£’000
(8,172)
Net
£’000
–
Net
£’000
–
Net
£’000
(6,547)
2017
Number
2017
£
2016
Number
2016
£
2015
Number
2015
£
61,084,135
3,054
48,699,456
2,435
33,467,504
1,673
Deferred Shares of £1 each
1,000,001
1,000,001
1,000,001
1,000,001
1,000,001
1,000,001
Total
1,003,055
1,002,436
1,001,674
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 following 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; and
(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; and
(b) shall not be entitled to receive any dividend or other distribution of out of the profits of the Company.
100
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 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 1.0p for all the Deferred Shares.
Ordinary
Shares
Number
Deferred
Shares
Number
Share Price
£
Total
consideration
£’000
2015
As at 1 January 2015
27,794,258
1,000,001
24 April 2015
Exercise of employee share options
25 September 2015
Exercise of employee share options
4 December 2015
Share issue on acquisition of DARA
BioSciences, Inc.
23 December 2015
Deferred consideration re: acquisition
of Q Chip Limited
16,500
10,000
5,422,028
224,718
–
–
–
–
0.00005
0.00005
32,000
–
–
2.63
14,240
2.67
600
As at 31 December 2015
33,467,504 1,000,001
46,840
2016
1 July 2016
31 October 2016
Deferred consideration re: acquisition
of Q Chip Limited
Placing and Open Offer (costs shown
in Note 17)
74,908
15,157,044
–
–
2.67
200
1.10
16,673
As at 31 December 2016
48,699,456 1,000,001
2017
19 May 2017
Share issue to SIPP trustee (see Note 28)
20,000
16 October 2017
Placing and Open Offer (shown in Note 17) 12,314,679
7 November 2017
Share issue to SIPP trustee (see Note 28)
50,000
–
–
–
0.00005
0.5
0.00005
As at 31 December 2017
61,084,135
1,000,001
63,713
1
6,157
3
69,874
101
OverviewGovernanceStrategic ReportFinancial statements 25 Reserves
The following describes the nature and purpose of each reserve within equity:
Reserve
Share premium
Merger reserve
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 to be issued
Shares for which consideration has been received but which are not yet issued and which
form part of consideration in a business combination.
Foreign exchange reserve
Gains/losses arising on retranslating the net assets of overseas operations into Sterling.
Accumulated deficit
All other net gains and losses and transactions with owners (e.g. dividends) not
recognised elsewhere.
26 Leases
The Group had commitments under non-cancellable operating leases as set out below:
2017
Expiring in one year or less
Expiring between one and five years
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
27 Retirement benefits
Land and
buildings
£’000
449
359
808
Land and
buildings
£’000
371
449
820
Land and
buildings
£’000
313
410
723
Other
£’000
8
32
40
Other
£’000
7
28
35
Other
£’000
1
2
3
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.
102
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 28 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:
At 1 January
2017
Granted in
2017
Exercised in
2017
Forfeited in
2017
At 31
December
2017 Exercise Price
Date of grant
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
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,000
–
–
–
–
3,000
3,000
3,000
–
–
26,122
3,000
25,110
41,766
3,000
35,796
200,000
880,000
2,000
50,000
607,600
8,000
10,000
–
–
–
40,000
40,000
95,000
102,000
5,750
1,104,250
–
1,351,250
(110,750)
4,529,894
19 December 2016
1,110,000
15 December 2017
–
1,351,250
3,289,394
1,351,250
Options exercisable at 31 December 2017
Weighted average exercise price of outstanding options at 31 December 2017
Weighted average exercise price of options exercised in 2017
Weighted average exercise price of options forfeited in 2017
Weighted average exercise price of options granted in 2017
Weighted average remaining contractual life of outstanding options at 31 December 2017
£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
£0.46
1,000,469
£1.003
n/a
£1.242
£0.46
8.3 years
103
OverviewGovernanceStrategic ReportFinancial statements 28 Share-based payments continued
At 1 January
2016
Granted in
2016
Exercised in
2016
Forfeited in
2016
At 31
December
2016 Exercise Price
Date of grant
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
1,232,294
2,071,600
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(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
(14,500)
3,289,394
£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
468,194
£1.234
n/a
£3.446
£1.685
8.6 years
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
104
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017 £1.425
£3.985
£4.00
£4.19
£4.19
£4.19
£0.075
£0.075
£0.075
£0.075
366,044
£0.502
£0.075
£4.193
n/a
7.8 years
Date of grant
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
At 1 January
2015
Granted in
2015
Exercised in
2015
Forfeited in
2015
At 31
December
2015 Exercise Price
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)
–
–
–
–
–
–
(17,900)
–
–
–
–
–
26,122
15,500
25,110
41,766
3,000
35,796
–
200,000
880,000
(6,000)
5,000
(26,500)
(23,900)
1,232,294
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
All of the 1,351,250 options granted during 2017, contain the following conditions:
• 25% (i.e. 337,812 options) become eligible to vest on the first anniversary of the relevant date of grant;
• A further 6.25% (i.e. 84,453 options) vest every three months following the first anniversary of the date of
grant such that by the fourth anniversary all 1,351,250 options shall have be eligible for vesting; and
• All vesting is subject to the 20-VWAP share price reaching £1 at any time during the life of the option.
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;
• 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; and
• 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 contained the following conditions:
• Vesting was conditional on the same time-based vesting criteria noted above and also on the Midatech Pharma
US, Inc. business achieving a revenue target for the year ended 31 December 2017. This target was not met and
the options have therefore lapsed.
105
OverviewGovernanceStrategic ReportFinancial statements 28 Share-based payments continued
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.
The following information is relevant in the determination of the fair value of options granted during the year 2017
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
2017
1,351,250
Monte-Carlo
£0.41*
£0.46
10 years
5 years
42.5%**
0%
0.73%
* The share price used in the determination of the fair value of the options granted in 2017 was the share price 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 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.
All other share options relate to the Midatech Limited 2008 unapproved share option scheme.
106
Notes Forming Part of the Financial Statements continuedfor the year ended 31 December 2017Midatech Pharma plcAnnual Report & Accounts 2017
Share Incentive Plan
In April 2017 the Group set up the Midatech Pharma Share Incentive Plan (MPSIP). Under the MPSIP, Group
employees and Directors can acquire Ordinary Shares in the Company via a salary sacrifice arrangement. Midatech
grants matching shares for every share bought. In order to retain these shares, scheme participants must remain
employed by the Group for three years from the date of acquisition. All shares purchased by the MPSIP are held by
an Employee Benefit Trust that is not under the control of Midatech. Shares must be left in the plan for 5 years to
qualify for full income tax and NIC relief.
29 Capital commitments
The Group had no capital commitments at 31 December 2017, 31 December 2016 and 31 December 2015.
30 Related party transactions
Details of Directors’ remuneration are given on page 41 and in Note 5.
Transactions with Monosol RX, LLC
The Directors considered Monosol RX, LLC (‘Monosol’) to be a related party by virtue of the fact that Monosol was
a shareholder of the Company and a collaborative partner in the MidaSol Therapeutics joint operation.
During the prior period, due to cessation of activities within the MidaSol joint operation no monies were receivable
from Monosol (2016: nil, 2015: £317K) for research services. Amounts receivable in prior years were credited to
research and development expenditure. The year-end receivable due from Monosol was nil (2016: nil, 2015: £219K).
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 in 2016 of £187.7k, payable to Monosol (2015: nil). The 2016 year-
end payable to Monosol was £48.7k (2015: nil).
Transactions with Preci-Health
The Directors consider Preci-Health SA (‘Preci-Health’) to be a related party by virtue of the fact that there is a
common Director with the Company.
During the year, £44.4k was invoiced to Preci-Health for research services, and credited to revenue. This was paid
by Preci-Health during the year. There were no transactions with Preci-Health in earlier periods.
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 2017, 2016 or 2015 regarding related party transactions.
31 Contingent liabilities
The Group had no contingent liabilities at 31 December 2017, 31 December 2016 and 31 December 2015.
32 Ultimate controlling party
The Directors do not consider that there is an ultimate controlling party.
107
OverviewGovernanceStrategic ReportFinancial statements Company Balance Sheet
at 31 December 2017
Fixed assets
Intangible assets
Investments
Property, Plant & Equipment
Current assets
Debtors
Cash at bank
Creditors: amounts due falling due within one year
Net current assets
Total assets less current liabilities
Creditors: amounts due falling after one year
Net assets
Capital and reserves
Called up share capital
Share premium account
Accumulated deficit
Total equity attributable to owners of the Parent Company
Note
2017
£’000
2017
£’000
2016
£’000
2016
£’000
4
5
6
7
34,706
5,865
40,571
(1,075)
8
9
10
14
14
2,153
7,405
230
9,788
39,496
49,284
(5,207)
44,077
1,003
52,939
(9,865)
44,077
22,093
11,957
34,050
(1,291)
2,357
7,405
285
10,047
32,759
42,806
–
42,806
1,002
47,211
(5,407)
42,806
The loss for the financial period, of the Company, as approved by the Board, was £4.83m (2016: £3.34m)
(2015: £1.19m).
The financial statements were approved and authorised for issue by the Board of Directors on 20 April 2018 and
were signed on its behalf by:
Nick Robbins-Cherry
Chief Financial Officer
The notes on pages 110 to 116 form part of these financial statements.
108
Midatech Pharma plcAnnual Report & Accounts 2017 Company Statement of Changes in Equity
for the year ended 31 December 2017
Share
capital
£’000
Share
Premium
£’000
Accumulated
deficit
£’000
Total equity
£’000
Cost
At 1 January 2017
Loss for the year
Total comprehensive loss
Transactions with owners
Shares issued (net of issue costs)
Share option charge
Total contribution by and distributions to owners
At 31 December 2017
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
1,002
47,211
–
–
(5,407)
(4,831)
1,002
47,211
(10,238)
1
–
1
1,003
1,002
–
–
–
–
–
5,728
–
5,728
52,939
31,643
–
–
15,568
–
15,568
47,211
–
373
373
(9,865)
(2,247)
(3,343)
(3,343)
–
183
183
42,806
(4,831)
37,975
5,729
373
6,102
44,077
30,398
(3,343)
(3,343)
15,568
183
15,751
At 31 December 2016
1,002
(5,407)
42,806
109
OverviewGovernanceStrategic ReportFinancial statements Notes Forming Part of the Company Financial Statements
for the year ended 31 December 2017
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’).
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.
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.
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.
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. Goodwill is being amortised to ‘administrative
expenses’ over a period of five 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.
110
Midatech Pharma plcAnnual Report & Accounts 2017 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 except goodwill 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 – 13 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 – The term of the lease
Computer Equipment and Software – 4 years
Fixtures and Fittings – 4 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.
111
OverviewGovernanceStrategic ReportFinancial statements Notes Forming Part of the Company Financial Statements continued
for the year ended 31 December 2017
2 Staff cost
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:
General and administration
2017
£’000
2016
£’000
717
42
102
373
883
35
156
183
1,234
1,257
2017
£’000
4
4
2016
£’000
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
£4.83m (2016: £3.34m, 2015: £1.19m).
112
Midatech Pharma plcAnnual Report & Accounts 2017 4
Intangibles
Cost
At 1 January 2017
Additions
At 31 December 2017
Amortisation
At 1 January 2017
Charge for year
At 31 December 2017
Net book value
At 31 December 2017
Cost
At 1 January 2016
Additions
At 31 December 2016
Amortisation
At 1 January 2016
Charge for year
At 31 December 2016
Net book value
At 31 December 2016
Product and
marketing
rights
£’000
Goodwill
£’000
2,512
–
2,512
197
193
390
2,122
53
–
53
11
11
22
31
Product and
marketing
rights
£’000
Goodwill
£’000
2,512
–
2,512
4
193
197
2,315
53
–
53
–
11
11
42
Total
£’000
2,565
–
2,565
208
204
412
2,153
Total
£’000
2,565
–
2,565
4
204
208
2,357
113
OverviewGovernanceStrategic ReportFinancial statements Notes Forming Part of the Company Financial Statements continued
for the year ended 31 December 2017
5
Investments
Brought forward 1 January
Additions
Total investments at 31 December
2017
£’000
7,405
–
7,405
2016
£’000
7,405
–
7,405
At 31 December 2017, the Company held share capital in the following subsidiaries and joint arrangements:
Name
Midatech Limited
Midatech Pharma (Espana) SL
PharMida AG
Registered
Office or Country of Incorporation
Nature of
Business
Proportion
held
Notes
65 Innovation Drive, Milton Park, Milton,
Abingdon, Oxfordshire, OX14 4RQ
Parque Tecnológico de Vizcaya, Edificio 800
Planta 2, Derio, 48160, Vizcaya, Spain
c/o Kellerhals, Hirschgässlein 11, 4051 Basel,
Switzerland
Trading company 100%
Trading company 100%
(a)
Dormant
100%
(a) (b)
Midatech Pharma (Wales)
Limited
Oddfellows House, 19 Newport Road, Cardiff,
CF24 0AA
Trading company 100%
Midatech Pharma US, Inc.
8601 Six Forks Road, Suite 160, Raleigh, North
Carolina 27615, USA
Trading company 100%
(c)
Dara Therapeutics, Inc.
8601 Six Forks Road, Suite 160, Raleigh, North
Carolina 27615, USA
Dormant
100%
Midatech Pharma PTY Limited c/o Griffith Hack Consulting, 300 Queen Street,
Trading company 100%
(d)
(e)
Brisbane, QLD 4000, Australia
MidaSol Therapeutics GP
Incorporated in the Cayman Islands
Syntara LLC
Incorporated in the United States
Dormant JV
Dormant JV
50%
50%
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 Limited was incorporated on 16 February 2015.
114
Midatech Pharma plcAnnual Report & Accounts 2017 6 Property, plant and equipment
Cost
At 1 January 2017
Additions
At 31 December 2017
Depreciation
At 1 January 2017
Charge for year
At 31 December 2017
Net book value
At 31 December 2017
Cost
At 1 January 2016
Additions
At 31 December 2016
Depreciation
At 1 January 2016
Charge for year
At 31 December 2016
Net book value
At 31 December 2016
7 Debtors
Trade Debtors
Amounts due from group companies
Other debtors
Prepayments
Fixtures
and fittings
£’000
Leasehold
improvements
£’000
Computer
equipment
and software
£’000
5
–
5
2
1
3
2
229
–
229
78
48
126
103
175
44
219
44
50
94
125
Fixtures
and fittings
£’000
Leasehold
improvements
£’000
Computer
equipment
and software
£’000
4
1
5
1
1
2
3
229
–
229
30
48
78
151
144
31
175
11
33
44
131
2017
£’000
–
34,270
159
277
Total
£’000
409
44
453
124
99
223
230
Total
£’000
377
32
409
42
82
124
285
2016
£’000
27
21,631
191
244
34,706
22,093
115
OverviewGovernanceStrategic ReportFinancial statements Notes Forming Part of the Company Financial Statements continued
for the year ended 31 December 2017
8 Creditors: amounts due falling due within one year
Trade creditors
Accruals
Other creditors
Derivative financial liability
2017
£’000
329
717
29
–
2016
£’000
306
352
233
400
1,075
1,291
Details of the derivative financial liability are provided in Note 21 of the consolidated financial statements.
9 Creditors: amounts due falling after one year
Bank Loan
2017
£’000
5,207
5,207
Details of the bank loan are provided in Note 20 of the consolidated financial statements.
10 Share capital
Allotted and fully paid
Ordinary Shares of 0.00005 each
Deferred Shares of £1 each
Total
2017
Number
61,084,135
1,000,001
2017
£’000
2016
Number
3
48,699,453
1,000,001
1,000
1,003
2016
£’000
–
–
2016
£’000
2
1,000
1,002
Details of shares issued by the Company in the year are given in Note 24 of the consolidated financial statements.
11 Capital commitments
The Company had no capital commitments at 31 December 2017 or at 31 December 2016.
12 Contingent liabilities
The Company had no contingent liabilities at 31 December 2017, or at 31 December 2016.
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.
116
Midatech Pharma plcAnnual Report & Accounts 2017 Overview
Strategic Report
Governance
Financial statements
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
117
OverviewGovernanceStrategic ReportFinancial statements Midatech Pharma plc
Annual Report & Accounts
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Midatech Pharma
Registered office
65 Innovation Drive
Milton Park
Abingdon
Oxfordshire
OX14 4RQ
United Kingdom
Registered number
09216368