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DEVELOPING FUTURE PRODUCTS
FOR AIRWAYS DISEASES
Vectura Group plc Annual Report and Accounts 2014/15
D
A transformational year
REVENUE CONTINUES TO GROW
GROWING ROYALTY STREAMS
MAIDEN PROFIT AFTER TAX
PORTFOLIO REVIEW COMPLETED
AND ALIGNED TO STRATEGY
CONTINUED PROGRESS ON PARTNERED
AND UNPARTNERED PROJECTS
ACTIVAERO INTEGRATION COMPLETED
INCREASED BUSINESS
DEVELOPMENT OPPORTUNITIES
Vectura is making excellent progress in executing
its business model on its journey towards becoming
a specialty pharmaceutical company
OUR YEAR
Focus on exploiting valuable niches
in our therapeutic space
Established “partner of choice” in
airways diseases product development
Prioritisation of R&D expenditure
Increase in business development
opportunities following the acquisition
of Activaero
Partnered product launches drive
royalty revenue growth
Read more on pages 02 and 03
Strategic report
01 Financial highlights
02 Operational highlights
04 Our business at a glance
06 Chairman’s statement
08 Chief Executive’s statement
10 Our markets and opportunities
14 Our business model
16 Our strategy
18 Key Performance Indicators (KPIs)
20 Risks and risk management
26 Our products
34 Our technology platforms,
development capability and devices
36 Corporate social responsibility statement
40 Financial review
Introduction from the Chairman
Governance
43
44 Board of Directors
46 Executive management
47 Corporate governance report
53 Audit Committee report
57 Nomination Committee report
59 Remuneration Committee report
60 Remuneration report
78 Directors’ report
80 Statement of Directors’ responsibilities
Financial statements
Independent auditor’s report
81
86 Consolidated income statement
87 Consolidated statement of comprehensive income
88 Balance sheet
89 Cash flow statement
90 Statement of changes in equity
91 Notes to the financial statements
115 Five-year summary
116 References
IBC Shareholder information
For more information visit:
www.vectura.com
01
FINANCIAL HIGHLIGHTS
Maiden profit after tax
Revenue growth
£3.7m
£58m
+59%
14/15
£3.7m
14/15
£58m
(£2.3m)
13/14
13/14
£36.5m
EBITDA1 progression
Basic EPS
£16.2m
+212%
14/15
13/14 £5.2m
0.9p
£16.2m
14/15
0.9p
(0.7p)
13/14
1 Earnings before investment income, finance (costs)/gains, tax, depreciation, amortisation, share-based compensation
and adjusted for non-recurring expenditure items.
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OPERATIONAL HIGHLIGHTS
Marketed products (see further detail on pages 26 to 29)
Partnered
Ultibro® Breezhaler® (indacaterol/glycopyrronium bromide, QVA149)
achieved total net sales of $156m within our financial year (as reported
by Novartis) generating increased royalty income for Vectura
• The product has been launched in 21 countries (including
Germany, Japan and Canada)
• Launch of NVA237 in the US is anticipated to generate additional
royalty income for Vectura
AirFluSal® Forspiro® (salmeterol/fluticasone) has been launched in
12 European countries, and also in South Korea and Mexico. It has
been approved in approximately 30 countries
• The product has been approved for use in over 60 countries
including countries within the EU, Japan, Latin America, Canada,
Switzerland and Australia
• Receipt of the Czech Republic and Portuguese marketing
authorisation by Sandoz triggered milestone payments
to Vectura of €1.5m each
QVA149 US FDA filing acceptance triggered a milestone payment
to Vectura of $12.5m
Licence agreement
• Novartis expects US Food and Drug Administration (“FDA”) action
by Q4 2015
US launch of Anoro® Ellipta® (umeclidinium/vilanterol) by GSK
triggered a £2m milestone to Vectura
• Launch of QVA149 in the US is anticipated to generate additional
royalty income for Vectura
Seebri® Breezhaler® (glycopyrronium bromide, NVA237) achieved
total net sales of $153m within our financial year (as reported by
Novartis) generating increased royalty income for Vectura
• The product is approved for use in over 80 countries including
countries within the EU, Japan, Latin America, Canada,
Switzerland and Australia
NVA237 US FDA filing acceptance triggered a milestone payment
to Vectura of $7.5m
• Novartis expects US FDA action by Q4 2015
Other
Corporate Development
Entered into a global development and licence agreement
with Janssen Biotech, Inc. for the exclusive development of novel
anti-inflammatory therapies for the treatment of asthma/COPD
Enlarged technology platform now attracting significant deal interest
Post-period Event
FDA approval of RAPLIXA™ triggered a milestone payment of
approximately $3.5m from Vectura’s licensee, The Medicines Company
Strong partnerships and business model validation
Vectura has established development collaborations, joint
ventures and licence agreements with several pharmaceutical
and biotechnology companies. Recent Company progress
has also attracted considerable increased interest in future
business development opportunities.
Read more on our business model
on pages 14 and 15
02
Vectura Group plc Annual Report and Accounts 2014/15
Pipeline (see further detail on pages 30 to 33)
VR315
VR647 (SCIPE)
Vectura received two additional milestones, each of $1.5m,
as a result of further progress with VR315 in the US
Pre-IND meeting scheduled in June 2015 to agree the US
regulatory strategy
VR506
Licence agreement signed in the US with Vectura’s established
US partner for VR315
• Important step in the development of VR506 for the US market
• Extends the successful collaboration with our US partner
VR475 EU (FAVOLIR®)
Objective is to retain current label/indication of budesonide,
with a claim for reduced dosing time
Continuing to evaluate incoming licensing requests to expedite
value creation
VR611 (TRPV1 receptor modulator)
Further development has been stopped
A clinical study design has been agreed with the CHMP and clinical
trial activities will start imminently, with filing anticipated in mid-2018
Other
Refocused to target the broader patient population shift from
GINA step 5 OCS-dependent patients to GINA step 4 and 5 patients
Phase IIb/III trial results published
VR475 US (FAVOLIR®)
Following the revised development strategy for FAVOLIR® in the EU,
a similar approach will be sought for the US once the European
Phase III study completes. At that time the Company will seek
endorsement of this approach with the FDA
• Creates an affordable development programme that builds off the
positive clinical momentum created in the EU from the conduct of
the current study
• Targets an increased market opportunity
Approach is aligned with our strategic desire to optimise return
on R&D investment over the near term
Assets acquired following the purchase of Activaero GmbH
are now integrated into development plans
Important assets for ongoing partnered programmes
Post period: the Gemünden site will be closed by March 2016
and activities will be transferred to other sites
Final Chinese government approval of Kinnovata anticipated
in FY 2015/16, upon which an exceptional non-cash gain will
be recognised
Currently in process of transferring all critical intellectual property
and trade marks pertaining to the licensed technology to the new
joint venture
Building work has commenced on the new, purpose-built,
manufacturing facility for the products that are currently
in development
Clear strategic focus
Vectura’s portfolio has emerged from the Company’s product
development, formulation and drug delivery expertise and
is currently centred around developing inhaled products to
address unmet needs in airways diseases.
We continue to focus on balancing the unmet needs of all
stakeholders (patients, physicians, payors) with commercial
attractiveness and exploiting valuable niches in our
therapeutic space.
Read more on our strategy on
pages 16 and 17
03
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
OUR BUSINESS AT A GLANCE
ADDRESSING THE UNMET NEEDS
OF PATIENTS WITH AIRWAYS DISEASES
Operational activities to support the journey
Vectura develops products in-house
and in collaboration with partners
PRODUCT DEVELOPMENT
(Partnered and wholly owned)
Supported by Clinical and Regulatory teams,
Quality and IP
and supports
DEVICE MANUFACTURING
AND COMMERCIALISATION
(Dry Powder Inhalers (“DPIs”) and Smart Nebulisers)
Underpinning our product development focus through stages
of pre-clinical and clinical development and ensure successful
commercialisation in partner’s or contract manufacturing facilities
Vectura has deep expertise in
as well as
FORMULATION
Pharmaceutical development services
(fee-for-service activities for partners)
DEVICE DESIGN AND DEVELOPMENT
(Dry Powder Inhalers (“DPIs”) and Smart Nebulisers)
Making Vectura the partner of choice in airways diseases with
a range of DPIs and smart nebuliser devices for inhaled delivery
of drugs to the lungs
04
Vectura Group plc Annual Report and Accounts 2014/15 Marketed and pipeline assets
Our portfolio comprises partnered marketed products as well as branded
and generic investigational drugs. Each category has specific benefits
in terms of revenue and IP accretion. Our hybrid business model
(whilst we transition into a specialty pharmaceutical company) allows us
to pursue various routes to market including partnership, co-development
and self-commercialisation.
Partnered:
Marketed
Wholly owned:
Pipeline
Asthma, COPD, non-respiratory*
Asthma, severe inflammatory diseases
Pipeline
Asthma, COPD, pulmonary hypertension, cystic fibrosis,
influenza, respiratory syncytial virus
* Haemophilia, dialysis and surgical adhesions.
Read more on our products
and pipeline on pages 26 to 33
Proprietary technologies
GyroHaler®
An unparalleled breadth of delivery technologies underpins
our product development focus
Pre-metered foil blister DPIs
Reservoir DPIs
Focus for asthma/COPD programmes:
Established technology used in Chinese JV:
GyroHaler®, Lever-operated,
Duohaler®, Clickhaler®
Open-Inhale-Close
Inhalation formulation technologies
Smart nebuliser-based inhalation
FOX™
Expertise in small and large molecules/
Systems for specialty applications:
biologics developments
AKITA JET®, AKITA®² APIXNEB®,
FOX™ (hand held)
Read more on our technologies
and devices on pages 34 and 35
05
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
CHAIRMAN’S STATEMENT
THIS HAS BEEN A
BREAKTHROUGH YEAR
FOR VECTURA GROUP
Summary
Delivering our maiden profit
Established platform to continue to deliver growth
and value to shareholders
Our strategy will create significant value
for all stakeholders through developing
and commercialising products with high
unmet need.
Dear shareholder
I am delighted to introduce Vectura’s Annual Report for the financial
year 2014/15. The Group has continued to build on the foundations
put in place and has performed well against financial and non-financial
KPIs. Importantly, this financial year has seen Vectura generate its
maiden profit after tax as we move to a new phase for the Group
based on sustainable growth and we are poised to generate
significant cash flow per share.
Our business
During the year we completed a review of our portfolio, which has
been prioritised and aligned to the strategy and which we believe
will deliver maximum value capture in the period to 2021. Vectura’s
journey to becoming a specialty pharmaceutical company was
launched from a base of income generated from partnered products
with a growing range of royalties contributing to an increased quality
revenue mix; we have described this as our hybrid business model.
This model builds on the partnering model we have pursued historically
and foresees Vectura pursuing higher returns on investment, where
possible, through co-development deals and self-commercialisation
of focused, specialty pharmaceutical assets. The strategy aims
to balance investment in growth opportunities with the delivery
of higher returns.
We have made significant progress during the year, completing the
integration of Activaero GmbH which we acquired in March of last
year. Following the acquisition, we have seen a significant increase
in interest from third parties in our broader offering of pipeline
products and inhalation technologies.
Governance
As a Board, we are committed to the principles of good corporate
governance. Through our robust internal framework of systems
and controls, we strive to maintain the highest standards.
06
Vectura Group plc Annual Report and Accounts 2014/15 Read more about our strategy on
pages 16 and 17
Read more about our CSR on
pages 36 to 39
Read more about our governance on
pages 43 to 52
Our people
The Board and I would like to thank the employees of Vectura,
whose efforts helped us achieve so much this year and whose
support helped position Vectura as a partner of choice by companies
seeking to address the unmet medical needs of patients with airways
disease. We recognise the importance of investing in our people
and in particular ensuring that they have the skills and experience
necessary to execute our business model and implement the
transition of the Group.
Shareholders
We continue to be grateful to our shareholders for their support
as Vectura makes the exciting journey to becoming a profitable
specialty pharmaceutical company. Our aim is to continue to
deliver shareholder value.
Outlook
This year saw Vectura achieve record financial results, which is
testament to the skills and experience of our people. The foundations
are in place for the next stage of the journey and I believe that our
strategy and business model will continue to result in growth
of shareholder value.
Bruno Angelici
Chairman
19 May 2015
Board
There were two important changes to the Executive Board during
the year. In January, Andrew Oakley was appointed Chief Financial
Officer and Company Secretary, replacing Paul Oliver. Andrew
brings a wealth of experience to the Group. I would like to thank
Paul for his eight years’ service with Vectura and I wish him well
for the future. In February, after over twelve years of dedicated
service to Vectura, Dr Chris Blackwell, Chief Executive, announced
his intention to step down from this position. Chris will leave the
Company at the end of June 2015.
On behalf of my Board colleagues, I would like to take this opportunity
to thank Chris for the dedication he has given to the Group and for
the value he has created for our shareholders, over many years.
Chris leaves the Group in a very strong position, with an experienced
senior management team in place. The Company has engaged an
external search firm to assist it to evaluate both internal and external
candidates and the comprehensive search is making good progress.
The Company hopes to be in a position to bring this to a successful
conclusion in the near future. In order to ensure continuity of leadership,
Dr Trevor Phillips, currently the Group’s Chief Operations Officer, will
assume the role of Interim CEO on 1 July 2015 in the event that a
new CEO is not in place by this time.
On 1 April this calendar year, we announced we had strengthened
the Board with the appointment of Dr Per-Olof Andersson as a
Non-Executive Director. Per-Olof has an international R&D track
record within the pharmaceuticals, bio-pharmaceuticals and specialty
pharmaceutical industries and considerable experience in respiratory
therapeutic development. Per-Olof is a welcome addition to the Board.
We will continue to strengthen our Board and place great importance
on governance procedures.
07
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
CHIEF EXECUTIVE’S STATEMENT
SIGNIFICANT PROGRESS
FOR FUTURE GROWTH
Delivering our strategy
This has been another year of significant progress for Vectura.
Our revenue continues to grow, driven by increasing royalty
income as our partnered products continue their global roll-out,
and I am very proud that we have reported a maiden profit after
tax for this year. Our business focus continues to optimise return
on investment in our development pipeline. At our interim results
in November 2014, we announced we had evaluated the strategic
perspectives of our business through a thorough evaluation of our
development portfolio, maintaining alignment with the evolution
of our business model. This resulted in a prioritisation of our R&D
expenditure, with an emphasis on attaining value inflection points
within our strategic horizon to 2021. Vectura has become an
established expert and ‘partner of choice’ in the development of
products for airways diseases. This can be seen from the products
that have already been brought to market by our partners and the
development and partnership deals that we have announced over
the last twelve months. Leveraging value from the Company’s
technologies, via our own projects with partners, is critical for
Vectura to deliver its strategic goal.
Our operational performance
At the start of the year, the US launch of Anoro® Ellipta® by GSK
triggered a milestone payment to Vectura associated with our
licence agreement. Two further milestone payments were received
for VR315 US, illustrating the continued progress being made in the
development of this asset, a major component of our high value
respiratory generic portfolio in the US. Extending this successful
collaboration, we announced a US licence agreement for our product
VR506 with the same, undisclosed US partner. This is an important
step for the development of VR506 and provides additional third-party
validation of our expertise and know-how in the development
of inhaled drug assets.
Last year also saw the publication of Phase IIb/III trial results for
Vectura’s wholly owned, investigational drug/device combination
VR475 EU. A further clinical trial will commence in the middle of 2015.
We had a successful start to this calendar year when, in January,
Vectura signed a global development and licence agreement with
Janssen, utilising Vectura’s formulation technology/device platform
offerings in a deal that comprises upfront and development milestones
and a tiered royalty on net sales. In addition, Novartis, announced it
had completed US FDA submissions for QVA149 and NVA237, which
were subsequently accepted, triggering significant milestones for
Vectura. Novartis expects US FDA action in the fourth quarter of 2015.
We now have a strong platform
to take Vectura to the next phase
of its journey to become a specialty
pharmaceutical company.
08
Vectura Group plc Annual Report and Accounts 2014/15 Our people
I am very proud of the quality and dedication of our people.
I would like to take this opportunity to express my gratitude to
all employees of the Group, past and present, for their commitment
and hard work. In February this year, I announced that, after more
than twelve years at Vectura, eleven of those as Chief Executive,
I would step down to take on new challenges, confident in the
legacy and team that takes Vectura to new heights. I am intensely
proud of what has been achieved over the past twelve years and
would like to thank all our stakeholders for their support.
Outlook
After another year of significant progress, we are in a strong
position to continue to implement our business model and strategy.
We are confident that this strategy will enable us to continue to
build on the existing platform and ultimately deliver a successful
specialty pharmaceutical business.
Dr Chris Blackwell
Chief Executive
19 May 2015
Products, pipeline and R&D
Our pipeline review prioritised our portfolio and aligned our resources
to ensure that our investment in R&D is measured, controlled, realises
value near term and is supportive of our strategy.
Our near-term priorities are to:
• accelerate the overall value of our existing pipeline; and
• demonstrate value realisation in our pipeline within our strategic
horizon to 2021.
The development focus of the Group will change over time towards
value realisation from later-stage products and revenue-generating
opportunities in the near term, exemplified by the Janssen deal.
Working in partnerships
Our aim, to develop long-term business alliances, continues
with a new co-development partnership established with Janssen
in January 2015. During the year, existing collaborations with partners
including Sandoz and Novartis continued to develop and now show
strong revenue streams. We are focused on cementing and developing
all our key relationships by ensuring that management and governance
of the partnerships is effective, long-term value is delivered and
Vectura further develops its reputation as a partner of choice.
Organisational changes
As a result of the enlarged organisation and as we implement our
corporate strategic and operational plans, the Company announced
some significant management changes in January. Andrew Oakley
joined Vectura as Chief Financial Officer and Company Secretary
and Executive Board Director and we also welcomed Joanne Hombal,
who joined as Director of Human Resources and a member of the
Executive Management Team.
Post-period, in April, we announced that we would be transferring
all activities from our Gemünden site to the remaining three
Vectura facilities. The Gemünden site will be closed by March 2016.
The acquisition of Activaero GmbH provided Vectura with people and
technologies that will help shape the future of Vectura. To that end,
I would like to express our sincere gratitude to Gerhard Scheuch,
who will leave Vectura on 31 July 2015, leaving behind a positive
legacy upon which the Company can build.
09
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OUR MARKETS AND OPPORTUNITIES
EXCITING PROSPECTS
IN A GROWING MARKET
Our markets
Our current addressable market falls into six
main indications in airways-related diseases
1
Asthma
2
Chronic obstructive
pulmonary disease (COPD)
Product pipeline status
Product pipeline status
Partnered
Generic
Branded
Wholly owned
Market need
Partnered
Branded
Market need
Asthma is a heterogeneous, chronic inflammatory airways disease
that is characterised by variable respiratory symptoms, recurrent
episodes of reversible expiratory airflow limitation and episodic
acute exacerbations of symptoms. In recent years it has become
clear that asthma can be the result of a range of inflammatory
changes which can be addressed by different therapeutic interventions.
An unmet need remains, particularly in the treatment of severe
or ‘difficult-to-control asthma’.
COPD is a progressive, poorly reversible obstructive airways disease of
airflow limitation typically caused by toxic particle inhalation. Smoking is
the major cause, but biomass smoke and industrial noxious particulates
or gases also cause the condition by triggering a chronic inflammatory
response in the airways and the lungs. Symptoms are dyspnoea
(shortness of breath), cough, mucus production and exercise limitation.
Patients often experience infection-driven exacerbations of symptoms
which speed up decline of lung function2.
Market opportunity
Market opportunity
Vectura works, alone and in partnerships, on anti-inflammatory
programmes across the spectrum of asthma encompassing generic
single therapy (VR506), combination therapy (AirFluSal® Forspiro®,
VR315US, VR632), severe asthma (VR475, VR588) and paediatric
asthma (VR647) utilising its proprietary formulation and device
inhalation technology to develop new and cutting-edge solutions
to meet the need for effective, patient-focused control of asthma.
There is no cure for COPD so treatment is centred on control
of symptoms via the use of bronchodilator and anti-inflammatory
agents. Vectura has been at the forefront of the latest generation
of bronchodilator development via its collaboration with Novartis in
the development of NVA237 now approved as Seebri® Breezhaler®
and QVA149 approved as Ultibro® Breezhaler®.
Statistics
• It is suffered by approximately 250 million subjects worldwide
• COPD is currently the fourth biggest killer worldwide3
and its incidence is growing1
• WHO forecasts a further 100 million suffers by 20251
• WHO estimates that currently 64 million people have COPD
and that COPD will become the third leading cause of death
worldwide by 20303
• Chronic lower respiratory disease, primarily COPD, was the third
leading cause of death in the United States in 20114
* To view the original source for all footnotes,
please refer to page 116.
10
Vectura Group plc Annual Report and Accounts 2014/15 3
Influenza
4
Cystic fibrosis (CF)
Product pipeline status
Product pipeline status
Partnered
Branded
Market need
Partnered
Branded
Market need
Infection with the influenza virus is a well-recognised phenomenon
because of its annual occurrence around the world. It represents a
major target of anti-infective strategy (both vaccination and treatment)
in many countries5. The young, old and sick are at most risk from
influenza and are the target of therapeutic approaches available
(vaccination and anti-viral treatment), all of which have their
limitations to efficacy6,7.
Market opportunity
Vectura’s VR736 programme is investigating the role of an approved
drug with novel anti-viral effects when delivered as a nebulised
formulation using proprietary Vectura delivery technology in patients
with severe influenza infections that have resulted in hospitalisation.
An ongoing Phase II clinical trial is due to report out during 2015.
Cystic fibrosis (CF) is a genetic, life-limiting disorder affecting a number
of organ systems but with significant effects in the lungs. The genetic
mutation affects a protein whose role is key in the production of mucus,
sweat and digestive enzyme fluids, and results in those fluids becoming
thick. In the lungs this results in accumulation of mucus and long-term
issues include difficulty in breathing and coughing up sputum resulting
from frequent lung infections. There remains no cure for CF, with all
approved therapy directed at symptom reduction, e.g. physiotherapy,
antibiotics and mucus thinning agents. Lung transplantation is an option
in some circumstances.
Market opportunity
Vectura is engaged in partnership with the Spanish company
Grifols in exploring the use of alpha-1 anti-trypsin for the treatment
of CF (VR179).
• approximately 3–5 million cases worldwide of severe
• Life expectancy is now between 35 and 50 where optimised
illness per annum5
treatment is available8
• approximately 250,000–500,000 deaths per annum5
• In Europe and the USA the incidence of CF is in the order
of 1 in 2,000–3,500 newborns8
11
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OUR MARKETS AND OPPORTUNITIES continued
Population growth and rising wealth,
particularly in developing economies,
continue to expand the global market
for pharmaceuticals.
Our markets continued
5
Human respiratory
syncytial virus (RSV)
6
Pulmonary arterial
hypertension (PAH)
Product pipeline status
Product pipeline status
Partnered
Branded
Market need
Partnered
Branded
Market need
RSV is a major cause of respiratory tract infections in infants.
The virus is active globally. There remains a high unmet need
for a more effective and conveniently delivered treatment.
Market opportunity
This need is the basis of the collaboration with Ablynx NV (VR465),
in which Vectura is providing advanced nebulisation technology
aimed at inhaled delivery of a novel treatment for RSV to infants.
PAH is the occurrence of raised pressure in the pulmonary artery
caused by pathological changes that result in narrowing and
thickening of the arterial wall and consequent impairment of
blood flow through the lungs. Over time this leads to lowered
body oxygen levels and cardiac failure.
Market opportunity
Current therapy options rely chiefly on a range of vasodilatory drugs,
none of which are able to reverse progression. A small number of
patients are suitable for lung transplantation. But there remains a
large unmet need in the treatment of PAH.
Vectura’s collaboration in this area (VR876) seeks to improve on the
delivery of a known, effective treatment by increasing the local delivery
to the pulmonary vasculature using Vectura’s FOX™ technology.
Statistics
• 60% of US children are infected during their first winter season9
• 15–50 patients/million population10
• Nearly all children infected by the age of two9
• Five-year survival rates of 50–60%11
• Of those infected, 25–40% will develop signs of airway
inflammation (bronchiolitis) and lung infection (pneumonia)
with around 1–2% needing to be hospitalised9
* To view the original source for all footnotes,
please refer to page 116.
Read more about our pipeline and each
product phase in more detail on pages 30 to 33
12
Vectura Group plc Annual Report and Accounts 2014/15 S
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Growth drivers
Population growth, increasing longevity and rising wealth,
particularly in developing economies, continue to expand the
global market for pharmaceuticals. In addition there are a number
of specific factors affecting the market, in particular downward
pressure on healthcare costs, regulatory challenges, legally controlled
pricing, the cost of developing and protecting intellectual property
and intensifying competition from generic products.
Expanding patient populations
The world population is expected to rise from its current level of some
7bn, to reach 9.6bn by 205012. In addition, the number of people
who can access healthcare continues to increase, particularly
among the elderly. Globally, it is estimated that between 2000 and
2050 the number of people aged 60 years and over will increase
from 605m to over 2bn13.
Unmet medical need
In most established markets, ageing populations and certain
lifestyle choices such as smoking, poor diet and lack of exercise
are increasing the incidence of non-communicable diseases, such
as airways-related diseases, which require long-term management.
Advances in science and technology innovation are critical if we
are to address unmet medical need. Existing drugs will continue
to be important in meeting the growing demand for healthcare,
particularly with the increasing use of generic medication. The use
of large molecules, or biologics, has also become an important
source of innovation, with biologics among the most commercially
successful new products.
The respiratory market is dominated by a small number
of companies. Inhalation products are complex dosage forms,
which are challenging to develop within a strict global regulatory
environment. Volume growth is expected to continue as demand
in the developing world expands.
Vectura is one of only a few independent product development
companies able to meet the challenges of the market for inhaled
therapies to treat airways diseases. The Group has proven technologies
and expertise in the development of inhalation products incorporating
dry powder inhalers (both branded and generic) and smart inhalation
systems utilising nebulisation.
Our position
The Group’s specialism and expertise in inhaled product development
puts us in a good position to meet the regulatory requirements for
successfully bringing to market branded and generic inhalation drugs.
To optimise benefit to patients and maximise value from global
opportunities, we are focusing on both the branded and generic
respiratory product markets. Vectura has proprietary technology
for a range of inhalation devices covering approximately 57%
of the inhaled market in the G8 (US, Japan and EU5)9.
Dry powder inhalation (“DPI”) products for asthma and COPD
generated sales in excess of $10bn14 a year in 2013 in the G8
and is growing. Recent trends show increasing use of DPIs with the
majority of the new products approved in the US since 2013 being
DPI based. In total, 10 new inhaled asthma, COPD and cystic fibrosis
products have been approved during this period – 6 DPIs, 3 pMDIs
“pressurised metered dose inhaler”, and 1 nebulised.
The Group’s specialism and expertise in inhaled product
development puts us in a good position to meet the regulatory
requirements for successfully bringing to market branded and
generic inhalation drugs. There are relatively few competitors
working on complex, inhaled generic products, and new market
opportunities are emerging that provide potential for growth.
* To view the original source for all footnotes,
please refer to page 116.
13
Annual Report and Accounts 2014/15 Vectura Group plc
OUR BUSINESS MODEL
OPTIMISING AND ACCELERATING
RETURN ON INVESTMENT
Vectura has become an established expert and partner of choice in
airways diseases product development. We are evolving our business
model to leverage that reputation for maximum value.
LEVERAGING OUR STRENGTHS
Innovative technologies
– formulation, device
design and
development and smart
inhalation systems
Extensive market
knowledge enabling
us to take advantage
of viable opportunities
through technology,
products and people
Developing assets with
focused investment
using an established
project management
framework
Highly developed
in-house expertise from
a talented, experienced
and committed team
of individuals
TO MAXIMISE PIPELINE POTENTIAL
Choice of routes to market
Partnering
Acquisition of knowledge
Transfer of skills
Intellectual companionship
Larger network
Validation of technology
and expertise
Co-development
Interaction with partners
Rapid transfer of skillsets
Increased collaboration
Self-commercialisation
Capturing value
Control over
commercialisation process
Co-promotion in marketing
and distribution could be
the first step
REVENUE IMPACT
Co-development and co-promotion enable access to innovate
and commercialise knowledge
IN ORDER TO BECOME
A specialty pharmaceutical company focused on the development and
commercialisation of innovative pharmaceutical products to address the
unmet need within airways-related diseases
REALISING VALUE FOR
Patients
Partners
Shareholders
Our people
14
Vectura Group plc Annual Report and Accounts 2014/15 From an out-licensing strategy…
…to a hybrid business model
The Company is undergoing a transition from a pure out-licensing
strategy where we provided formulation and/or device (DPI and
nebuliser) in return for milestones and royalties upon sales. This
model has been validated by a wide range of successful licensing
agreements with a broad spectrum of companies, from small
biotechnology firms to multinational pharmaceutical companies.
The next step is to implement a hybrid business model that builds
upon the success of our licensing/royalty model but also offers
additional business options including co-development, where
Vectura commits additional resources in return for higher rewards,
ultimately seeking self-commercialisation capability in niche therapeutic
areas where a small focused sales force would be applicable.
How it works
How we get there
The execution of this hybrid model allows for optimising value
realisation across the spectrum of airways-related diseases,
partnering with large pharmaceutical companies for large
indications such as asthma and COPD, whilst exploring
increased economic returns in more niche areas.
The sustainable development of our business model is based on
balancing unmet need with commercial attractiveness and financial
discipline. In practice, this also means we will selectively develop
portfolio assets to maximise our return on investment by continually
evaluating the balance between developing assets in-house and
licensing to a partner at an appropriate stage.
How we generate revenue
The diversified and rapidly growing revenue base from the
commercialisation of our partnered products underpins the
cash flow to develop our pipeline and maintain investment
in technology.
£0.9m
£1.7m
Royalties
Product licensing
Technology licensing
Development services
Device sales
£36.5m
£4.3m
£13.3m
£16.3m
£58.0m
£6.6m
£19.8m
£2.5m
£3.9m
Royalty break down £25.2m
Novartis
GSK
Baxter
Other
£0.5m
£25.2m
£12.2m
2014
2015
£8.7m
£3.8m
15
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OUR STRATEGY
OUR STRATEGIC
PLAN OF ACTION
1
Creating the
value cycle
2
Leveraging our
technology base
Priorities
Priorities
• Transform the business into a significant, profitable
and self-sustaining specialty pharmaceutical company
• Technologies underpin our product-to-pipeline focus
• Creation and protection of our underlying intellectual
• Expand development portfolio
property assets
• Mitigate specific product development and market risk
• Appropriate deal making through in-licensing,
co-development and acquisition
• Deliver superior returns for shareholders
• Our technologies underpin our products and pipeline
focus. The cash flow from the commercialisation of
our products will be invested in a balanced way to
develop our pipeline and maintain our technology
leadership, thereby creating the Vectura value cycle
Future outlook
• Continue to grow our revenue streams and manage
our portfolio risk
• Prioritise investment into our pipeline assets
and make appropriate commercialisation choices
• Recognise that such a strategy requires
careful investment, and that we cannot take on
every opportunity open to us. We must continue to
expand our revenue streams and manage our portfolio
risk, prioritise investment into our pipeline assets
and make appropriate commercialisation choices
• Aim to maintain our technology leadership within
inhaled medicine through appropriate investment
in people and processes and robust defence of IP
• Continue to leverage investment in our technology
and device platforms, intellectual property and
general know-how
• Continue to provide low risk revenue generation
within a structure that allows for the generation
of future royalty streams
• Maintain our technology leadership within inhaled
medicine through appropriate investment in people
and processes and robust defence of IP
• Maintain a substantial portfolio of more than 100
patent families, many of which comprise granted
European and US patents
Future outlook
• Develop more innovative products that address the
needs of patients, physicians and payors
• Our returns will arise from collaborations with other
parties, where we earn milestone payments and
royalties from development and commercialisation
• We seek to add collaboration agreements with
new and existing partners through our DPI and
smart inhalation technologies
KPI
Revenue growth
KPI
Revenue growth + Innovation performance measure
16
Vectura Group plc Annual Report and Accounts 2014/15 Read more about our KPIs on
pages 18 and 19
Read more on our risks on
pages 20 to 25
3
Progressing
our pipeline
4
Making appropriate
commercialisation choices
Priorities
Priorities
• Build a profitable cash-generative business through
a specialist therapeutic focus and progress our
development portfolio within airways diseases
• Continue with existing partnering model to access
those markets, such as COPD and asthma, that
require large general sales forces
• Broaden and deepen our development pipeline
covering a wide range of indications within
the category of airways-related diseases
• Endeavour to maximise the economic return
to shareholders, which will involve sharing an
increased level of risk in certain indications
Future outlook
• We have set out our intended development pathway
for VR475 in Europe and clinical trial activities have
started. Our anticipated filing date for VR475
remains 2018
• We intend to continue to develop our pipeline
within tight parameters to maintain our record
of capital discipline
• It is our intention to continue to prioritise our
development pipeline and to drive the R&D
to its earliest value inflection point
• Seek increased economics in the co-development
portion of our business model which also has the
important effect of increasing the knowledge base
of our own staff
Future outlook
• Consider co-promotion or self-commercialisation
of certain assets to harness economic returns
• Commercialisation options will be restricted to
therapeutic indications which can be addressed
by a small, cost-effective and focused sales and
marketing infrastructure
• The Group will continue to evaluate the commercial
landscape to identify assets and companies that have
appropriate infrastructure, as well as meeting key
financial criteria such as being revenue enhancing
and accretive on a cash earnings basis
KPI
KPI
Pipeline progression performance measure
Revenue growth + Innovation performance measure
17
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
KEY PERFORMANCE INDICATORS (KPIs)
MEASURING OUR PERFORMANCE
AGAINST STRATEGY
Vectura’s Board and management rigorously monitor the progress of our business, maintaining
strict financial discipline, to facilitate achieving our key strategic objective of becoming a
profitable, self-sustaining and cash-generative business.
We measure performance against our strategy based upon a range of financial and non-financial
KPIs. The key financial indicators we monitor are revenue growth, EBITDA progression and free
cash flow. These have been selected to demonstrate our progress towards executing our key
strategic objective, reflecting our history of acquisitions and our investment plans. Vectura’s
bonus scheme uses similar metrics to assess financial performance against targets; refer to
page 70 for more information.
Financial KPIs
Revenue growth
Revenue increased by 59% to £58.0m, mainly driven by increased
royalties from recently marketed products and significant milestone
achievements. Revenue generated by royalties has increased significantly
over the last two years, and this trend is expected to continue in future
years. Growing and sustainable royalty revenues will provide stability
and cash-resources to fund future growth and investment.
7%
4%
2014/15
43%
46%
£58.0m
5%
2%
2013/14
45%
48%
£36.5m
2012/13
43%
54% £30.5m
2%
1%
2011/12
41%
44%
£33.0m
Royalties
Milestones
Development services
Device sales
8%
7%
EBITDA
EBITDA is a measure of Vectura’s underlying operating performance.
As shown on the face of the consolidated income statement, EBITDA
is calculated by adjusting Vectura’s operational result for non-cash
and non-recurring items. A positive EBITDA shows Vectura’s ability
to generate returns on investment over time. EBITDA has increased
to £16.2m (2013/14: £5.2m) and this reflects a £21.5m increase in
revenue, offset by continued and measured investment in research
and development activities.
2014/15
2013/14
2012/13
(£3.4m)
2011/12
(£4.2m)
£5.2m
Free cash flow
Careful management of cash resources is vital to ensure that Vectura
is able to develop and augment its pipeline assets. Free cash flow (FCF)
is a measure of the cash investment required to support Vectura’s
operations and it is defined as the net cash flow from operations, less
net capital expenditure. Free cash flow increased to £6.6m during the
year, despite the large negative working capital movement which is
due to the timing of milestone receipts being received by the Group.
2014/15
2013/14
(£3.0m)
2012/13
(£6.6m)
2011/12
(£2.1m)
18
£16.2m
£6.6m
Vectura Group plc Annual Report and Accounts 2014/15 Non-financial KPIs
Innovation performance measure
Innovation is the foundation of our business and the Company
continues to invest in its people and its technologies. This investment
is important to enable us to deliver our strategy and maintain our
position as a key enabler of inhaled product delivery within the field
of airways-related diseases.
• Number of patents filed/registered
Total patent families
107
100
107
2014/15
2013/14
2012/13
Pipeline progression performance measures
Successful product development is key to creating long-term value.
Our development pipeline encompasses a broad range of assets
across various stages of development and includes partnered as
well as wholly owned assets.
Alliance performance measures
Our hybrid business model allows for appropriate deal structures
for business opportunities based on a rigorous assessment of the
associated risk, expenditure, and time to value realisation. This allows
for an appropriate balance of risk and reward and is a key element
of our strategy and also provides operational focus.
• Number of project milestones completed
• Number of clinical studies completed to stated time
2014/15
2013/14
2012/13
Project milestones completed
Clinical studies completed
9
1
13
2
4
1
• Number of successful feasibility outcomes
• Number of alliances established
2014/15
2013/14
2012/13
Number of successful
feasibility outcomes
Number of alliances established
6
2
3
2
1
0
19
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report RISKS AND RISK MANAGEMENT
IDENTIFYING AND
UNDERSTANDING KEY
RISKS TO THE BUSINESS
Our ability to meet our goals and objectives may be affected by a number of risks and uncertainties
relating to our strategy, business model and operating environment. Our approach to risk management
is to develop and implement a risk management process which will ensure that significant risks are
identified, assessed, managed and reported to relevant stakeholders in a concise and timely manner
to inform and support decision making.
6
Reporting
5
Executing and
monitoring
1
Strategy
4
Risk
mitigation
2
Risk
identification
3
Risk
assessment
Objectives of the Vectura risk management process:
• to identify and understand the risks that Vectura faces
in the execution of its strategy and the operation of its
business model;
• to ensure that appropriate mitigating actions and controls are
in place for all identified risks and that the residual risk is aligned
to the risk appetite of the Board;
• to ensure that the risk appetite of the Board is embedded
throughout the organisation and fully understood by those
who are responsible for managing risk and making key
decisions across the business;
• to assess the potential impact of identified risks and to create
and maintain a register of these risks, documenting the decisions
taken and the judgements made;
• to control systematic risks within the organisation by maintaining
and improving a system of internal controls to manage risks
in decision making, legal contract management, quality
and regulatory processes and the processing of financial
transactions; and
• to ensure that identified risks are reported to relevant stakeholders
in a timely manner to facilitate effective decision making.
20
Vectura Group plc Annual Report and Accounts 2014/15 Vectura’s Audit Committee reviews the effectiveness of the Group’s
risk management process on behalf of the Board. In reviewing the
effectiveness of the process, the Audit Committee recognises that such
a process is designed to understand and mitigate, rather than eliminate,
the risk of failure to achieve business objectives and can only
provide reasonable and not absolute assurance against material
misstatement or loss.
Setting the tone
Designing the system
Completing the review
The Board
Executive Management Team
Accountable for ensuring that a sound
system of risk management and
internal control is in place
Responsible for conducting an annual
effectiveness review of the Group’s
risk management and internal control
systems. This review covers all
material controls, including financial,
operational and compliance controls.
The scope of this review extends to a
review of the Group’s principal risks
Responsible for reporting to
shareholders about the Group’s
risk management
Responsible for ensuring that the risk
management and internal control
systems are appropriately designed
and implemented
Responsible for ensuring that the risk
appetite of the Board is appropriately
understood by risk owners and key
decision makers
Responsible for reviewing the
business-wide and project
risk registers
Responsible for conducting an annual
assessment of strategic risks for
discussion at Board level
Heads of departments
and projects
Responsible for updating department
and project risk registers and
reporting significant risks to the
Executive Management Team
Responsible for implementing
and monitoring any mitigating actions
and controls
Responsible for training and educating
department and project team
members about Vectura’s risk
management process
Review of process and outputs
Review of high risks
Risk registers
Read more on our principal risks
and uncertainties over the page
21
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
RISKS AND RISK MANAGEMENT continued
Our principal risks and uncertainties
The principal risks specific to our business have been outlined below together with an explanation of
how we manage and mitigate them. Some of these risks are specific to the Group and others are more
generally applicable to the pharmaceutical industry or specific markets within which Vectura operates.
Risks specific to the Group:
Strategic risks
1. Implementation of strategy
3. Recruitment and retention of key employees
In order to become a specialty pharmaceutical company, Vectura
needs to transition to a hybrid business model focused on driving
R&D to its earliest inflection point for value realisation whilst actively
evaluating the landscape for attractive M&A opportunities.
Delivering this strategy requires significant decisions to be made,
including decisions on M&A activity, investment capex and balance
of product development versus partnerships.
Failure to make these strategic decisions in a timely manner may
mean that strategic or commercial opportunities are missed or
are not maximised. Perceived exposure to this risk may increase
as a result of recent changes within the management team.
Mitigating activities
Vectura’s strategy has been endorsed by the Board and
communicated to shareholders through the Annual Report,
corporate website and through management presentations
at investor conferences.
Vectura operates in a specialised industry and in order
to deliver against our strategic objectives we require highly
skilled and experienced employees. Challenges in attracting,
retaining and motivating such employees may impact our ability
to maintain performance levels and to deliver against our strategic
growth objectives.
Mitigating activities
A comprehensive review of total remuneration packages is underway
to ensure that our pay and benefits are market competitive.
Vectura is positive about developing all employees for current and
future roles and our career development and talent management
programmes remain a key area of focus for our management team.
We continue to invest in ongoing training and development.
Succession plans for key roles are being developed to ensure that
a talent pool is identified, developed and ready for succession.
2. Identification and execution of merger
and acquisition activity and integration
of acquired businesses and assets
Vectura is at a pivotal point in its maturity and strategic direction,
and in order to deliver our Board-approved strategy of becoming
a specialty pharmaceutical company we must undertake further
M&A activity. Realising anticipated benefits from such acquisitions
depends upon how well we identify M&A targets, how well
we conduct due diligence and how well we integrate acquired
businesses and assets into our business operations.
A shortage of skills, experience and transactional capability
in certain aspects of M&A due diligence and post-acquisition
integration could result in the sub-optimal management
of acquisitions, eroding enterprise value and delaying
our transition to a specialty pharmaceutical company.
Mitigating activities
We have established processes in place to manage acquisitions
and the associated due diligence prior to acquisition. Our internal
due diligence teams are supported by external subject matter
experts to ensure that the wider due diligence team has the
appropriate breadth and depth of knowledge and experience.
Structured post-acquisition integration plans are established
to ensure that integration is executed successfully.
22
Operational risks
4. Operational disruption
A significant and prolonged disruption to a research and
development or manufacturing operation upon which Vectura
relies could result in a substantial loss of royalty revenues, other
liabilities or a significant delay to a development programme.
Mitigating activities
Vectura identifies key suppliers in relation to its business and, where
possible, alternative sources of supply are sought, although this is
not always economically feasible.
Where appropriate, Vectura holds duplicates for business-critical
equipment. We have established good working relationships with the
manufacturers of business-critical equipment and we monitor our
supplier relationships to ensure effective and responsive service levels.
Contingency is built into product development plans, and Group-wide
business continuity plans have been established. Our operational
team is currently reviewing our business continuity procedures
and intends to undertake crisis simulations to test the robustness
of our arrangements.
Vectura has insurance, subject to certain exclusions and deductibles,
against the usual insurable perils, such as property damage and
other business interrupting events.
Vectura Group plc Annual Report and Accounts 2014/15 Increase
Decrease
Stable
Financial risks
Broader risks specific to the pharmaceutical industry
5. Foreign exchange risk
6. Regulatory approvals
A substantial proportion of the Group’s income from collaborative
agreements is received in US dollars and euros and expenditure
is predominantly incurred in pounds sterling. To the extent that
Vectura’s foreign currency assets and liabilities are not matched,
fluctuations in exchange rates between pounds sterling, the US
dollar and the euro may result in realised or unrealised exchange
gains and losses on translation of the underlying currency into our
presentational and functional currency of pounds sterling. Such gains
or losses may increase or decrease Vectura’s operating result and
may adversely affect Vectura’s financial condition, each as stated
in pounds sterling. In addition, if the currencies in which the Group
earns its revenues and/or holds its cash balances weaken against
the currencies in which it incurs its expenses, this could adversely
affect profitability and liquidity.
Mitigating activities
Where known foreign currency liabilities arise, foreign currency revenue
receipts are retained on deposit in the appropriate currency in order
to offset the exchange risk on these liabilities. As at 31 March 2015,
the Group had sufficient euro and US dollar reserves to cover its
immediate and short-term liabilities in respect of these currencies.
Where a substantial net foreign currency liability exists, Vectura will
consider hedging against it to minimise foreign currency expense.
However, such hedging is based on estimates of liabilities and
future revenues and will not fully eliminate future foreign currency
exchange fluctuations.
The international pharmaceutical industry is highly regulated
by governmental authorities in the UK, the US and Europe and
by regulatory agencies in other countries where Vectura or a
collaborator intends to test or market products they may develop.
These regulatory requirements are a major factor in determining
whether a substance can be developed into a marketable product
and the amount of time and expense associated with such
development. There can be no assurance that Vectura’s, or a
collaborator’s, products will receive and maintain regulatory
approvals. Even if products are approved, they may still face
subsequent regulatory difficulties. Such difficulties may result
in financial loss and reputational damage.
Mitigating activities
We work closely with expert regulatory advisors and, when
appropriate, seek advice from regulatory authorities on the design
of key development plans for pre-clinical and clinical programmes.
In respect of our collaborations and partnerships, we work with
a number of blue-chip pharmaceutical partners such as Novartis,
Sandoz, Baxter and GSK, who have significant regulatory expertise.
7. Unforeseen side effects
All drugs have a risk of adverse reactions and side effects
and therefore unforeseen side effects may result from the use
of Vectura’s, or a collaborator’s, products or product candidates.
This is an inherent risk which may be identified at any time,
even after a product has been approved and sold commercially.
Discovery of unforeseen side effects, other than those acceptable
to the regulators, may result in a substantial loss of royalty
revenues, other liabilities, a significant delay to a development
programme or withdrawal or suspension of regulatory approval.
Mitigating activities
Vectura and its collaborators conduct extensive pre-clinical and
clinical trials, designed to test for and identify any adverse side
effects. In addition, there is a significant amount of safety data
available regarding existing marketed products to which our
generic products relate.
23
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report RISKS AND RISK MANAGEMENT continued
Broader risks specific to the pharmaceutical industry continued
8. Partnerships
Vectura currently has a number of strategically important
partnerships, collaborations and licensing arrangements for
development, manufacture and commercialisation of certain of
its pipeline assets. Loss of any one of our strategically important
partnerships, collaborations or licensing arrangements could have
a material impact on Vectura’s future prospects. Vectura is also
reliant on suppliers for the development and manufacture of certain
devices. Any poor performance of the third parties could delay or
prevent devices from being successfully developed and delivered to
plan. This could result in key development milestones being missed
or associated payments being delayed and could also affect partners’
confidence in Vectura’s ability to deliver.
Mitigating activities
Vectura has an agreed process for managing entering agreements
and this includes appropriate oversight and approval at Board level.
All collaborations are performed under a suitable legal agreement
which is assessed by Vectura and its external legal advisors.
Typically, for collaborations a Joint Steering Committee (JSC) will
be established, which provides a mechanism by which Vectura can
ensure that any joint project team activity is managed appropriately
within our standard project management processes.
An alliance manager is identified for all licensing partnerships
or contract research organisation engagements.
In addition, in many European countries, there has been an increasing
trend towards reference pricing, where the amount of reimbursement
is determined in light of reimbursement levels for comparable drugs in
other European countries. This is likely to severely restrict the potential
per unit price for many new drugs unless such drugs can be significantly
differentiated from existing products. If products developed by Vectura
or its partners are not covered by government or other third-party
reimbursement schemes, are reimbursed at prices lower than those
expected by Vectura, or become subject to legislation controlling
treatments or pricing, Vectura and/or its partners may not be able
to generate significant revenue or attain profitability for any product
candidates which are approved for marketing.
Mitigating activities
Where appropriate, products may be out-licensed to partners who
have the expertise to commercialise products and negotiate pricing
structures with third-party payors, especially in disease indications
that require large sales forces. Should Vectura self-commercialise,
this would be targeted commercialisation for niche products with
significant unmet need, which requires a small sales force to target
specialist physicians.
Our business model includes bringing highly innovative products
to address unmet needs and we are also involved in a number
of generics programmes which support government initiatives to
reduce costs. This adds balance to our business model in an era
of increasing cost containment.
9. Pricing and reimbursement
10. Competition
Vectura or our collaborators may not be able to sell its products
profitably if reimbursement from third-party payors, including
government and private health insurers, is unavailable or limited.
A significant portion of Vectura’s future revenue is likely to depend
on payments by third-party payors, including government health
administration authorities and private health insurers. As such,
Vectura may be adversely affected by third-party reimbursement
and healthcare cost containment initiatives.
Vectura may not be able to sell its products profitably if reimbursement
from these sources is unavailable or limited. Third-party payors are
increasingly attempting to contain healthcare costs through measures
that are likely to impact the products Vectura is developing, including:
• challenging the prices charged for healthcare products, limiting
both coverage and the amount of reimbursement for new
therapeutic products, and denying or limiting coverage for new
products that are approved by the regulatory agencies; and
• refusing to provide coverage when an approved drug is used
in a way that has not received regulatory marketing approval.
Our business faces intense competition from a range of pharmaceutical
and biotechnology companies. Technological changes could overtake
the products being developed by Vectura or by its collaborators.
Our competitors in the biotechnology and pharmaceutical industries
may have superior research and development capabilities, products,
manufacturing capability or sales and marketing expertise. Many of
our competitors have significantly greater financial and human resources
and may have more experience in research, development and
commercialisation. As a result, our competitors may develop safer
or more effective products, implement more effective sales and
marketing programmes or be able to establish superior proprietary
positions. In addition, we anticipate that we will face increased
competition in the future as new companies enter Vectura’s markets
and alternative products and technologies become available.
24
Vectura Group plc Annual Report and Accounts 2014/15 Mitigating activities
Vectura maintains an appropriate level of product liability insurance
and operates quality systems relating to the manufacture of products.
Vectura has a pharmacovigilance system to monitor safety events
arising with respects to products sold.
Vectura’s insurance portfolio also includes other third-party liability
insurances which would provide cover in the event of certain other
contractual or statutory claims.
12. Intellectual property
Vectura’s success depends in part on its ability to obtain and
maintain protection for its inventions and proprietary information,
so that Vectura or our partners can exclude others from making,
using or selling its patented products. A failure to establish,
maintain or enforce intellectual property which is significant
to Vectura’s competitive position may have a material impact
on our future prospects.
Mitigating activities
Vectura owns a portfolio of patents and patent applications
and is the authorised licensee of other patents. Processes are
in place to ensure that patent applications are filed in a timely
manner and that applications are prosecuted to grant and
defended as appropriate.
Vectura has a dedicated IP team, who work closely with legal
advisors and obtains, where necessary, freedom to operate
and patentability opinions on the intellectual property landscape
relevant to our product development programmes, manufacturing
activities and processes.
Reasonable security measures are adopted to protect other
intellectual property, including appropriate confidentiality
provisions and agreements with collaborators, consultants
and employees.
All our licensing and collaboration agreements contain provisions
that underpin the strength and value of our patent estate and all
staff are trained to help Vectura maximise patent value and identify
opportunities for new patent protection.
Mitigating activities
Vectura performs detailed reviews of the development process
and progress of projects through trials.
For programmes managed in-house, Vectura has an established
project management framework. The potential commercial opportunities
for each project are assessed at the end of each stage of the project.
Projects are assessed using widely accepted valuation metrics based
upon discounted cash flows. These cash flows are discounted using
a hurdle rate that is in line with industry standards and the expected
return of each project is further risk adjusted by its phase of
development. Vectura has experienced development and commercial
teams who all contribute to this assessment. This in-house review is
supplemented by well-regarded disease area reports and, where
appropriate, bespoke market research.
Under this framework, research and development programmes will
only be approved by the Board if it can be shown that the expected
benefits outweigh the expected costs. All programmes are subject
to a stage-gate approval process and in the event that it was no
longer considered that future revenues would be higher than
future costs, the Board would consider terminating or redefining
the programme.
Where appropriate, the Group looks to mitigate the development and
commercial risk of its product pipeline by partnering drug candidates
at an appropriate stage. The partnering event crystallises part of the
programme’s value, with the goal of retaining an attractive proportion
of the commercial upside through future milestones and an ongoing
royalty interest from commercial sales. Vectura’s current royalty
generating products are expected to continue to provide royalties
until patent expiry or until Vectura is no longer entitled to receive
royalties in accordance with a licence agreement.
Vectura works closely with its advisors and obtains, where necessary,
opinions on the intellectual property landscape relevant to the Group’s
product development programmes and manufacturing activities and
processes. In addition, Vectura works with a number of key licensing
partners who have significant expertise in the research, development
and commercialisation of pharmaceuticals. These licensing partners
have access to significant financial and human resources.
11. Product liability
In carrying out its activities Vectura will potentially face contractual
and statutory claims, or other types of claim from customers,
suppliers and/or investors.
Vectura is exposed to potential product liability risks that are
inherent in the research, the pre-clinical and clinical evaluation,
pre-clinical study, clinical trials, manufacturing, marketing and use
of pharmaceutical products. Consumers, healthcare producers or
persons selling products based on Vectura’s and its collaborators’
technology may be able to bring claims against Vectura based on
the use of such products in clinical trials and the sale of products
based on Vectura’s technology.
25
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OUR PRODUCTS
MARKETED PRODUCTS
AT A GLANCE
We have eight products marketed by partners. We receive royalty income
from sales of these products.
26
Vectura Group plc Annual Report and Accounts 2014/15 PARTNERED
Ultibro® Breezhaler® (EU & ROW)
(indacaterol/glycopyrronium bromide; QVA149)
Primary indication:
COPD
Partner:
Novartis
Description:
A novel, once-daily, dual bronchodilator
approved in the EU as a maintenance
bronchodilator treatment for adult
patients with COPD.
History:
Glycopyrronium bromide was exclusively
licensed to Novartis in April 2005
by Vectura and our co-development
partner Sosei Group Corporation.
Progress:
Approved for use in over 60 countries,
including countries within the EU, Japan, Latin
America, Canada, Switzerland and Australia.
Seebri® Breezhaler® (EU & ROW)
(glycopyrronium bromide; NVA237)
Primary indication:
COPD
Partner:
Novartis
Description:
A novel, once-daily maintenance
bronchodilator treatment for adult
patients with COPD.
AirFluSal® Forspiro® (EU & ROW)
(salmeterol/fluticasone; VR315)
Primary indication:
Asthma and/or COPD
Partner:
Sandoz
Description:
Innovative inhaler with inhaled combination
therapy for asthma and/or COPD.
History:
Glycopyrronium bromide was exclusively
licensed to Novartis in April 2005 by
Vectura and our co-development
partner Sosei Group Corporation.
Progress:
Approved for use in over 80 countries,
including countries within the EU, Japan, Latin
America, Canada, Switzerland and Australia.
History:
Vectura initially developed the VR315
product and created the design of the
innovative inhaler before licensing the
asset to Sandoz in 2006.
Progress:
Approved in approximately 30 countries
and launched in twelve European countries
as well as South Korea and Mexico.
Photos of Seebri® Breezhaler® and Ultibro® Breezhaler® courtesy of Novartis AG. Ultibro®, Seebri®, Breezhaler®,
AirFluSal® and Forspiro® are registered trade marks of Novartis AG.
27
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report OUR PRODUCTS continued
PARTNERED continued
ADVATE® (Global)
Primary indication:
Haemophilia A
Partner:
Baxter
Adept® (Global)
Primary indication:
Prevention of
surgical adhesions
Partner:
Baxter
Description:
For the treatment of haemophilia A and is marketed worldwide by Baxter,
from which Vectura earns royalties from sales.
History:
In 2000, Vectura granted worldwide rights to Baxter to use its stabilisation patents
in its serum-free recombinant Factor VIII, ADVATE®.
Description:
Adept® is a 4% icodextrin solution used during surgery to reduce post-surgical
adhesions, a frequent and major complication after gynaecological and other
abdominal surgery, where abnormal scarring causes the surfaces of internal
structures to stick together.
Whilst not necessarily dangerous in themselves they can lead to future complications,
often years later or if further abdominal surgery is required. It has been used in Europe
since 2000 and since 2006 in the US.
History:
In December 2005, Vectura signed a licence deal with Baxter for the manufacture
and distribution of Adept®.
28
Vectura Group plc Annual Report and Accounts 2014/15 LICENSED
In August 2010, GSK entered into a licence and an option-to-license agreement
for certain of Vectura’s dry powder formulation patents. Vectura is entitled to
a low single-digit royalty on net sales of products using these patents, capped
at a maximum amount of £13m per annum.
Anoro® Ellipta® (UMEC/VI)
Primary indication:
COPD
Technology
licensee:
GSK
Description:
A multi-dose dry powder inhaler containing an anticholinergic, umeclidinium,
and a long-acting bronchodilator, vilanterol, formulated by GSK using proprietary
Vectura technology.
Relvar® Ellipta®/Breo® Ellipta®(FF/VI)
Primary indication:
Asthma, COPD
Technology
licensee:
GSK
Description:
A multi-dose dry powder inhaler containing a steroid, fluticasone furoate,
and long-acting bronchodilator, vilanterol, formulated by GSK using proprietary
Vectura technology.
Incruse® Ellipta®(UMEC)
Primary indication:
COPD
Technology
licensee:
GSK
Description:
A multi-dose dry powder inhaler containing an anticholinergic, umecildinum,
formulated by GSK using proprietary Vectura technology.
Anoro® Ellipta®, Relvar® Ellipta®/Breo® Ellipta® and Incruse® Ellipta® are registered trade marks of GSK, photos courtesy of GSK
Read more about our product
pipeline over the page
29
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
OUR PRODUCTS continued
PRODUCT PIPELINE
We have prioritised our portfolio and aligned our resources to ensure that our investment
in R&D is measured, controlled, realises value in the near term and is supportive of our strategy.
Our near-term priorities are to:
• accelerate the overall value of our existing pipeline; and
• demonstrate value realisation in our pipeline within the
strategic period to 2021.
The development focus of the Company will change over time.
Our current partnered programmes are unaffected and partner
obligations are contractual and must be supported. However, we will
seek to focus on value realisation from later-stage products, and from
an increased number of revenue-generating opportunities in the near
term arising from the considerable interest in our capabilities.
1
2
PRE-CLINICAL
PHASE I
PHASE II
VR588
Severe Inflammatory
Airways Disease
(Global)
VR588 is a broad-based, potent and selective
pan-JAK inhibitor
VR942 (UCB)
Inflammatory
Airways Disease
(Co-development global)
VR942 has the potential to be the first inhaled,
highly differentiated biological therapy for severe
airways disease
VR475
FAVOLIR®
Severe Uncontrolled
Adult Asthma
(US)
VR475 FAVOLIR® is an investigational product
that comprises the inhaled corticosteroid
budesonide delivered with Vectura’s smart
nebuliser, the AKITA® JET
VR465 (Ablynx)
RSV Infection
(Global)
Anti-RSV Nanobody® ALX-0171 for the
treatment of RSV in infants
VR096 (Janssen)
Anti-inflammatory
Asthma/COPD
(Global)
Novel anti-inflammatory therapies for the
treatment of asthma/COPD
VR647
SCIPE
Paediatric Asthma
(Global)
The Safe Corticosteroid Inhalation in Paediatrics
(SCIPE) programme aims to provide additional
benefit to persistent asthmatics under the
age of eight
VR647 SCIPE is an investigational product
that comprises the inhaled corticosteroid
budesonide delivered with Vectura’s smart
nebuliser, the AKITA® JET
VR179 (Grifols)
Cystic Fibrosis
(Global)
VR179 is a nebulised alpha-1-antitrypsin product
VR736 (Ventaleon)
Severe Influenza
(Global)
VR736 is an inhaled treatment for hospitalised
patients with severe influenza
30
Vectura Group plc Annual Report and Accounts 2014/15 Branded
Generic
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Wholly owned
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PHASE III
FILED
GENERICS
VR475
FAVOLIR®
Severe Uncontrolled
Adult Asthma
(EU)
VR475 FAVOLIR® is an investigational
product that comprises the inhaled
corticosteroid budesonide delivered with
Vectura’s smart nebuliser, the AKITA® JET
VR876
(Undisclosed partner)
Pulmonary Hypertension
(Europe)
Nebulised version of a currently marketed drug
using Vectura’s FOX™ device
NVA237 (Novartis)
COPD
(US)
Twice-daily (glycopyrronium/bromide)
12.5mcg. Maintenance bronchodilator
treatment for COPD in adults
Novartis expects US FDA action in Q4 2015
QVA149 (Novartis)
COPD
(US)
Twice-daily (indacaterol/glycopyrronium
bromide) 27.5/12.5mcg. Maintenance
bronchodilator treatment for COPD in adults
Novartis expects US FDA action in Q4 2015
VR315
(Undisclosed partner)
Asthma and COPD
(US)
VR315 is an inhaled combination therapy
for asthma and COPD
VR506
(Undisclosed partner)
Asthma
(US)
VR506 is an inhaled corticosteroid for the
treatment of asthma
VR632 (Sandoz)
Asthma and COPD
(EU)
VR632 is Vectura’s second inhaled combination
therapy for asthma and COPD
Read more over the page for
details of each project
31
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
OUR PRODUCTS continued
BRANDED AND GENERIC
INVESTIGATIONAL DRUGS
(PARTNERED AND WHOLLY OWNED)
PRE-CLINICAL
VR588 Severe Inflammatory Airways Diseases
(Global)
VR588 is a broad-based, potent and selective pan-JAK inhibitor that
demonstrates a pharmacokinetic profile suitable for development as an
inhaled treatment. Pre-clinical development activities have progressed
successfully and VR588 will soon commence Phase I-enabling inhalation
toxicology studies.
• Initial focus on asthma; multiple additional indications possible
• Minimise investment and focus on activities that generate data
to support licensing
VR942 (UCB) Inflammatory Airways Disease
(Co-development global)
VR942 has the potential to be the first inhaled, highly differentiated
biological therapy for severe airways disease. Vectura market research
indicates an overwhelming US physician preference for inhaled rather
than parenteral administration of such a product.
The VR942 programme is a co-development deal with UCB for a novel
therapy currently at the pre-clinical stage. The programme has moved
successfully through a number of pre-clinical milestones.
1
PHASE I
VR465 RSV (Ablynx) Respiratory Syncytial
Virus infection
(Global)
The Belgian biotech company, Ablynx, is developing the anti-RSV Nanobody®
ALX-0171 for the treatment of RSV infections in infants. Ablynx has demonstrated
favourable tolerability and PK of ALX-0171 in three Phase I trials. Ablynx
opened recruitment for the first-in-infant Phase IIa study with ALX-0171
in December 2014. If recruitment goes to plan, the study is expected to
be completed in Q2 2015 with results anticipated in Q3 2015. Vectura is
providing technology and expertise in delivery of the active product.
2
PHASE II
VR096 (Janssen) Anti-inflammatory Asthma/COPD
(Global)
Global development and licence agreement with Janssen Biotech Inc. for the
exclusive development of novel anti-inflammatory therapies for the treatment
of asthma/COPD. Initial focus is on the development of a Phase II candidate
with the possibility to include additional clinical-stage candidates.
Deal will leverage Vectura’s expertise and proprietary dry powder inhaler
technologies for the development of inhaled therapeutics. Vectura will apply
its delivery technologies to develop Janssen’s pulmonary products into
late-stage clinical development and commercialisation.
Janssen will lead the clinical development programmes, with Vectura taking
responsibility for pharmaceutical development and manufacturing to support
Phase II clinical trials and beyond.
VR475 Severe Uncontrolled Adult Asthma
FAVOLIR®
(US)
VR475 is an investigational product that comprises the inhaled corticosteroid
budesonide, delivered with Vectura’s smart nebuliser system, the AKITA® JET.
• Following the revised development strategy for FAVOLIR® in the EU,
a similar approach will be sought for the US
• Development plan will be discussed with FDA post completion of the
EU clinical study
• Targets an increased market opportunity
VR647 Paediatric asthma
SCIPE
(Global)
The Safe Corticosteroid Inhalation in Paediatrics (SCIPE) programme aims
to provide additional benefit to children who are persistent asthmatics.
Pre-IND meeting scheduled in June 2015 to agree US regulatory strategy.
• Objective is to retain current label/indication of budesonide, with a claim
for reducing dosing time
• Evaluating incoming licensing requests to expedite value return
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VR179 (Grifols) Cystic fibrosis
(Global)
VR179 is a nebulised alpha-1-antitrypsin product, under investigation
for the treatment of cystic fibrosis. The programme is partnered with
the Spanish company Grifols.
QVA149 (Novartis) COPD
(US)
Novartis submitted the NDA for QVA149 to the FDA in the US in the fourth
quarter of 2014 for an indication in COPD. In the first week of March 2015,
this filing was accepted by the FDA, triggering a milestone payment
to Vectura of $12.5m. Novartis expects US FDA action in Q4 2015.
Approved in EU and ROW as Ultibro® Breezhaler®, see page 27.
VR736 (Ventaleon) Severe influenza
(Global)
VR736 is an inhaled treatment for hospitalised patients with severe influenza
and is being developed by Ventaleon, a joint venture between Vectura and an
investment syndicate.
GENERICS
3
PHASE III
VR475 Severe Uncontrolled Adult Asthma
FAVOLIR®
(EU)
VR475 is an investigational product that comprises the inhaled corticosteroid
budesonide, delivered with Vectura’s smart nebuliser system, the AKITA® JET.
• A clinical study design has been agreed with the CHMP and clinical trial
activities will start imminently, with filing anticipated in mid-2018
• Refocused to target the broader patient population shift from GINA step 5
OCS-dependent patients to GINA step 4 and 5 patients
VR876 (Undisclosed partner) Pulmonary hypertension
(Europe)
This is being developed by an undisclosed partner as a nebulised version
of a currently marketed drug for the treatment of pulmonary arterial
hypertension (PAH). It uses Vectura’s smart nebuliser technology to
improve the patient acceptance of the product.
FILED
VR315 (Undisclosed partner) Asthma and COPD
(US)
VR315 is an inhaled combination therapy for asthma and COPD.
In August 2011, Vectura signed a licence agreement for the development,
manufacturing and commercialisation of VR315 in the US with the US
division of a leading international pharmaceutical company.
• Vectura will receive a royalty from sales of VR315 in the US
• Vectura will receive a further $26m upon achievement of future
pre-determined development milestones
• During 2014/15, Vectura received two additional milestones, each
of $1.5m, as a result of further progress with VR315 in the US
VR506 (Undisclosed partner) Asthma
(US)
VR506 is an inhaled corticosteroid for the treatment of asthma, which entered
clinical development in 2011. In June 2014, Vectura signed a partnership
agreement in the US. The licence agreement is with Vectura’s existing,
undisclosed US partner for VR315.
• Under the terms of this agreement, Vectura’s partner is responsible for
the commercialisation and manufacture of the product together with
clinical development
• Vectura has received an initial payment of $4m and will receive up
to $8m upon achievement of predetermined milestones. In addition,
Vectura will receive a royalty from all VR506 US sales
NVA237 (Novartis) COPD
(US)
Novartis submitted the NDA for NVA237 to the FDA in the US in the fourth
quarter of 2014 for an indication in COPD. In the first week of March 2015,
this filing was accepted by the FDA, triggering a milestone payment to
Vectura of $7.5m. Novartis expects US FDA action in Q4 2015.
Approved in EU and ROW as Seebri® Breezhaler®, see page 27.
VR632 (Sandoz) Asthma and COPD
(EU)
VR632 is Vectura’s second inhaled combination therapy for asthma
and COPD. The European rights for VR632 were licensed to Sandoz
in December 2007 in a deal worth up to €15.5m in milestones and
development funding plus royalties on all products sold. Vectura
retains the rights for the US and other territories.
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Annual Report and Accounts 2014/15 Vectura Group plcStrategic report
OUR TECHNOLOGY PLATFORMS, DEVELOPMENT CAPABILITY AND DEVICES
ENABLING THE DEVELOPMENT AND
DELIVERY OF VALUE-ADDING PRODUCTS
Vectura has a wide range of patent-protected technology platforms,
used to support the development and delivery of our own, value-adding
products. We also offer licences to our technologies, generating
significant revenues for Vectura.
The development of drugs for inhalation is complex and requires
specialist processes and know-how. Companies across the world
are keen to harness our expertise and technology for their own
inhalation programmes.
Dry Powder Formulation technologies
Vectura has a long history and successful track record in the
development of novel formulations. These novel formulation
approaches together with extensive know-how have been applied
to a broad range of Dry Powder Inhaler (DPI) products, including
both generic and branded/innovative products.
Vectura’s expertise enables us to achieve performance aligned
with product delivery. For a generic product this will mean developing
a formulation/device combination with performance to match the
reference branded product both in laboratory testing and in the clinic.
For a branded/innovative product the goal is to maximise performance
as befits the target airways disease and mechanism of action of the
drug. Vectura not only has extensive experience in the development
of lactose blend based formulations for small molecule drugs but
also in the development of dry powder formulations of biologics.
Formulation technologies for small molecule DPIs
Vectura has deep experience and a broad palette of IP that it can
apply to developing state-of-the-art DPI formulations for small
molecules. These technologies such as PowderHale® and PowderMax
make use of Force Control Agent (FCA) technology. The FCA is a
substance incorporated into the formulation to enhance various
aspects of performance.
With PowderMax, the approach is optimised to selectively place the
FCA where it will provide the most benefit. The technology is used
across a range of Vectura’s long established and newer partnerships.
Formulation technologies for inhaled biologics
Vectura has a long history of creating novel particle-engineered
DPI formulations of biologics both for inhaled and other product
applications and has developed significant know-how and a broad
portfolio of patents in this field. Vectura uses spray drying to produce
room-temperature-stable formulations that can be filled into blisters
and readily aerosolised using one of Vectura’s proprietary devices.
The combination of Vectura’s IP in particle engineering, its ability
to apply that IP to a product programme and then scale up and
industrialise the manufacturing process, we refer to as our ParticleMAX
technologies and capability. This is currently being applied to an
inhaled biologic being co-developed with our partner UCB.
Pharmaceutical development and GMP manufacturing capability
Vectura is able to apply these technologies to product development
programmes and through all stages of pharmaceutical and product
development including pivotal clinical trials and technical transfer
to commercial production. Vectura has state of the art development
and Good Manufacturing Practice (GMP) facilities in Chippenham, UK,
serving our requirements in both small molecule and biologic
product space. This enables us to produce supplies for late-phase
clinical trials using equipment that is entirely representative of that
which would be used at the final commercial manufacturing site.
This product development capability is supported by an extensive
analytical capability generating the high quality data that is essential
to the decision making required in product development.
Device technologies
Dry powder inhalers
Vectura’s range of pre-metered foil blister DPIs has been developed
to meet patients’ needs in inhalation therapy for asthma and COPD.
The devices are low cost and easy to use, yet they meet challenging
technical and regulatory requirements, as demonstrated by ongoing
approvals of Sandoz’s AirFluSal® Forspiro®. Forspiro® is the name
Sandoz gave to Vectura’s GyroHaler® device. This device also gained
a Red Dot design award in 2011. The core technology and IP used in
GyroHaler® has also been incorporated in a family of devices aimed
at meeting future product development and partnering opportunities.
These include lever-operated, open-inhale-close and single unit
dose devices which provide a range of dose number, performance
and user-interface options. The device platform was further
validated by an agreement with Janssen Biotech Inc. to develop
the technology for use with Janssen’s pulmonary products.
Smart nebuliser delivery systems
Vectura’s smart nebuliser delivery systems provide targeted inhalation
therapy for applications where precise and targeted delivery of a drug
to the lungs is needed. To achieve this the nebuliser device creates a
liquid aerosol and co-ordinates delivery after the patient has inhaled
using the FAVORITE principle for precise delivery of drugs to the lungs.
34
Vectura Group plc Annual Report and Accounts 2014/15 FAVORITE (Flow And Volume Regulated Inhalation TEchnology)
A patient’s breathing pattern can alter the efficiency of drug
delivery to different parts of the lung. Control of the inspiratory
flow rate, the inspiratory volume of aerosol and the timing during
the inspiration when the drug aerosol is delivered can materially
affect how much drug gets to central or peripheral parts of the
lungs. This is the basis of our proprietary, smart nebulisation-based
technology known as FAVORITE.
This control is achieved through a modified nebuliser unit that
delivers the nebulised aerosol tailored to the individual patient’s
breathing capacity. The increased efficiency of delivery means the
drug is distributed more efficiently allowing targeted deposition in
the lungs. Other benefits for the patient may also be derived from
this approach, such as reduced treatment time.
Tidal Breathing
(typical short and abrupt
inhalation pattern)
FAVORITE Inhalation
(slow and deep inhalation)
DPI DEVICES
SMART NEBULISER SYSTEMS
GyroHaler®
Lever-operated
Open-inhale-close
Single unit dose
AKITA® JET
FOX™
The AKITA® JET nebuliser system uses
proprietary technology to create positive
ventilation and control the flow and
volume tailored to the patient’s
breathing characteristics.
The system is used in conjunction with
smart card technology that ensures full
device exclusivity for specific drugs.
AKITA®2 APIXNEB
The AKITA®2 APIXNEB nebuliser is similar to the
AKITA® device, but with a mesh-based nebuliser
handset instead of a jet nebuliser. The mesh
provides much higher nebulisation efficiency
than a jet nebuliser, and can be used to nebulise
molecules that cannot tolerate the higher shear
forces of a jet nebuliser.
FOX™ is a hand-held, self-contained,
battery powered inhalation system that
delivers nebulised liquid drugs with high
performance using a vibrating mesh
technology. The mesh-based aerosolisation
engine is proprietary to Vectura. The FOX™
inhalation system also makes use of a flow
sensing/controlling value system, is rechargeable
and can be Bluetooth®-enabled.
In January 2015, Vectura received 510(k)
clearance from the US Food and Drug
Administration (FDA) for its FOX™ mobile
smart nebuliser device. The FDA clearance
shows Vectura’s commitment to innovation,
safety and quality and allows the FOX™
device to be marketed in the United States.
In April 2014, the FOXTM gained a Red Dot Award
for product design.
All of Vectura’s smart nebuliser systems are
now CE marked and 510(k) approved. A 510(k)
is a pre-marketing submission made to the FDA
to demonstrate that the device to be marketed
is as safe, effective and substantially equivalent
to an existing marketed device.
Annual Report and Accounts 2014/15 Vectura Group plc
35
Strategic report CORPORATE SOCIAL RESPONSIBILITY STATEMENT
OUR VALUES PROMOTE AN
INCLUSIVE WORKING ENVIRONMENT
We remain committed to ensuring that our business activities are
conducted in a responsible manner for the benefit of our stakeholders.
In achieving this objective, we focus our activities in four key areas
which we believe are most relevant to our business: our people, our
local communities, our environmental footprint and our governance.
We believe that having empowered people, who understand their
responsibilities, who display sound judgement and who act in an
ethical way, is key to the ongoing success and development of Vectura.
Vectura is a member of the FTSE4Good index, a leading investment
index for businesses that meet globally recognised corporate social
responsibility standards.
Our people
Our values
Our values clearly articulate our expectations and our
aspirations. We encourage and reinforce these values through
our performance management process and the “People’s Champion”
award. The “People’s Champion” is an annual award which allows
our employees to recognise and reward those individuals who have
acted as a behavioural role model, demonstrating our values in a
way that has inspired and engaged their colleagues.
We believe that our values promote an inclusive working environment
whereby individuals are rewarded for their individual and collective
contributions to the business.
Our employment practices
Vectura encourages diversity, throughout all levels of the
organisation. We believe that individual success depends on
ability, behaviour, performance and evidenced potential and
we remain committed to offering career opportunities without
discrimination. Our commitment to equal opportunities, diversity
and non-discrimination is enshrined in our working practices and
policies; we operate on the basis of mutual respect and we do
not tolerate discrimination or harassment on any basis. Our diversity
and equal opportunities policy covers all permanent and temporary
employees, including Executive and Non-Executive Directors, job
applicants, agency staff, associates, consultants and contractors.
We give full and fair consideration to every job application we
receive. Vectura has not set formal diversity quotas or targets and
all appointments, both internal and external, are ultimately made
on the basis of merit. Where possible, we support part-time and
flexible working with around 16% of our employees benefiting
from some kind of flexible working practice.
Chris Blackwell is the Board member responsible for overseeing
human resources and non-discrimination issues.
Our culture is fundamental to our success.
The passion of our people is compelling
evidence of the strength of our values, which
encompass enthusiasm, creativity, teamwork,
respect and trust. Our culture is typified
through respectful, friendly and inclusive
behaviours and practices.
Joanne Hombal
Director of Human Resources
36
Vectura Group plc Annual Report and Accounts 2014/15 Overall gender breakdown
as at 31 March 2015
Male
Female
141
156
Vectura Group plc’s Director gender split
as at 31 March 2015
Male
Female
1
7
21
Vectura senior managers
as at 31 March 2015
Male
Female
5
OUR VALUES:
Achievement
Enthusiasm
Participation
Innovation
Trust and respect
Our employee communications
We value the opinions and experience of our people.
Effective and engaging communication is at the heart of our internal
communication strategy. In an industry based on innovation and
research and development, our employees are our biggest asset
and it is therefore critical that we forge strong connections through
timely and meaningful communication.
We have established Staff and Managers’ Forums. These forums
provide a mechanism by which all employees can raise issues that
matter to them for discussion, to enable employee feedback and to
facilitate the communication and dissemination of key information
throughout the organisation.
We recognise that effective communication is a two-way, open
exchange of ideas and opinions. Our employees host regular
“Lunchtime Seminars”, during which individuals can present
on a topic that is relevant to their work or to the work of Vectura.
These sessions can be accessed remotely by all staff, using video
conferencing facilities, and they are designed to promote and enable
peer learning. In addition, we promote the use of employee-led and
facilitated “creative thinking” workshops; these sessions encourage
shared problem solving, which we believe fosters an inclusive and
innovative working environment.
The circulation of press announcements and internal newsletters,
monthly all-staff Chief Executive videolink updates as well as quarterly
individual site Chief Executive Q&A sessions keep employees
informed of business developments and performance.
In the forthcoming year, we plan to implement biennial employee
engagement surveys. The results of these surveys will be openly
communicated and will form the basis for action plans which
address any areas for improvement and build on our strengths.
We monitor our employee turnover on a monthly basis to identify
any possible employee relations or motivational issues and to assist
in our recruitment and resource planning. We are pleased to report
that a significant percentage of our employees have five or more
years’ continuous service.
0–5 years
5–10 years
10–15 years
15–20 years
3%
20–30 years
1.5%
31.5%
20%
44%
37
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report CORPORATE SOCIAL RESPONSIBILITY STATEMENT continued
Our people continued
Developing and rewarding our people
Attracting and retaining skilled people with values aligned to our
company ethos is critical for our business and we aim to develop
and maintain a motivated and professional workforce. As such,
we recognise the importance of investing in our people, ensuring
that they are equipped to deliver in their current and future roles
within the business. In addition to investment in general training
and development, Vectura offers all employees the opportunity
to apply for scholarship funding. The Meakin Scholarship provides
substantial financial assistance to those who wish to pursue further
self-development, largely in their own time. Any course that would
significantly enhance an employee’s skills whilst benefiting Vectura
is considered.
Remuneration plays an important role in retaining and motivating
our people. We seek to provide well-constructed and fair reward
systems designed to incentivise superior performance and align
the interests of our employees with those of our shareholders.
Our remuneration packages are designed to be both fair and
competitive and all remuneration packages include an element of
variable remuneration in the form of an annual bonus. The annual
bonus allows us to reward employees for achieving and exceeding
challenging corporate and individual objectives. In addition to our
remuneration packages, which include a pension entitlement,
permanent health insurance and life assurance and private medical
care, all employees are given the opportunity to participate in our
all-employee share plans. For more details of our all-employee
share plans, please refer to the Report on remuneration.
Our commitment to health and safety
Vectura considers health and safety to be a priority in its workplaces.
We have an established Health and Safety Committee that reviews
health and safety standards within the organisation. The Committee
continually monitors and reviews health and safety practices to
ensure that health and safety management procedures are robust
and in line with industry best practice. Annual updates are provided
to the Board for review and additional update reports are provided
as required. Trevor Phillips is the Board member to whom responsibility
for health and safety issues has been delegated.
Specialist ongoing training is provided to those individuals who
are responsible for health and safety across the organisation.
General health and safety training is delivered to all staff via
in-house training sessions provided by our Health and Safety
Manager and by e-learning courses.
The Group has an excellent safety record and there have been
no major incidents or accidents reported to the Health and Safety
Committee during the year (2014/15: none).
Our local communities
We consider that one of the most significant impacts we can have
within our local communities is to continue to provide high-quality
employment opportunities and to develop therapies to help patients
with airways-related diseases.
In addition, we support the STEM (Science, Technology, Engineering
and Mathematics) initiative, which is a major government programme
whereby our employees actively help local schoolchildren to gain
the understanding, capabilities and skills to flourish in a scientific
environment such as ours.
We are proud to have a highly creative and active Social Committee,
which initiates a calendar of social and charitable events each year.
With a dedicated budget, this team is empowered to organise engaging
and rewarding activities to raise money for local charities, as well
as facilitating our support of nationwide charity campaigns such
as Comic Relief. Wherever possible, company facilities are made
available for these events.
Our environmental footprint
Due to the nature of its activities, Vectura considers that it has
a low environmental impact. However, we remain committed to
minimising the impact of our activities on the environment and we
actively seek to make energy savings in a way that is beneficial for
the environment and cost effective for the business. Andrew Oakley
is the Board member to whom responsibility for environmental
issues has been delegated.
Vectura’s internal operational goals include objectives to reduce our
environmental footprint by controlling the use of energy and materials.
To help us achieve these objectives, a Green Action Team meets
regularly and has responsibility to pursue initiatives for environmental
sustainability and carbon reduction.
Green Action Team
Our Green Action Team is responsible for raising environmental
awareness, driving good environmental behaviours and co-ordinating
environmental initiatives across the organisation. The team regularly
publishes articles on environmental matters on our staff intranet and it
manages internal guidance for the use of heating and air conditioning.
Each year, the team organises an annual “Green Week” to promote
ongoing awareness of environmental matters amongst staff.
Our environmental policies
Our company environmental policy is modelled on ISO14001 standards,
and all staff are required to read and comply with Vectura’s green
working policy. Induction procedures for new staff include sufficient
information to ensure a high level of compliance with our
environmental standards.
Our environmental initiatives
Vectura has adopted and maintains a number of specific
environmental initiatives.
Energy efficiency
• 52 solar panels are installed at our Chippenham site which have
generated over 26,500kwh of electricity since installation in
November 2012.
• It is our policy that, when an existing light unit requires replacement,
it is replaced with an LED light. The LED lights installed are up to
four times more energy efficient than the traditional light units
that they replace. The majority of the lighting at our Chippenham
site is now LED.
38
Vectura Group plc Annual Report and Accounts 2014/15 • Passive infrared light sensors are installed in many general work
areas. This ensures that lighting is not left on in work areas that
are not currently in use.
The amounts shown below for total FY 14/15 Scope 1 and Scope 2
emissions are those required to be reported under the Regulations.
Greenhouse gas emission by source 2014/15(1)
2014/15
2013/14
Scope 1
Scope 2
Total emissions (Scope 1 and 2)
Emissions reported (tonnes of CO2 per sq ft)(2)
215
1,506
1,721
0.02
142
1,272
1,414
0.02
(1) GHG emissions reported in metric tonnes of carbon dioxide equivalents. Emissions factors
were sourced from the UK Defra database.
(2) Gas and electricity usage information has been obtained from purchase invoices and verified
by reference to meter readings. Vehicle fuel usage is based upon recorded mileage.
Our governance
Vectura’s corporate governance structure is set out on page 47
of this Annual Report.
Our ethical and social policies
Vectura’s principal activities are undertaken within the pharmaceutical
industry, which is subject to a highly regulated ethical framework
with which the Group complies. In addition, Vectura seeks to conduct
its activities generally in accordance with good business ethics.
We have adopted a clear anti-bribery policy, which has been
communicated to all employees so they can recognise and avoid
the use of bribery and report any suspicion for rigorous investigation.
Political donations are prohibited and advance approval from
management is required before management and staff may
accept or solicit a gift of any kind.
We do not believe that human rights issues present a significant
issue for Vectura, but we are committed to protecting the human
rights of our employees and the people who come into contact
with our business.
• We continue our commitment to promoting “green IT”. Where
possible, we use virtual PCs that use c.20% of the electricity
of a standard desktop PC and we employ virtual servers.
Waste management
Initiatives to effectively manage and reduce waste have been
implemented throughout the organisation:
• We recycle all paper and cardboard waste, aluminium cans,
plastics, printer toners/cartridges and redundant mobile
telephone handsets.
• We operate a managed print solution to help control paper usage.
• We use registered waste disposal contractors and comply with
all relevant waste legislation.
The Carbon Disclosure Project
Vectura voluntarily reports its environmental performance under
the Carbon Disclosure Project (CDP). CDP plays an important role in
communicating information about greenhouse gas emissions and
related activities reported by the UK’s largest companies, enabling
investors and the public to take informed action against climate
change. There have been no contentious issues or other matters
having economic, legal, reputational or environmental
consequences that have arisen this year.
Greenhouse gas emissions
Vectura reports greenhouse gas emissions in accordance with
the Companies Act 2006 (Strategic Report and Directors’ Report)
Regulations 2013 (“the Regulations”).
Greenhouse gas assessment parameters
Baseline year
Intensity ratio(1)
FY13/14
GHG by gross building area(2)
(1) In order to express total annual emissions in relation to a quantifiable factor associated with
Vectura’s activities, gross building area has been used as an intensity ratio.
(2) Due to the nature of Vectura’s business, a large amount of energy is consumed
in maintaining air quality in the laboratories and therefore choosing gross building
area as an intensity ratio gives the fairest reflection of performance.
Emissions data is reported using a financial control approach
to define our reporting boundary, which meets the requirements
of the Regulations in respect of those emissions for which we are
responsible. The information is presented for a twelve-month
period. Emissions have been measured for all sites.
Annual Report and Accounts 2014/15 Vectura Group plc
39
Strategic report FINANCIAL REVIEW
FINANCIAL REVIEW
SIGNIFICANT PROGRESS
FOR FUTURE GROWTH
FY 14/15 has been a transformational year
for Vectura. We are pleased to report a 59%
increase in revenues to £58.0m, driven by
significant organic growth in royalty streams
derived from recently launched products,
augmented by significant development
milestones in respect of partnered programmes.
Revenue growth of £21.5m and an increase
of £10.5m in operating expenditures as we
continue to invest in growth, translates to
an £11.0m increase in EBITDA1 to £16.2m.
40
Financial Highlights
FY 14/15 has been a transformational year for Vectura. We are
pleased to report a 59% increase in revenues to £58.0m, driven by
significant organic growth in royalty streams derived from recently
launched products, augmented by significant development milestones
in respect of partnered programmes.
Revenue growth of £21.5m and an increase of £10.5m in operating
expenditures as we continue to invest in growth, translates to an
£11.0m increase in EBITDA1 to £16.2m. Research and development
expenditure for the financial year was below our guidance range as
the result of the timing of certain expenditure commitments relative
to our financial year end. The phasing of this spend will consequently
impact our research and development investment for FY 15/16 and,
as a result, we anticipate that research and development expenditure
for the forthcoming year will be at the higher end of our stated
guidance range.
Revenue
Vectura categorises revenues into five streams: royalties, product
licensing, technology licensing, development services and device
sales. In FY 14/15, we have seen revenue growth across the board
in each of our revenue streams.
Royalties
Royalty revenue of £25.2m has increased by 55% year-on-year; this
increase has been driven by a sustained increase in underlying sales
of recently launched products.
Net sales of Seebri® Breezhaler®, as reported by Novartis, have grown
by 87% to $153m for the twelve-month period ended 31 March 2015.
For Ultibro® Breezhaler®, which was launched in calendar Q4 2013,
Novartis reported net sales of $156m for the financial year under
review. In light of the strong growth in net sales, royalty income
received from Novartis for these two products has increased to
£8.5m during the year (2013/14: £2.7m).
In addition, we benefited from a full year of royalty revenue from
GlaxoSmithKline (GSK) for sales of Relvar®/Breo® Ellipta® and Anoro®
Ellipta®, and we received our first royalties on sales of Incruse® Ellipta®.
GSK reported net sales of £135m for sales of these three products,
upon which Vectura earned a royalty of £3.8m (2013/14: £0.3m).
Under the terms of our agreement with GSK, the maximum annual
royalties payable to Vectura for sales of these products are £13m.
Other royalty revenue is mainly derived from the two products
licensed to Baxter. Underlying sales of ADVATE® have continued
to advance by 6% during the year under review on a constant
currency basis and accordingly royalty revenue earned from
Baxter from sales of ADVATE® has increased to £11.8m. Adept®
contributed royalty revenues of £0.4m during the year.
Vectura Group plc Annual Report and Accounts 2014/15 Product Licensing
Product licensing of £19.8m has increased by 49% year-on-year. FY 14/15 has been a year of excellent progress across new and existing
partnerships, marked by a number of milestone events which are linked to significant revenue streams to Vectura over the coming years.
June 2014
We announced that we had licensed the US rights to VR506 to our existing partner for VR315 US (undisclosed).
Vectura received an initial milestone of £2.4m ($4m) upon signing of this agreement, and is eligible to receive
up to a further $8m upon achievement of certain predetermined milestones.
In addition, we recognised a milestone of £0.9m ($1.5m), being the first of two development milestones earned
during the year in respect of our partnered VR315 US programme.
October 2014
Approval of AirFluSal® Forspiro® in Portugal triggered a milestone receipt of £0.9m (€1.5m) from our partner Sandoz.
November 2014
Approval of AirFluSal® Forspiro® in the Czech Republic triggered another milestone receipt of £0.9m (€1.5m) from Sandoz.
A second development milestone of £0.9m ($1.5m) was recognised in respect of our partnership of VR315 US.
Under the terms of this agreement, Vectura will receive up to a further $26m upon achievement of future
predetermined development milestones. In addition, Vectura will receive a royalty on all sales of VR315 in the US.
March 2015
Our partner, Novartis, received acceptance by the FDA for their NDA submissions for QVA149 and NVA237.
Upon confirmation of this acceptance, Vectura earned milestone revenues of £8.2m ($12.5m) and £4.9m
($7.5m) respectively.
Technology Licensing
Technology licensing revenues of £6.6m (2013/14: £4.3m) primarily
relates to two significant milestones achieved during the year; £3.3m
($5m) relates to an upfront milestone recognised upon entering into
a global development and licensing agreement with Janssen Biotech, Inc.
for the exclusive development of novel anti-inflammatory therapies for
the treatment of asthma/COPD and £2.0m relates to the final milestone
defined in a non-exclusive licence with GSK. As explained in the royalties
section of this report, Vectura now earns royalties on the commercial
sale of Relvar®/Breo® Ellipta®, Anoro® Ellipta®, and Incruse® Ellipta®.
Development Services
Development service revenues of £3.9m were recognised during
FY 14/15. This increase is the result of higher demand for these
specialist services from Vectura’s existing partners as well as a
positive contribution from new partnerships and those partnerships
acquired as part of the Activaero acquisition.
Device Sales
Device sales of £2.5m have increased significantly compared to the
prior year (2013/14: £0.9m) due the launch of AirFluSal® Forspiro®,
which uses Vectura’s GyroHaler® device, in a number of European
and Rest of the World territories.
Research and Development Expenses
Total investment in research and development (R&D) was £36.1m,
representing a 29% increase on the previous year (2013/14: £28m).
During the year, we completed a portfolio review which has
allowed us to prioritise our portfolio and align our resources to
ensure that our investment in R&D is measured, controlled and
supportive of our strategic objectives. Accordingly, we have begun
to exploit two of our newly acquired assets namely VR475 EU and
VR876 and total external expenditure on these programmes was
£5.2m during the year. We have continued to develop VR942
in collaboration with our partner UCB and external expenditure
on this programme has increased compared to the prior year.
These increases were partially offset by a decrease in external project
spend associated with VR315 in the US as we have now effectively
come to the conclusion of our commitments on this project.
R&D spend in FY 14/15 was lower than our guidance due to the
timing of certain expenditure commitments relative to our year end.
We remain committed to managing our research and development
within a predefined range and we anticipate that our R&D expenditure
will be at the higher end of this range in the forthcoming year, as
we undertake clinical activities in respect of VR475 EU. Furthermore,
during FY 15/16, we will incur non-recurring expenditure as we
transfer activities from our Gemünden site to our other sites in the
UK and Germany. Overall the closure of the site will result in cost
savings, as from FY 16/17, in both R&D expenditure and other
administrative expenses.
Other Administrative Expenses
Other administrative expenses have increased from £3.4m
to £4.5m, with the majority of this increase attributed to the
acquisition of Activaero.
Taxation
The total taxation credit of £9.9m comprises R&D tax credits
of £3.1m and non-cash taxation credits of £6.8m relating to
movement in deferred taxation liabilities and assets within
the Group.
Goodwill
As outlined in the FY 13/14 annual report, given the proximity
of the Activaero acquisition to Vectura’s year end, the acquisition
accounting reported as at 31 March 2014 was deemed to be provisional.
In accordance with IFRS 3 – Business Combinations, the fair values
assigned to the identifiable assets, liabilities and contingent liabilities
have been revised in the period to 18 March 2015 to reflect new
information about facts and circumstances that existed as of the
acquisition date.
During the year, an additional payment of €0.6m was made
to the former shareholders of Activaero. This additional payment
was in consideration for working capital items that were acquired
during the acquisition. Accordingly, the goodwill associated with
the acquisition has increased from €9.3m to €9.9m.
41
Annual Report and Accounts 2014/15 Vectura Group plcStrategic report FINANCIAL REVIEW continued
Revenue
EBITDA1
Basic EPS
Cash and cash equivalents
£58.0m
+59%
£16.2m
+212%
2013/14: £36.5m
2013/14: £5.2m
0.9p
2013/14: (0.7p loss)
£90.0m
+10%
2013/14: £81.7m
Goodwill continued
In accordance with International Financial Reporting Standard 3
“Business Combinations”, the revised amounts have been recognised
as though they were the amounts known at the acquisition date and
so comparative information for the prior year has been restated.
The acquisition accounting is now considered to be final.
With the exception of the deferred consideration payment to
be made in August 2015, which was reflected in the provisional
acquisition accounting, no additional payments are due to be made
in respect of this acquisition.
Intangible Assets
Intangible assets of £104.3m include assets of £5.1m relating
to the Innovata acquisition and assets of £99.2m relating to the
Activaero acquisition.
The intangible assets of £5.1m (2014: £10.7m) associated with the
Innovata acquisition have been amortised by £5.6m (2013/14: £6.4m)
during the year. These assets will be fully written down over the
forthcoming year.
The carrying value of the intangible assets associated with the
acquisition of Activaero is £99.2m (2014: £128.2m), at the prevailing
exchange rate at the balance sheet date. The assets will continue to
be amortised over their remaining useful life.
Translation Reserve
The assets and liabilities, including goodwill, acquired from
Activaero are denominated in euros and therefore, in accordance
with accounting standards, the Group has recognised a net foreign
exchange difference of £11.4m within reserves as a result of the
movement in the exchange rate between 31 March 2014 and
31 March 2015. In future periods, the movement in this reserve
will be dependent upon the £/€ exchange rate at the relevant
balance sheet dates.
Property, Plant and Equipment
Vectura has invested £1.4m in its inhaled product manufacturing
capabilities during the year (2014: £2.5m). Capital investment is
expected to increase in FY 15/16 as we transfer manufacturing
activities previously performed at our Gemünden site to our
other sites in Germany and the UK.
Deferred Consideration
The deferred consideration of £25.6m relates to the €35m payment
in cash which is due to be paid to the former Activaero shareholders
in August 2015 as part of the acquisition consideration.
Foreign Exchange Rates
The following foreign exchange rates were used during the year:
Average rates
£/$
£/€
Period end rates
£/$
£/€
2014/15
2013/14
1.61
1.27
1.48
1.37
1.59
1.19
1.67
1.21
Cash Flow
Vectura continues to maintain a strong cash position with cash
and cash equivalents at 31 March 2015 of £90.0m (2014: £81.7m).
Vectura achieved a net cash inflow of £8.0m from operating activities
(2014: £0.7m outflow), which is reflective of growing and sustainable
cash receipts from royalty revenue and a focus on cost control
throughout the business. The negative movement in trade and
other receivables is largely due to the timing of the $20m in
milestones earned from Novartis following FDA acceptance of
the NDA filings for QVA129 and NVA237 in the US. This amount
has now been received during FY 15/16.
By order of the Board,
Andrew J Oakley
Director
19 May 2015
The Strategic report, which comprises pages 1 to 42, has been
approved and signed on behalf of the Board.
Deferred Income
Deferred income relates to milestones received in cash but not
yet recognised as revenue. Of the £1.7m on the balance sheet at
31 March 2015 (2014: £1.8m), £0.2m will be recognised as revenue
in 2015/16 and £1.5m, which relates to the VR315 (AirFluSal® Forspiro®)
RoW deal with Sandoz, will be recognised as revenue in later periods.
Dr Chris Blackwell
Chief Executive
19 May 2015
1 Earnings before investment income, finance (costs)/gains, tax, depreciation, amortisation, share based compensation and adjusted for non-recurring expenditure items.
42
Vectura Group plc Annual Report and Accounts 2014/15 CORPORATE GOVERNANCE
INTRODUCTION
FROM THE CHAIRMAN
Dear shareholder
On behalf of the Board, I am pleased to present the
Corporate governance report for the year ended 31 March 2015.
As a Board, we have a collective responsibility to shareholders for
the sustainable long-term success of Vectura. We believe that a strong
and balanced corporate governance framework is the foundation
of a successful organisation. We adhere to the principles-based
approach set out in the UK Corporate Governance Code (“the Code”),
whilst recognising that our governance structure must be appropriately
tailored to suit the needs of our business.
Our corporate governance framework is built with a focus upon
effective leadership, clear communication, risk management and
a commitment to a culture of openness, honesty and integrity.
This framework is embedded within the culture of our organisation
through our core values and our underlying policies, procedures
and management processes.
Complying with the UK Corporate Governance Code (“the Code”)
I am pleased to report that throughout the financial year, and
to the date of this report, Vectura has fully complied with the
principles and provisions set out in the Code. We will continue
to adhere to the Code and we will monitor developments and
implement improvements in our governance framework during
the year ahead.
Diversity and leadership
The Board recognises the importance of diversity, in its broadest
sense, at all levels within the organisation. When making appointments
to the Board, we have due regard for gender diversity; however, all
appointments are ultimately made on merit.
There has been one significant change to Board membership during
the year. On 1 January 2015, Andrew J Oakley was appointed as
Chief Financial Officer and Company Secretary. Andrew is a highly
regarded and well established Chief Financial Officer and he brings
a wealth of market knowledge and considerable transactional
experience. We believe that Andrew is well positioned to help
Vectura achieve its strategic objectives. The Board would like
to thank his predecessor, Paul Oliver, for his considerable
contribution to Vectura during his time with the Company.
During the year, Chris Blackwell also announced his intention
to step down as Chief Executive with effect from 1 July 2015.
The Nomination Committee, with the support of independent external
advisors, are leading the process to recruit Chris’ successor. Succession
planning as well as overall Board balance and composition continue
to be key areas of focus for the Nomination Committee.
In this regard, I am pleased to report that Dr Per-Olof Andersson was
appointed to the Board as an independent Non-Executive Director
with effect from 1 April 2015. Per-Olof brings a strong and impressive
track record to Vectura and we believe he will be of great benefit
to the Company as we continue our transformation into a specialty
pharmaceutical business.
Evaluating Board effectiveness
The annual Board performance evaluation was conducted internally
during the year and, following this process, it was concluded that
the individual members of the Board continue to be effective in
their roles and that they have the necessary skills and experience to
fulfil their duties. Details of the evaluation process and the outcome
can be found on page 50 of this report.
Communication with shareholders
The Board maintains its commitment to maintaining an open
dialogue with our shareholders. As ever, all of Vectura’s Directors
will be in attendance at our Annual General Meeting (AGM) on
24 September 2015 and will be available to meet and address
any questions from our investors.
Bruno Angelici
Chairman
19 May 2015
43
Annual Report and Accounts 2014/15 Vectura Group plcGovernance BOARD OF DIRECTORS
1. Bruno Angelici
MBA
R
N
2. Chris Blackwell
BSc, PhD
Role
Non-Executive Chairman
Tenure
Bruno Angelici, 67, was appointed to the Board
of Vectura Group on 1 December 2013 and became
Non-Executive Chairman on 1 February 2014.
Experience
Bruno is a French national with an MBA (Kellogg
School of Management) and business and law
degrees from Reims.
Bruno’s career includes senior management
roles in pharmaceutical and medical device
companies. Bruno retired from AstraZeneca in
2010 as Executive Vice President International
after a 20-year career. He was responsible
for Europe, Japan, Asia Pacific, Latin America,
Middle East and Africa having originally joined
as President of ICI Pharmaceuticals France.
Prior to this, he was at Baxter, a US-based global
supplier of medical devices. He has extensive
international experience, including in the US,
and brings a deep understanding to the
Company of the medical device and
pharmaceutical industries.
External appointments
Bruno is a Non-Executive Director of Smiths
Group plc, a FTSE 100 technology group, and
Novo Nordisk A/S, a global healthcare company
and world leader in diabetes care. He is also
a member of the Global Advisory Board of
Takeda Pharmaceutical Company Ltd Japan,
the largest pharmaceutical company in Asia,
and a member of the Supervisory Board
of Wolters Kluwer NV, a global information
services and publishing company.
Role
Chief Executive and Executive Director
Tenure
Dr Chris Blackwell, 53, was appointed
Chief Executive of Vectura in February 2004. He
joined the Group in 2002 as Chief Operations Officer
and Executive Director.
Experience
Having graduated with a first class honours
degree in applied biology, Chris received
a PhD for his work at the University of Bath.
Throughout both degrees, Chris was sponsored
by ICI Pharmaceuticals (now AstraZeneca),
and worked in the fields of respiratory
and cardiovascular diseases.
Prior to Vectura, Chris was Executive Director of
Drug Development at Scotia Pharmaceuticals Ltd.
He was previously at Hoffmann-La Roche, where
he was UK Director, Global Project Management,
and before that, at Glaxo Group Research Ltd.,
in the Department of Clinical Pharmacology.
3. Andrew Oakley
BEcon, MBA, ACA
Role
Chief Financial Officer and Company Secretary
Tenure
Andrew Oakley, 52, was appointed
Chief Financial Officer and Company Secretary
of Vectura in January 2015.
Experience
Andrew holds a Bachelor of Economics Degree
from Macquarie University and an MBA from
London Business School and has been
a Member of the Australian Institute
of Chartered Accountants since 1987.
Prior to Vectura, Andrew was the Chief Financial
Officer at the Swiss bio-pharmaceutical companies
Actelion Ltd and Novimmune SA. Prior to joining
Actelion, he served in a senior finance capacity
for the global holding companies of Accenture,
having previously held executive positions in
major multinational building material companies
and has also spent several years as an equity
analyst with banks in Australia, UK and the US.
4. Trevor Phillips
BSc, PhD, MBA
Role
Chief Operations Officer
and President of US Operations
Tenure
Dr Trevor Phillips, 54, joined the Board of Vectura
in June 2012. He was appointed Chief Operations
Officer in July 2011, having joined the Company
in January 2010 as President of US Operations.
Experience
Trevor has a BSc in microbiology from the
University of Reading and a PhD in microbial
biochemistry from the University of Wales.
He was awarded an MBA from Henley
Management College in 1997.
Prior to Vectura, Trevor gained extensive
international experience in organisational
leadership, management and pharmaceutical
drug development in a number of senior roles,
including positions as CEO and President of the
US publicly held company Critical Therapeutics
Inc, following six years as the company’s Chief
Operating Officer. During his time at Critical
Therapeutics, Trevor was involved in setting up
commercial partnerships, product in-licensing
and out-licensing, managing drug development
and NDA filings, commercial product manufacturing
and mergers and acquisitions. Between 1986
and 2002 Trevor held a number of management
positions at Sepracor, Scotia Pharmaceuticals,
Accenture, GlaxoWellcome Research and
Development and Simbec Research Limited.
1
44
2
3
4
8. Per-Olof Andersson
MD, PhD
Role
Non-Executive Director
Tenure
Dr Per-Olof Andersson, 62, joined the Board
of Vectura on 1 April 2015.
Experience
Per-Olof was born in Sweden and studied
medicine at Lund University. Per-Olof has
an international R&D track record within the
pharmaceuticals, bio-pharmaceuticals and
speciality pharmaceutical industry and considerable
experience in respiratory therapeutic development.
In 2011, Per-Olof retired from Almirall where
he was Executive Director for R&D and Member
of the Board of Directors. Prior to joining Almirall
in 2006, Per-Olof had a distinguished international
career at Pharmacia and Pfizer over a period
of nearly 20 years. Since 2011, Per-Olof has
been an independent consultant advising
biotech and pharmaceutical companies
and in particular working with Almirall.
Committee membership
R Remuneration Committee
N Nomination Committee
A Audit Committee
Committee chairman
5. John Brown
CBE, PhD, MBA, FRSE
R
N
A
Role
Non-Executive Director
and Senior Independent Director
External appointments
Susan holds a number of Non-Executive
Directorships with both public and private
companies in the biotech and healthcare
field, including BTG plc, Source Bioscience plc,
Cizzle Biotechnology Ltd, BerGenBio AS
and Evgen Ltd.
Tenure
Dr John Brown, 60, joined the Board of Vectura
in 2004.
7. Neil Warner
BA, FCA, MCT
R
N
A
Experience
John was previously Chairman of BTG plc
and Axis-Shield plc. Until late 2003, John
was Chief Executive of Acambis plc, a leading
producer of vaccines to treat and prevent
infectious disease. John is an Honorary Professor
of Edinburgh University and is a Fellow of the
Royal Society of Edinburgh.
External appointments
John is Chairman of CXR Biosciences Ltd,
Mode Diagnostics Ltd, The Cell Therapy Catapult
and the Roslin Foundation. He also chairs
the Life Science Advisory Board for the
Scottish government.
R
N
A
6. Susan Foden
MA, DPhil
Role
Non-Executive Director
Tenure
Dr Susan Foden, 62, joined the Board of Vectura
in January 2007.
Experience
Susan has held various positions in
venture capital and UK biotech companies.
From 2000 to 2003 she was an Investor Director
with the London-based venture capital firm Merlin
Biosciences Limited, and was Chief Executive Officer
of the technology transfer company
Cancer Research Campaign Technology Ltd
from 1987 to 2000. She studied biochemistry
at the University of Oxford from where she
obtained an MA and a DPhil.
Role
Non-Executive Director
Tenure
Neil Warner, 62, joined the Board of Vectura
in February 2011.
Experience
Neil has significant financial and managerial
experience in multinational businesses. He was
Finance Director at Chloride Group plc, a position he
held for 14 years until the company’s acquisition
by Emerson Electric. Prior to this, he spent six years
at Exel plc (formerly Ocean Group plc and acquired
by Deutsche Post in December 2005), where he
held a number of senior posts in financial planning,
treasury and control. He has also held senior
positions in Balfour Beatty plc (formerly BICC
Group plc), Alcoa and PricewaterhouseCoopers
and was a Non-Executive Director of Dechra
Pharmaceuticals plc, where he was the
Senior Independent Director and Chair of the
Audit Committee. Neil has an economics degree
from the University of Leeds and is a Fellow of
the Institute of Chartered Accountants.
External appointments
Neil is the Non-Executive Chairman of Enteq
Upstream plc, a specialist reach and recovery
products and technologies provider to the
upstream oil and gas services market.
5
6
7
8
45
Governance
EXECUTIVE MANAGEMENT
1. Karl Keegan
BSc, MPhil, PhD, MSc
2. Roger Heerman
BS, MBA
3. Joanne Hombal
BSc, PD-HRM
Role
Chief Corporate Development Officer
Role
Chief Commercial Officer
Tenure
Dr Karl Keegan, 48, joined Vectura
in September 2012.
Experience
Karl is an Irish national who has worked in the
healthcare industry for over 20 years.
Karl has a BSc in pharmacology from University
College Dublin, an MPhil and PhD in pharmacology
from the University of Cambridge and a masters
degree in finance from the London Business
School. Following postdoctoral research work at
Baylor College of Medicine, Houston, Texas, Karl
joined SmithKline Beecham as a bench scientist
and later moved to a strategic commercial role
within the Neuroscience Strategic Product
Development team.
Upon leaving the pharmaceutical industry,
Karl became one of the leading financial
analysts covering the biotechnology industry
on a global basis. His most recent analyst role
was at Canaccord Adams, as Managing Director,
UK Head of Equity Research and Global Head of
Life Sciences Research. Prior to joining Vectura
in 2012, he was CFO of Minster Pharmaceuticals,
a publicly listed UK company, and most recently
CFO of Pharming Group, a Dutch biotech
company listed on Euronext.
Tenure
Roger Heerman, 42, joined Vectura in 2010
and was appointed Senior Vice President,
Commercial Strategy in 2013.
Experience
Prior to joining Vectura, Roger gained extensive
US and international commercialisation experience
in a number of senior roles including VP Sales
and Marketing of the US publicly held company
Critical Therapeutics, Inc. and as VP, Director
of Client Service at McK Healthcare.
At Critical Therapeutics, he was responsible for
the build-out of the commercial infrastructure
and the launch of ZYFLO CR in the US. At McK
Healthcare, Roger supported the launch and
repositioning efforts of numerous US and global
brands including UCB’s Neupro® for Parkinson’s
disease and IROKO’s Aggrastat® for acute
coronary syndrome.
Roger began his career in the pharmaceutical
industry as a sales representative in the respiratory
division at GlaxoSmithKline. He received his BS
from Babson College and his MBA from the
F.W. Olin School of Business at Babson College.
Role
Human Resources Director
Tenure
Joanne Hombal, 41, joined Vectura
in January 2015.
Experience
Joanne has a BSc in psychology from the
University of Birmingham, a postgraduate
diploma in human resource management from
the University of Glamorgan and is a Chartered
Member of the Chartered Institute of Personnel
and Development.
Before joining Vectura, Joanne was
Vice President HR at Invensys Rail with
responsibility for setting the people strategy
for Northern Europe. She has also held senior
HR roles at AXA Life and led a number
of organisational development and
transformation initiatives.
1
46
2
3
CORPORATE GOVERNANCE REPORT
BOARD EFFECTIVENESS
AND COMPOSITION
Management and corporate structure
Shareholders
The Board
Chief Executive
Audit
Committee
Nomination
Committee
Remuneration
Committee
page 53
page 57
page 59
Executive
Management
Team
Statement of compliance with the
UK Corporate Governance Code
The UK Corporate Governance Code (“the Code”) sets out the
standards of good practice in relation to corporate governance
to be applied by companies with a listing on the London Stock
Exchange. A copy of the Code can be found on the Financial
Reporting Council’s website (www.frc.org.uk).
The principles and provisions of the Code cover five areas:
leadership of the Company, effectiveness of the Board,
accountability of the Board, remuneration and relations with
shareholders. The Board confirms that Vectura has fully complied
with the principles and provisions set out in the Code throughout
the year under review.
47
Annual Report and Accounts 2014/15 Vectura Group plcGovernance CORPORATE GOVERNANCE REPORT continued
Leadership
The Board of Directors
The Board is collectively responsible for the leadership, direction
and sustainable long-term success of Vectura.
A well-balanced Board is vital to ensure that there is appropriate
rigour and challenge in the decision making process. Vectura’s
Board is comprised of Directors from various backgrounds who
have a breadth of professional and sector skills and experience.
During the year ended 31 March 2015, Vectura’s Board, headed
by the Chairman, was comprised of three Executive Directors and
three Non-Executive Directors who were determined by the Board
to be independent. The Executive Directors are responsible for
Vectura’s business operations whereas the Non-Executive Directors
are responsible for bringing independent and objective judgement
to Board deliberations and decisions.
Key responsibilities
Whilst the Board delegates certain of its responsibilities to Board
committees, there are certain matters that are considered to be
so important to the long-term success of Vectura that they are
reserved for Board decision and approval. Such matters include:
• approving business and strategic plans;
• approving budgets and monitoring performance against them;
• approving significant acquisitions, disposals and capital expenditure;
• approving Vectura’s Interim Report and Annual Report and Accounts;
• management of Vectura’s risk profile;
• executive appointments and remuneration; and
• monitoring Vectura’s corporate governance arrangements.
Chairman
Board members (Executive)
Board members (Non-Executive)
Bruno Angelici
Chris Blackwell
Trevor Phillips
Andrew Oakley (from 1 January 2015)
Paul Oliver (until 1 January 2015)
John Brown
Susan Foden
Neil Warner
With effect from 1 April 2015, Dr Per-Olof Andersson was appointed
to the Board as an independent Non-Executive Director.
Brief biographies of current Board members are set out on
pages 44 to 45.
A well-balanced Board is vital to
ensure that there is appropriate
rigour and challenge in the
decision making process.
Board and committee meetings
The Board holds formal meetings on a bimonthly basis, with further meetings being called when circumstances or urgent
business dictate. Additional meetings may be held via conference call.
The Board met ten times during the year. Details of Directors’ attendance at these meetings are set out below.
In the event that a Director is unavailable to attend a Board meeting, or to attend by telephone link, he or she
will communicate their views on items to be raised at the meeting through the Chairman.
The
Board
Audit
Committee
Nomination
Committee
Remuneration
Committee
Meetings
attended/(held)
whilst the
Director was a
Board member
10/(10)
10/(10)
10/(10)
7/(8)
2/(2)
10/(10)
9/(10)
9/(10)
Meetings
attended/
(held)
n/a
n/a
n/a
n/a
n/a
3/(3)
3/(3)
2/(3)
Meetings
attended/
(held)
3/(3)
Meetings
attended/
(held)
4/(4)
n/a
n/a
n/a
n/a
3/(3)
3/(3)
3/(3)
n/a
n/a
n/a
n/a
3/(4)
4/(4)
4/(4)
Bruno Angelici (Chair)
Chris Blackwell
Trevor Phillips
Paul Oliver
Andrew Oakley
John Brown
Neil Warner
Susan Foden
48
Vectura Group plc Annual Report and Accounts 2014/15 Board agenda
The Board’s main activities during the year are described below:
• review and approval of Vectura’s strategy;
• regular updates on business performance and market conditions;
• review of project and pipeline progress;
• approval of the budget for FY 15/16;
• review of progress against the approved budget for FY 14/15;
• internally facilitated review of Board effectiveness;
• approval of the corporate goals;
• resignation of Paul Oliver as Chief Financial Officer
and Company Secretary;
• appointment of Andrew Oakley as Chief Financial Officer
and Company Secretary;
• appointment of Dr Per-Olof Andersson as an independent
Non-Executive Director; and
• initiation of the search for a new Chief Executive, following the
resignation of Dr Chris Blackwell.
Information and support
To enable the Board to function effectively and to assist Directors
in discharging their responsibilities, full and timely access is given to
all relevant information. In the case of Board meetings, this consists
of a formal agenda and a comprehensive set of papers including
regular business progress reports. An established procedure is in
place to ensure that such information is provided to Directors in a
timely manner in advance of meetings.
Roles and responsibilities
Division of responsibilities between the Chairman
and the Chief Executive
Clear roles and responsibilities are fundamental to the effective
running of the Board. Whilst maintaining a close working relationship,
our Chairman and Chief Executive have clearly defined and separate
roles. These roles are set out in writing and have been agreed by
the Board.
The Chairman
Our independent Chairman, Bruno Angelici, is responsible for the
effective running of the Board and for ensuring its effectiveness in
all aspects of its role, in particular for creating the conditions for overall
Board and individual effectiveness by:
• providing a sounding board to the Chief Executive;
• setting the agenda, style and tone of Board meetings;
• ensuring that the Board plays a full and constructive part in the
development of corporate strategy;
• ensuring the highest standards of leadership and governance
at Board level;
• ensuring that the performance of the Board, its committees
and individual Directors are evaluated each year; and
• ensuring effective communications with shareholders.
The Chief Executive
Our Chief Executive, Dr Chris Blackwell, is responsible for all aspects
of the operation and management of Vectura and its business, within
the authorities delegated to him by the Board. In executing this role,
Chris Blackwell is responsible for developing the Group’s long-term
strategic direction and strategy for consideration and approval by
the Board. He is also responsible for the Group’s operations, strategy
implementation and achievement of our operational and financial targets.
Chris Blackwell is supported in his role by other members of the
Executive Management Team (“the EMT”).
Executive Management Team
The Board has delegated responsibility for day-to-day management
of Vectura to the EMT. The EMT is comprised of the Chief Executive,
the Chief Financial Officer, the Chief Operations Officer, the
Chief Corporate Development Officer, the Chief Commercial Officer
and the Director of Human Resources.
The EMT is responsible for developing the strategy approved by the
Board and, in particular, is responsible for ensuring that the Group’s
budget and forecasts are properly prepared, that targets are met
and that the business is managed and developed within the overall
Board approved budget. Variations from the budget and changes
in strategy require approval of the Board.
The EMT normally has eight to ten formal meetings during the year,
in addition to weekly update calls. Other senior operational personnel
also attend meetings of the EMT as appropriate.
Brief biographies of the EMT members are set out on pages 44 and 46.
Non-Executive Directors
The duties of the Non-Executive Directors include contributing to
the formulation of Vectura’s strategy, shaping proposals on succession
planning and constructively challenging the Executive Directors where
they consider it to be appropriate. Vectura’s Non-Executive Directors
are all experienced and influential individuals and their skills and
expertise facilitate the effective functioning of the Board, ensuring
that all relevant matters are fully debated and that no one individual
can dominate the Board’s decision-making process.
Our Non-Executive Directors are encouraged to meet the Chairman
without the presence of Executive Directors, as appropriate. Such
meetings between the Chairman and the Non-Executive Directors
took place during the year and included discussions relating to each
Executive Director’s performance.
Biographies of the Non-Executive Directors can be found on
pages 44 to 45.
Senior Independent Director
John Brown is our Senior Independent Director and he is available
to help shareholders with concerns that they cannot resolve through
our Chairman, Chief Executive or Chief Financial Officer or for which
such a contact is inappropriate in the circumstances.
The Senior Independent Director is responsible for performing an
annual review of the performance of the Chairman and he is available
to act as an intermediary for Directors, if necessary.
49
Annual Report and Accounts 2014/15 Vectura Group plcGovernance CORPORATE GOVERNANCE REPORT continued
Effectiveness
Independence
The Board has determined that at least half of the Board, excluding
the Chairman, is comprised of independent Non-Executive Directors.
Key considerations are set out below:
Share options
The holding of share options by Non-Executive Directors could be,
amongst other things, relevant in determining whether a Non-Executive
Director is independent. As explained in previous Annual Reports,
prior to its listing on the Alternative Investment Market (AIM) on
2 July 2004, in addition to the payment of fees, the Group remunerated
Non-Executive Directors with options to acquire shares in Vectura.
At the time that the awards were granted, it was essential for an
emerging pharmaceutical company such as Vectura to secure the
recruitment and retention of Non-Executive Directors with the
appropriate experience and international perspective in the context
of the Group’s then stage of development. As such, the Board considers
that the historic granting of share options to Non-Executive Directors
while the Company was a private company was appropriate. The share
options did not have performance conditions attached to them and
thus they were consistent with holding a similar number of shares.
After detailed consideration, the Board has determined that it does
not believe the holding of share options by John Brown impacted
on his independence in character or judgement during the financial
year under review.
Dr John Brown exercised his outstanding share options during the
year and therefore, as at 31 March 2015, no Non-Executive Directors
hold share options in Vectura. There is no intention to award any
further options to any Non-Executive Director.
Material business relationships
Other factors that may reflect on the independence of a Non-Executive
Director include any material business relationships with the Group.
There were no such relationships during the year up until the date
of this report, or in the prior year.
Length of service
The Code indicates that serving more than nine years as a Non-Executive
Director could be relevant to the determination of a Non-Executive
Director’s independence. Notwithstanding the fact that John Brown
has been a Non-Executive Director for in excess of nine years, the Board,
having evaluated his performance, considers that he continues to
be fully independent in character and judgement when discharging
his duties and responsibilities.
Performance evaluation
The Board has a process for evaluating its own performance and that
of its committees and individual Directors, including the Chairman.
An annual formal evaluation takes place through an appraisal process
and informal evaluation discussions take place on a regular basis
throughout the year.
During the year, a questionnaire was circulated for all Board members
to answer and comment upon specific questions covering specific
topics. These included the responsibilities and the roles of individual
Directors and the Board as a whole, the conduct of Board meetings
and committees of the Board, the Board’s role in monitoring the
performance of the Group and corporate governance practices.
A detailed, anonymised analysis of the replies to the questionnaire,
together with conclusions drawn from such analysis, was prepared
by the consultant and considered by the Board.
Following this review, it was concluded that the Board and committees
remained effective and that individual members of the Board have
the necessary skills and expertise to discharge their responsibilities.
It was noted that the Board has both formal and informal meetings,
and this balance provides the dynamics for an effective Board.
Election and re-election
All Directors have service agreements with indefinite terms, with
twelve months’ notice for Executive Directors, three months’ notice
for Non-Executive Directors and six months’ notice in the case
of the Chairman.
Directors are subject to election by shareholders at the first opportunity
following their appointment, and to re-election at intervals of no
more than three years thereafter. In accordance with the Code,
Non-Executive Directors who have served more than nine years
on the Board are subject to annual re-election by shareholders.
The performance of Andrew Oakley, who is proposed for election,
and the performances of Neil Warner, Susan Foden, John Brown
and Trevor Phillips, who are being proposed for re-election, at the
Annual General Meeting (AGM), have been evaluated and it has
been determined that they continue to perform effectively and
show full commitment to their roles on the Board. In accordance
with our Articles of Association, Dr Per-Olof Andersson will also be
proposed for election at the forthcoming AGM.
Board appointments and succession
There are formal, rigorous and transparent procedures for the
appointment of new Directors to the Board. Shortlisted candidates
are interviewed by the Chairman of the Board and by the individual
members of the Nomination Committee. Evaluations of appropriate
candidates are then circulated to all members of the Nomination
Committee for consideration, before a recommendation is made
to the Board.
The Board recognises the importance of diversity within all levels
of the Group and it recognises that the Group, its shareholders and
other stakeholders are best served by a Board which is diverse in
skills, experience and background, including gender. Accordingly,
diversity is considered when making appointments to the Board;
however, any appointments are ultimately made on merit against
agreed selection criteria.
The recruitment process for Executive and Non-Executive Directors
focuses on ensuring that the Board as a whole displays the balance
of skills necessary to deliver Vectura’s strategy.
Induction and development
It is vital that Directors have a full understanding of the Group and
its operations. Therefore, upon appointment each Director undergoes
a formal induction programme, which includes briefing materials tailored
to his or her particular Board responsibilities. New Directors meet with
Board members and executive management as part of their induction
process and tours of the Group’s main facilities are scheduled to provide
them with the opportunity to meet with operational management.
50
Vectura Group plc Annual Report and Accounts 2014/15 All Directors have access to the advice and services of the Company
Secretary, who ensures that Directors take independent professional
advice, at Vectura’s expense, when it is judged necessary in order
for them to discharge their responsibilities.
Directors also receive regular updates on changes and developments
within the business as well as information regarding legislative and
regulatory changes. During the annual Board effectiveness review,
all Directors are encouraged to identify any further training requirements
which they feel would assist them in discharging their duties.
Accountability
The Board is committed to providing a fair, balanced and understandable
assessment of the Company’s position and prospects. For information
regarding the Directors’ responsibility to prepare financial statements,
please refer to the Statement of Directors’ responsibilities on page 80.
The Independent auditor’s report includes a statement by the auditor
on his reporting responsibilities.
The measures in place to ensure the auditor’s independence are set
out in the Audit Committee report on page 56.
The Board has overall responsibility for the Group’s system of internal
control and risk management and for reviewing its effectiveness. In
discharging that responsibility, the Board confirms that it has established
the procedures necessary to comply with the Code. Employees are
required to follow clearly defined internal procedures and policies
appropriate to the business and their position within the business.
These procedures are regularly reviewed by the Board.
Risk management
Vectura adopts a robust risk management process, which is reviewed
on a regular basis. This process is outlined on page 21 of his report.
Such a process is designed to manage rather than eliminate the risk
of failure to achieve business objectives and can provide only reasonable
and not absolute assurance against material misstatement or loss.
The concept of reasonable assurance recognises that the cost
of a control procedure should not exceed the expected benefits.
The significant risks identified are documented on pages 22 to 25
of this Annual Report.
Internal control
The Group’s internal controls are regularly reviewed as part of the
risk management process. The Audit Committee reviews the Group’s
internal financial control system on an annual basis and makes
recommendations to the Board regarding any improvements that
are required. The Board also carries out reviews of the non-financial
control systems.
The Group’s key systems of internal control include:
• Organisational structure: The Group’s organisational structure
has clearly established responsibilities and lines of accountability.
The Group endeavours to appoint employees with appropriate
skills, knowledge and experience for the roles they undertake.
• Documented policies and procedures:
• The Group has documented quality procedures to ensure the
maintenance of regulatory compliance. These are subject to
periodic review to ensure current standards of quality compliance
are maintained. A quality group monitors compliance with good
laboratory practice, good clinical practice and good manufacturing
practice through the implementation of a compliance programme
for in-house and contracted-out activities.
• The Group has a formal Health and Safety Committee comprising
appropriate members of management and other employees
to be responsible for these issues.
• The Group has formal procedures to ensure appropriate security
of documents and proprietary information.
• The Group has a formal policy in place regarding share
dealing in Vectura Group plc shares by employees and
their connected persons.
• The Group has a comprehensive financial planning and
accounting framework which includes a robust budgeting
and forecasting system. Detailed monthly management accounts
are prepared and reports are provided to the Board showing
actual results against budget and forecast results, highlighting
and explaining significant variances. Variance reports are also
provided to, and discussed with, the budget manager.
• The Group has specific controls in place regarding the production
of consolidated financial information. This includes operational
procedures and validation and review of information.
• The Group has clear requirements for the approval and control
of expenditure. Material or strategic investment decisions are
subject to formal approval by the Board. Day-to-day expenditure
is controlled using predetermined authorisation limits which
are approved by the EMT in accordance with tolerance limits
agreed with the Board.
• Whistleblowing policy: the Group has a formalised whistleblowing
policy which is available to all staff via the intranet. This policy
provides a mechanism through which staff of the Group may,
in confidence, raise concerns about possible improprieties
in matters of financial reporting or other matters.
There have been no significant internal control failings or weaknesses
throughout the year ended 31 March 2015 and up to the date of
publication of this report.
Remuneration
The Board has adopted remuneration policies that are considered
sufficient to attract, retain and motivate Executive Directors of the
highest calibre who are capable of delivering the Group’s strategic
objectives. Remuneration packages are structured in such a way as
to link rewards to corporate and individual performance. For further
details, please refer to the Remuneration report set out on
pages 59 to 77.
51
Annual Report and Accounts 2014/15 Vectura Group plcGovernance CORPORATE GOVERNANCE REPORT continued
Relations with shareholders
Shareholder relations
The Board recognises the importance of regular dialogue with
shareholders and regular meetings between institutional shareholders
and Executive Directors are held throughout the year. The Chief Executive
and the Chief Financial Officer give annual and half-yearly presentations
to institutional investors, analysts and the media. Periodic site visits
are held, as considered appropriate.
Vectura’s brokers collate anonymous feedback after investor
presentations. This feedback is then circulated to the Board for its
consideration. Through this programme of regular dialogue, the
Executive Directors and the Board are able to develop an understanding
of shareholder views and objectives and create a mutual understanding
of the Company’s strategy.
All meetings with shareholders are held in such a way as to protect
price sensitive information that has not already been made generally
available to the Company’s shareholders and similar guidelines apply
to communications between the Company and other parties, such
as financial analysts, brokers and the media.
In addition, all Non-Executive Directors have developed an understanding
of the views of shareholders through corporate broker briefings
and review of issued analyst notes. The Chairman seeks to meet
with major shareholders on a regular basis and Non-Executive Directors
meet with major shareholders as required.
Where material changes in respect of remuneration schemes or
governance structures are proposed, the Board seeks to consult
with its major shareholders before implementing such changes.
The Company views its website (www.vectura.com) as an important
investor relations tool, particularly for private investors. In line with
best practice, the website is regularly updated, ensuring that information
relating to the Group and its activities is easily accessible. The website
provides an overview of the business including its strategy, products
and objectives.
All periodic reports and accounts are made available to shareholders
on the website and paper copies are mailed to those shareholders
who have elected to receive them. Separate announcements of all
material events are made as necessary by press release. All such
announcements are published on the website without delay along
with webcasts of both the Interim and Annual Report presentations.
The terms of reference of each of the Board’s three committees
and certain corporate governance documents are also published
on the Group’s website.
Private shareholders are encouraged to express their views and
concerns either in person at the AGM or by e-mail using the links
provided on the Group’s website.
Constructive use of the AGM
The Board seeks to use the AGM (together with other forums) to
communicate with investors and encourage their participation by
making business presentations and inviting shareholder questions.
The Chairs of the Audit, Nomination and Remuneration Committees
are present at the AGM to answer questions through the Chairman
of the Board.
Notice of the meeting is posted to shareholders not less than
20 working days prior to the date of the AGM. The information
sent to shareholders includes a summary of the business to be
covered at the AGM, where a separate resolution is prepared for
each substantive matter. Results of voting at the AGM are posted
on the Group’s website as soon as they are available.
52
Vectura Group plc Annual Report and Accounts 2014/15 AUDIT COMMITTEE REPORT
Dear shareholder
On behalf of the Board, I am pleased to present Vectura’s Audit
Committee report for the year ended 31 March 2015.
During the financial year, the Audit Committee has continued to focus
on the quality and integrity of the information provided in the Group’s
published financial reports. The Committee continually reviews the
corporate governance landscape and is aware of the forthcoming
changes to the UK Corporate Governance Code (“the Code”) which
will come into effect for Vectura during the 2015/16 financial year.
The Committee is very supportive of these proposed changes to the
Code, and we believe that it allows the Audit Committee to further
strengthen its role as the key independent oversight committee at
Vectura and to add value to the Group and its operations. This report
highlights how the Committee has discharged its responsibilities as
set out in the Code.
I hope you will find this report helpful in understanding the work
of the Committee.
Neil Warner
Chair of the Audit Committee
19 May 2015
Read more about our business model on
pages 14 and 15
Read more on our strategy on
pages 16 and 17
Role and responsibilities
The Audit Committee (“the Committee”) operates under written terms
of reference, which are modelled on the Code and are available on
the Company website, www.vectura.com. The Committee advises the
Board as to whether the Annual Report and Accounts, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group’s performance,
business model and strategy.
The Committee reviews the annual and half-year financial statements
and interim management statements. In reviewing these reports, the
Committee considers whether the accounting policies applied during
the preparation of the information are consistent year-on-year and
whether the disclosures made are appropriate, complete and in
compliance with the relevant financial reporting standards, corporate
governance standards and regulatory requirements. The Committee
also considers the significant areas in which judgement has been applied
in the preparation of the financial statements. In fulfilling this role,
it supports the Board in discharging its responsibilities in relation to
Group’s external financial reporting and similar announcements.
The Committee manages the relationship with the external auditor
on behalf of the Board. During the year, the Committee reviews and
monitors the independence of the external auditor and considers
the effectiveness of the external audit process. In addition, the
Committee is responsible for developing and implementing the Group’s
policy on non-audit services. The Committee makes recommendations
to the Board regarding the appointment and, where appropriate,
reappointment of the external auditor and it approves the external
auditor’s terms of engagement. On an annual basis, the Committee
will consider the need for an internal audit function and will make
recommendations to the Board accordingly.
The Committee is responsible for reviewing the integrity and
effectiveness of the Group’s financial risk management and internal
control systems.
The Chairman of the Committee reports to the Board on all significant
matters reviewed by the Committee.
The Committee has access to the external auditor and, if considered
necessary, is authorised to obtain external professional advice
including, without limitation, legal and accounting advice to assist
in the performance of its duties. No such advice has been sought
during the year.
53
Annual Report and Accounts 2014/15 Vectura Group plcGovernance
AUDIT COMMITTEE REPORT continued
Membership and meetings
In accordance with the Code, the Audit Committee comprises
three independent Non-Executive Directors: Mr Warner, Dr Brown
and Dr Foden. The Board is satisfied that all members of the Committee
have the breadth of knowledge, experience and overview of the
Group’s business and financial dynamics and the risks facing the
Group to effectively fulfil the Committee’s responsibilities.
The Committee is chaired by Mr Warner, who is a Fellow of the
Institute of Chartered Accountants with significant recent and
relevant financial experience. Details of Mr Warner’s financial
experience are set out in his biography on page 45.
The Group Company secretary acts as Secretary to the Committee
and the Executive Directors also attend Committee meetings at the
invitation of the Chairman. So as to facilitate open and unreserved
discussion, the Committee meets with the external auditor at least
twice a year without management being present. The Committee
Chairman keeps in touch, as required, with the key people involved
in the Group’s governance, including the Chairman of the Board, the
Chief Executive Officer, the Chief Financial Officer and the external
audit lead partner.
The composition of the Committee is reviewed annually to ensure
that it contains the appropriate balance of knowledge, skills and
experience to support the business.
Financial reporting
As explained above, the Committee is responsible for monitoring
the integrity of the Group’s financial statements and reviewing
the significant judgements applied in the preparation of financial
information. During the year, the Committee reviewed the Group’s
interim management statement which was issued in August 2014,
the interim report for the period ended 30 September 2014, and
the preliminary announcement and Annual Report and Accounts for
the year ended 31 March 2015. In November 2014, the Financial
Conduct Authority (“the FCA”) issued a Policy Statement removing the
requirement to publish interim management statements. The Group’s
interim management statement issued in August 2014 was the last
statement required to be published under the FCA regulations.
The significant issues considered and the conclusions reached
by the Committee are outlined in this report.
Significant issues considered in relation to the financial statements
Acquisition accounting
On 13 March 2014, the Group announced that it had acquired 100%
of the share capital of Activaero GmbH for a total consideration of
€130m (£108m). The provisional accounting for this acquisition was
set out in the notes to the 2013/14 Annual Report. In accordance with
International Financial Reporting Standards, the Group had twelve
months to finalise the accounting for the acquisition and, as a result
of this, changes have been made to certain balances and the financial
statements have been restated to reflect these changes. The full details
of the acquisition and the revised accounting treatment applied are
set out in note 29 to the financial statements.
The Committee reviewed the revised accounting treatment applied in
the 2014/15 financial statements. The key areas of judgement relating
to the acquisition are the identification of intangible assets and the
subsequent determination of their fair value. Management provided
a report to the Committee detailing how intangible assets had been
identified, how their useful economic lives had been derived and the
key judgements, and assumptions made in determining likely returns
and an appropriate discount rate. Each of these issues was discussed
with management and the external auditor, who also provided
detailed reporting to the Committee in respect of this matter.
Based upon the evidence reviewed and the discussions held,
the Committee is satisfied that the identification and calculation
of intangible assets is reasonable based upon the known facts
and the information available to the Group, and that the transaction
has been appropriately presented in the financial statements.
Revenue recognition
As disclosed on page 98 of this report, the Group has five revenue
streams, being royalty income, product licensing milestone income,
technology licensing milestone income, development services and
device sales.
During the year, the Committee reviewed the judgements exercised by
management in determining when to recognise key milestone events,
particularly those milestones that were achieved around a period end.
The Committee also discussed each significant milestone achieved during
the year with the external auditor. Following discussions held and the
review performed, the Committee is satisfied that the treatment
adopted by management is reasonable and in compliance with
IAS 18 and Vectura’s accounting policies.
Details of the number of meetings held by the Committee and attendance thereat is detailed on page 48.
Member
N W Warner (Chair)
J R Brown
S E Foden
Date of
appointment
1 February 2011
13 May 2004
18 January 2007
Committee meetings held during the year coincided with key dates in the Group’s financial reporting cycle. The key issues considered by
the Committee during the year are outlined in this report.
54
Vectura Group plc Annual Report and Accounts 2014/15 The recognition of royalty revenue involves accruing for an estimate
of underlying product sales in the final quarter, and management
has limited visibility over this information, save for where a licensing
partner makes the information publicly available, or where a royalty
statement is provided to the Group in advance of its financial results
reporting date. This area was an increased focus during 2014/15,
as the Group has now begun to receive significant royalty streams
from a number of new products and therefore management does
not have significant historic evidence upon which to base the
revenue accrual. The basis for each accrual was discussed with
both management and the auditor, and the Committee is satisfied
that appropriate assumptions have been made, where actual
revenue information is not available to the Group.
Goodwill impairment
During the year, particular attention was paid to the carrying value
of goodwill. Goodwill associated with the acquisition of Innovata,
Vectura Delivery Devices (VDD) and Co-ordinated Drug Development
(since renamed Vectura Limited) totals £49.6m and, as such, it
represents one of the largest assets on the Group’s balance sheet.
For the purposes of impairment testing, management has determined
that there is only one cash-generating unit (CGU) relating to these
assets. This is considered appropriate in light of the fact that these
entities have now fully integrated into the Group and future
projects will use a mixture of Innovata, VDD and Vectura Limited
technologies and expertise.
The Committee reviewed the judgements and assumptions underlying
the models used to support the carrying value of goodwill in the
consolidated balance sheet. The primary judgement areas relate to
the achievability of long-term business plans and the discount rate
applied to the relevant cash flows. Management provided the
Committee with a report, outlining the basis for the assumptions
made. The Committee reviewed this document and challenged
management assumptions where appropriate.
The carrying value of goodwill was also a key area of focus for
the external audit team and, accordingly, Deloitte LLP (“Deloitte”)
provided a detailed report to the Committee regarding management’s
assumptions and conclusions. This report also included the results
of sensitivity testing performed, which assessed whether a “reasonably
possible” change in a key assumption could result in an impairment
of the balance. The Committee noted that there were no disagreements
between the conclusions of management and the conclusions made
by the external auditor. Following a review of the evidence provided
and discussions with both management and the audit team, the
Committee is satisfied that no impairment charge should be recorded
in 2014/15 and that the disclosures made in the financial statements
are appropriate.
Risk management and internal control
The Board as a whole, including the Audit Committee members,
considers the nature and extent of Vectura’s financial risk management
framework and the risk profile that is acceptable to achieve the Group’s
strategic objectives. The Committee is responsible for reviewing
the adequacy and effectiveness of the Group’s risk management
and internal control systems. In order to discharge this responsibility,
the Committee receives reports from Vectura’s management team
and the external auditor as appropriate. The Committee has noted
the upcoming changes to the Code in respect of risk management
and reporting of risk and notes that the Group is currently performing
a review of risk management practices in conjunction with an external
specialist to ensure that risk management policies and practices
remain compliant with evolving best practice.
Each year, the Audit Committee considers the need for an internal
audit function and has concluded that, given the size of the Group’s
operations at this time, it is not necessary.
Whistleblowing
The Audit Committee reviews arrangements by which staff
of the Group may, in confidence, raise concerns about possible
improprieties in matters of financial reporting or other matters.
The Audit Committee’s objective is to ensure that arrangements
are in place for the proportionate and independent investigation
of such matters and for appropriate follow-up action.
The Group has a formal whistleblowing policy, which is available
to all staff via the Group’s intranet.
UK Bribery Act
The Group has continued to operate its anti-bribery policy, introduced
in 2010, in response to the UK Bribery Act 2010. This has included
the conduct of due diligence on new key business partners who
may act on behalf of the Group in higher risk areas of business.
External audit
The external auditor, Deloitte, is engaged to express an opinion
on the Group’s and the Company’s financial statements.
The Audit Committee is responsible for making recommendations
to the Board on the appointment, reappointment and removal of the
external auditor. When considering reappointment, the Committee
considers the independence of the audit firm and the effectiveness
of the overall external audit process.
Audit engagement partner rotation
Deloitte adheres to a rotation policy which is in accordance with
the ethical standards of the Audit Practices Board (“the APB”) and the
Group engagement partner is rotated every five years. David Hedditch,
the current engagement partner, was appointed during the 2012/13
financial year and therefore the next rotation is scheduled to take
place in time for the 2017/18 financial year audit.
55
Annual Report and Accounts 2014/15 Vectura Group plcGovernance AUDIT COMMITTEE REPORT continued
External audit continued
Independence and non-audit work performed
by the external auditor
The Committee is responsible for monitoring and reviewing the
independence and objectivity of the external auditor. On an annual basis,
the auditor confirms its policies for ensuring auditor independence
and provides the Committee with a confirmation that it continues
to be independent in respect of the forthcoming audit engagement.
Effectiveness
The Committee places great importance on ensuring that there
are high standards of audit quality and effectiveness in the external
audit process. The effectiveness of the external audit process is
reviewed on an annual basis, and this includes consideration of the
qualification, expertise, resources, remuneration and independence
of the auditor. Where appropriate, actions are agreed in respect
of any issues identified and these are monitored for progress.
Vectura’s policy on the provision of non-audit services is a key
mechanism which safeguards the independence of the external
auditor. The provision of non-audit services by the auditor is
governed by a “non-audit services policy”, which is reviewed by the
Committee on an annual basis. The policy sets out the circumstances
in which the external auditor may be permitted to undertake
non-audit services and the overriding purpose of the policy is
to ensure that the auditor does not provide a service that:
• creates a mutuality of interest;
• places the auditor in a position of auditing their own work;
• results in the auditor acting as a Vectura manager or employee; or
• places the auditor in a position to advocate for Vectura.
Vectura does not impose an automatic restriction on the provision
of non-audit services by the external auditor. The external auditor is
eligible for selection to provide non-audit services that are not, and
are not perceived to be, in conflict with auditor independence, provided
that the auditor has the skill, competence and integrity to carry out
the work in the best interest of the Group. Where appropriate, services
are tendered prior to awarding work to the external auditor.
During the year, Deloitte undertook non-audit services, and the
relevant fees are disclosed in note 5 to the financial statements.
These services were provided in compliance with the policy
outlined above and no actual conflicts of interest were found to
exist between the audit work and the non-audit work performed,
which related to the interim financial report and tax compliance
work. The Committee considered that it was appropriate for the
auditor to undertake these services given the nature of the work
to be performed. During a planning meeting held in February 2015,
the external auditor confirmed to the Audit Committee that it had
met its statutory requirements with regard to independence.
Accordingly, the Audit Committee confirms that the Group continues
to receive an independent audit service. On this basis, the Committee
has recommended to the Board that Deloitte be reappointed as the
Group’s auditor for a further year. This recommendation has been
accepted by the Board.
At the conclusion of the 2014/15 financial year audit, the
Committee performed a formal evaluation of the performance
of the external auditor. In performing this evaluation, the Committee
worked with the external auditor, Executive Directors and relevant
senior management. In addition to this, the Committee performs
its own ongoing evaluation of audit quality and effectiveness, taking
into account such matters as the quality of reporting to the Committee
by the external auditor and the level and quality of the interactions
between the Committee and the audit partner.
Tendering
Deloitte has been Vectura’s auditor since 2007 following its full
listing on the London Stock Exchange. During that time, the audit
has not been formally tendered and, whilst this is not currently
a formal requirement for Vectura under the Code, the Committee
has due regard for the transitional rules of the Competition and
Markets Authority and the EU and will continue to monitor the need
to put the audit out to tender. There are no contractual restrictions
in place that would restrict the choice of the external auditor.
Committee effectiveness review
During the year, the Committee reviewed its own effectiveness
as part of the overall Board evaluation process. The Committee
considered that it acted transparently and, given the number of
Committee and Board meetings scheduled throughout the financial
year, maintained a thorough understanding of the Group and its
business. The results of the review were advised to the Board.
Neil Warner
Chairman of the Audit Committee
19 May 2015
56
Vectura Group plc Annual Report and Accounts 2014/15 NOMINATION COMMITTEE REPORT
Dear shareholder
On behalf of the Board, I am pleased to present Vectura’s Nomination
Committee report for the year ended 31 March 2015. The role of
the Committee is to ensure that the Group maintains a Board which
is appropriately balanced and, as a unit, functions as efficiently and
effectively as possible.
During the year, the Committee has continued to focus on the issues
of succession planning and overall Board balance and composition.
The Committee considered and made recommendations to the
Board regarding the appointment of Andrew Oakley as our new
Chief Financial Officer and Per-Olof Andersson as Non-Executive Director.
The Committee also began a search for a new Chief Executive to
replace Dr Chris Blackwell, who announced in February 2015 that
he would be standing down from this role.
On 1 April 2015, I stood down as Chairman of the Nomination Committee
and I was succeeded by Bruno Angelici, Chairman of the Board.
Dr John Brown
Chair of the Nomination Committee
19 May 2015
Role and responsibilities
The Nomination Committee (“the Committee”) operates
under written terms of reference, which are modelled on the
UK Corporate Governance Code (“the Code”) and are available on
the Company website, www.vectura.com. The Committee reviews
these terms on an annual basis. No material changes were made
to the terms of reference during the year.
The Committee is responsible for reviewing the structure of the
Board and Board Committees and evaluating the balance of skills,
experience, independence and knowledge of the Board as a whole.
On the basis of this evaluation, the Committee makes recommendations
to the Board regarding Board appointments. Where the need for a
new Executive or Non-Executive Director is identified, the Committee
is responsible for preparing a description of the role and the capabilities
required for a particular appointment and for identifying and
nominating potential candidates to fill the vacancy.
The Committee also ensures that appropriate succession plans
for Non-Executive Directors, Executive Directors and the Group’s
senior management are kept under review with a view to ensuring
the long-term success of the Group.
Membership and meetings
The membership of the Committee, the number of Committee
meetings held and attendance thereat can be found on page 48
of the Governance section of this annual report.
The Committee comprises four independent Non-Executive Directors,
John Brown, Susan Foden, Neil Warner and the Chairman of the
Board, Bruno Angelici.
During the financial year FY 14/15, the Committee was chaired
by John Brown. With effect from 1 April 2015, Bruno Angelici,
the Chairman of the Board, has been appointed as the Chairman.
Details of Bruno Angelici’s experience are set out in his biography
on page 44.
The Group Company Secretary acts as Secretary to the Committee.
The Executive Directors, other members of Executive Management
and external advisors may also attend Committee meetings as
required, at the invitation of the Chairman.
57
Annual Report and Accounts 2014/15 Vectura Group plcGovernance NOMINATION COMMITTEE REPORT continued
Membership and meetings continued
The Committee is authorised to obtain external professional advice
including, without limitation, legal and other professional advice to
assist in the performance of its duties. During the year, the Committee
has utilised the services of Russell Reynolds and Spencer Stuart, as
outlined below. Both firms are signatories to the Voluntary Code of
Conduct for Executive Recruitment Firms (as recommended by the
Davies Report). There were no other services provided by these
firms during the year.
The Committee met three times during the year ended 31 March 2015,
and all members were present at each meeting. Additionally, the
Committee held a number of informal meetings and discussions
during the year.
The key issues considered by the Committee during the year are
outlined below.
Appointment of Directors
There is a formal, rigorous and transparent procedure for the
appointment of new Directors to the Board under which the Committee
interviews suitable candidates who are proposed either by existing
Board members or by an external executive recruitment firm.
The Committee gives careful consideration to the appointment of
any proposed appointee, to ensure that the candidate has sufficient
time available to devote to the role as well as the required level of
skill and knowledge to ensure that the balance of skills, experience
and knowledge on the Board is maintained.
During the year, Paul Oliver announced his intention to stand down
as Chief Financial Officer and Company Secretary. The Committee
appointed an executive recruitment firm, Russell Reynolds, to find
a suitable replacement for Paul, giving due regard to the experience
and skills required for the role. Russell Reynolds has no other
connection to the Company.
Following this recruitment process, the Committee recommended
to the Board that Andrew Oakley be appointed as Paul’s successor.
Andrew gained considerable experience at two Swiss bio-pharmaceutical
companies, including nearly eleven years at Actelion, a leading
international bio-pharmaceutical company. He joined Actelion as
Chief Financial Officer in 2003 and during his tenure the company
enjoyed a period of strong growth, with sales rising more than ten-fold
to CHF1.8bn in 2013. During his time at Actelion, Andrew accumulated
considerable transaction experience, including acquisitions, out-licensing
and in-licensing deals. After leaving Actelion in 2013, he served as
Chief Financial Officer at privately held Swiss biotech Novimmune.
As such, Andrew was well placed to succeed Paul as the Group’s
Chief Financial Officer and the Board was unanimous in accepting
the recommendation of the Committee to appoint him as an
Executive Director and Company Secretary.
The Committee undertook a search for a Non-Executive Director
during the year. This followed a review of the existing skills and
experience of the Non-Executive Directors and it was assessed that
a non-executive director with an extensive background in research
and development would bring much benefit to the Board. The
Committee subsequently appointed the executive recruitment firm,
Spencer Stuart, to assist with this search. The Committee worked
with Spencer Stuart who drew up a list of candidates from a range
of industries and backgrounds for initial appraisal by the Committee.
58
From this list, a shortlist of suitable candidates who met the search
and selection criteria was prepared and these candidates were
interviewed by members of the Nomination Committee.
Spencer Stuart has no other connection to the Company.
Following this extensive international search, the Committee
recommended the appointment of Per-Olof Andersson to the
Board as a Non-Executive Director. Per-Olof disclosed his significant
commitments to the Board prior to his appointment and the Board
as a whole were satisfied that he had sufficient time to devote to
this role. Per-Olof Andersson was appointed on 1 April 2015 and
he has been appointed for an initial term of three years, subject
to election by shareholders at the Annual General Meeting on
24 September 2015. The appointment may be terminated earlier
than three years at the discretion of either party upon three
months’ notice.
Per-Olof Andersson has an international R&D track record within the
pharmaceuticals, bio-pharmaceuticals and specialty pharmaceutical
industry and considerable experience in respiratory therapeutic
development. In 2011, Per-Olof retired from Almirall where he was
Executive Director for R&D and Member of the Board of Directors.
Prior to joining Almirall in 2006, Per-Olof had a distinguished
international career at Pharmacia and Pfizer over a period of
nearly 20 years.
Per-Olof was independent at the time of his appointment to the
Board, in accordance with B.1.1 of the UK Corporate Governance
Code. Full biographical details can be found on page 45.
Following the announcement in February 2015 that Dr Chris Blackwell
will step down as Chief Executive, the Committee appointed a well
known search firm in the search for a suitable replacement. The
Committee has provided them with a role description, together with
a list of the required skills and personal attributes to be considered.
The Nomination Committee is in the process of interviewing shortlisted
candidates and the final recruitment decision will be taken by the
Board as a whole.
Diversity
The Board’s policy on diversity is set out on page 50.
The search for Board candidates is conducted, and appointments
made, on merit against objective selection criteria and having due
regard, amongst other things, to the benefits of diversity on the
Board, including the inclusion of women. Diversity is considered
by the Nomination Committee in considering Board composition
and in the process of making Board appointments.
Committee effectiveness review
During the year, the Committee reviewed its own effectiveness
as part of the overall Board evaluation process. The Committee
considered that it acted transparently and, given the number of
Committee and Board meetings scheduled throughout the financial
year, maintained a thorough understanding of the Group and its
business. The results of the review were advised to the Board.
Dr John Brown
Chairman of the Nomination Committee
19 May 2015
Vectura Group plc Annual Report and Accounts 2014/15 REMUNERATION COMMITTEE REPORT
Read more about our KPIs on
pages 18 and 19
Read more about our strategy on
pages 16 and 17
Dear shareholder
On behalf of the Board, it is my pleasure to present Vectura’s
Remuneration Committee report for the year ended 31 March 2015.
This has been an important year for Vectura. The Group has
delivered significant progress against its financial and non-financial
KPIs, Activaero has been successfully integrated and the Group has
completed its portfolio review and set its strategy for future growth.
Revenues have increased by 59% as a result of organic growth in high
quality royalty streams and significant development milestones earned
during the year. These milestone events are linked to what we expect
to be significant revenue streams to Vectura over the coming years.
As such, Vectura is well positioned to deliver on its current strategy
and ambitions to become a speciality pharmaceutical business.
In light of the excellent performance of the Group and the continued
development of Vectura’s structure and profile, the Committee has
approved adjustments in the base salary of each of the Executive
Directors for the forthcoming year. Details of each Director’s base
salary are set out on page 77 of the report. This review has been
undertaken in accordance with our approved remuneration policy
whereby the Committee has considered a number of parameters
in determining appropriate base salary levels including, inter alia,
pay awards across the general workforce, Company growth and
complexity and alignment of salaries with our policy statement
in regard of mid-market levels.
The Committee also recommended bonus payments to the
Executive Directors of 80%–84% of base salary in respect of the
year ending 31 March 2015 after performing a detailed review
of performance against the agreed corporate and personal bonus
objectives. The Committee considers that these awards appropriately
reflect Vectura’s performance over the past financial year, which
represents demonstrable and significant progress against stretching
financial and non-financial targets.
The Committee believes that long-term incentives should
comprise the most significant element of the remuneration package
for Executive Directors, with stretching performance metrics that
are clearly aligned to the creation of shareholder value. During the
year, the Committee has considered the vesting of LTIP awards
made in 2010 and approved an LTIP award equal to 100% of base
salary for Executive Directors which was granted on 1 July 2014.
The Committee continues to review Vectura’s long-term incentive
arrangements. The Committee will continue to engage with major
shareholders and their representative bodies regarding the
development and implementation of Vectura’s remuneration policy
in respect of long-term incentives and variable pay arrangements.
In assessing the vesting of the 2010 LTIP award, the Committee
engaged PricewaterhouseCoopers LLP (PwC) to assess Vectura’s
performance against the relevant metrics over the measurement
period. Over the measurement period, Vectura’s TSR exceeded that
of the upper quartile of the FTSE SmallCap Index and the average
share price requirement of £1.27 was also exceeded. Accordingly, the
Committee approved 100% vesting of the award.
During the year, the Committee applied Vectura’s approved
remuneration policy as the basis for determining the remuneration
package of the new Chief Financial Officer, Andrew J Oakley.
Andrew’s base salary was set at £275,000, which the Committee
believes is representative of the mid-market salary for this position.
In addition, the Committee gave due regard to Vectura’s remuneration
policy on termination and loss of office with respect to the departure
of Paul Oliver as Chief Financial Officer and Company Secretary and
considered the treatment of Paul’s unvested LTIP awards and awards
made under Vectura’s all-employee share schemes. Details of the
payments made to Paul and the arrangements for his share option
awards are set out on page 75 of this report.
This year’s report retains the same structure as last year’s
remuneration report; it consists of three sections:
1. This annual statement.
2. A policy report, which describes the remuneration of Executive
and Non-Executive Directors and, save for minor amendments
to reflect the passage of time, is unchanged from that which was
approved by shareholders for three years at the 2014 Annual
General Meeting. This section of the report is not subject to audit.
3. The Annual report on remuneration, which is prepared in
accordance with the Large and Medium-Sized Companies and
Groups (Accounts and Reports) (Amendment) Regulations 2013
and the relevant provisions of the Listing Rules of the Financial
Conduct Authority. Certain parts of this report are subject to
audit and these areas have been clearly identified.
Our Annual report on remuneration will be subject to an advisory vote
at our forthcoming Annual General Meeting on 24 September 2015.
I hope that you will join me in supporting this resolution.
Yours sincerely
Dr Susan Foden
Chair of the Remuneration Committee
19 May 2015
59
Annual Report and Accounts 2014/15 Vectura Group plcGovernance
REMUNERATION REPORT
LINKING REMUNERATION
TO PERFORMANCE
Unaudited information
Directors’ remuneration policy
Vectura’s remuneration policy is driven by its strategy and business
model and the core principles underlying the policy remain unchanged.
Vectura aims to provide a remuneration package that is sufficient to
attract, retain and motivate high-calibre Executive Directors who have
the necessary skills and expertise to deliver the business strategy.
The Committee recognises that remuneration packages should be
appropriately structured, including both fixed and variable pay
elements and a mixture of short, medium and long-term incentives.
The Committee believes that appropriately structured remuneration
packages serve to align the actions and interests of our Executive
Directors with those of our shareholders.
Summary remuneration policy
The following table and accompanying notes set out the main
principles of reward for the Executive Directors of Vectura Group plc.
For the avoidance of doubt, any commitments entered into by the
Company prior to the approval and implementation of the policy
outlined below may be honoured, even if they are not consistent
with the policy prevailing at the time the commitment is fulfilled.
The report that follows has been prepared in accordance with
the provisions of the Companies Act 2006 (“the Act”), the Large
and Medium-Sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 (“the Regulations”). It also meets
the requirements of the UK Listing Authority’s Rules and the
Disclosure and Transparency Rules.
In this report, we also describe how the principles of good
governance relating to Directors’ remuneration, as set out in the
Corporate Governance Code (“the Code”), are applied in practice.
The Committee confirms that Vectura has complied with these
governance rules and best practice provisions throughout the
year ended 31 March 2015.
The Regulations require our auditor to report to shareholders
on the audited information contained within this report, and to
state whether, in their opinion, the relevant sections have been
prepared in accordance with the Act. The elements of the Annual
report on remuneration which are subject to audit have been clearly
identified, and the auditor’s opinion is set out on page 81 of this
Annual Report and Accounts for the year ended 31 March 2015.
Introduction
The following report is presented in two separate sections:
• Directors’ remuneration policy – set out on page 60 to 67; and
• Annual report on remuneration – set out on pages 67 to 77.
At the 2014 Annual General Meeting (“the AGM”), 98.2%
of shareholders approved the Directors’ remuneration policy.
The policy report is therefore included for reference only, with
minor amendments made to reflect the passage of time and
changes to the composition of the Board during the year.
The Annual report on remuneration continues to be subject to
an advisory vote by shareholders at the AGM.
60
Vectura Group plc Annual Report and Accounts 2014/15 Executive Directors
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Base salary
To recruit and retain executives
of the highest calibre who are capable
of delivering the Group’s strategic
objectives, reflecting the individual’s
experience and role within the Group.
Base salary is designed to provide
an appropriate level of fixed income
to avoid an over-reliance on variable
pay elements that could encourage
excessive risk taking.
Benefits
Benefits in kind offered to
Executive Directors are provided on
a market-competitive basis, to assist
with the retention and recruitment
of staff.
The Committee aims to provide
base salary at levels that are broadly
aligned with the mid-points for
equivalent roles in comparable
companies in the UK, adjusted to
reflect company size and complexity.
Salaries are normally reviewed
annually and changes are generally
effective from 1 April.
The annual salary review of Executive
Directors takes a number of factors
into consideration, including:
• business performance;
• salary increases awarded to the
overall employee population;
• skills and experience of the
individual over time;
• scope of the
individual’s responsibilities;
• changes in the size and complexity
of the Group;
• market competitiveness; and
• the underlying rate of inflation.
The Company aims to offer benefits
that are in line with market practice.
The main benefits currently provided
are life assurance, permanent health
insurance and private medical and
dental insurance.
Under certain circumstances the
Group will offer relocation allowances
to employees.
No formal metrics although increases
will take account of Group performance.
Base salary increases are awarded
at the discretion of the Committee;
however, salary increases will normally
be no greater than the inflationary pay
rises awarded to the wider workforce.
Where peer review data indicates
that a role is under-remunerated,
or where there has been a change in
responsibilities, the Committee retains
the discretion to award more significant
base salary increases.
The value of each benefit is not
predetermined and is based upon
the cost to the Group.
Not performance related.
61
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Executive Directors continued
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Pensions
The Group aims to provide
market-competitive retirement
benefits, to reward
sustained contribution.
Annual performance bonus
An annual cash bonus rewards the
achievement of stretching objectives
that support the Group’s corporate
goals and delivery of the business
strategy together with goals in relation
to personal performance.
Up to 20% of base salary contribution
to the Group Personal Pension Plan or
equivalent cash allowance.
Not performance related.
The Group operates a money
purchase scheme and all employees,
including Executive Directors, are
invited to participate.
For executives who are affected
by the HMRC lifetime or annual
allowances, the Company may
provide cash supplements in respect
of benefits above the allowance.
Corporate goals typically include
revenue generation, development
of pipeline progress, partnering
successes and control of cash
expenditure, although the Committee
has discretion to set other targets.
Goals set are specific,
measurable and linked to the
Group’s longer-term strategy.
0% of the maximum is payable
at threshold performance.
Objectives are agreed with the
Committee, and the Board as a whole,
at the start of each financial year.
Bonuses are limited to a maximum
of 100% of base salary for each
Executive Director.
Different performance measures
and weightings may be used each
year, as agreed with the Committee,
to take into account changes in the
business strategy.
Bonuses are paid at the discretion
of the Remuneration Committee. The
Committee takes into account overall
corporate performance and individual
performance when determining the
final bonus amount to be awarded.
Bonuses are paid in cash, typically
in June.
Under the rules of the scheme, the
Committee can claw back up to 100%
of the bonus awarded in the event
of material misstatement of the
Company’s financial results, an error
in assessing the performance conditions
to which an award is subject or for any
other matter which it deems relevant.
62
Vectura Group plc Annual Report and Accounts 2014/15 Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Long-Term Incentive Plan (LTIP)
Awards of up to 200% may be
granted; however, Executive Directors
would normally receive grants
of 100% of salary.
The Remuneration Committee believes
that a key component of the overall
remuneration package is the provision
of equity awards to senior executives
through the LTIP, which is designed to
develop a culture which encourages
strong corporate performance on an
absolute and relative basis.
Awards are made on an annual
basis, at the discretion of the
Remuneration Committee.
Awards consist of shares that vest
according to performance conditions.
Typically, awards are granted
following the release of full-year
or interim financial results.
Awards are discretionary and do
not vest until the date on which
the performance conditions are
determined. If employment ceases
during a three-year performance
period, awards will typically lapse,
save in certain good leaver situations.
The Committee may decide that
an award will be subject to clawback
where there has been a misstatement
of the Company’s financial results,
an error in assessing the performance
conditions to which an award is
subject or for any other matter
which it deems relevant.
Awards are subject to challenging
performance measures.
Current awards are based on relative
total shareholder return (TSR) measured
over a three-year period against two
peer groups each determining the
vesting of 50% of the awards.
The Committee retains the discretion to
vary the peer groups and the weighting
between them, and to introduce new
metrics for awards in future years,
providing they are not materially
less challenging in the circumstances.
The Committee would normally
consult with its major shareholders
before making significant changes
to the performance conditions.
Awards are subject to an “underpin”
based on the Committee’s assessment
of the Group’s underlying performance
against a range of factors, including
the Company’s underlying financial
performance, absolute shareholder
return and progress against milestones
over the three-year performance
period. Any exercise of discretion
will be fully disclosed to shareholders.
Furthermore, the Company will consult
with its major shareholders before
exercising its discretion to increase
the percentage that vests.
The performance conditions for
previous long-term incentive awards
are described in the Annual report
on remuneration section.
For the current TSR performance
conditions 25% of the award vests
at median against the peer group,
increasing on a straight-line basis so
that 100% vests for performance at
or above the upper quartile.
63
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Executive Directors continued
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
All-employee share schemes
All employees, including Executive
Directors, are encouraged to become
shareholders of Vectura Group plc
through participation in our
all-employee share schemes.
The Group currently offers employees
the opportunity to participate in the
Vectura Sharesave Scheme and the
Vectura Share Incentive Plan (SIP).
Share ownership guidelines
Share ownership guidelines
for Executive Directors and senior
employees are designed to align the
interests of senior management to
those of Vectura’s shareholders.
Both of the schemes offered are
HMRC approved schemes and
operate on standard terms.
Participation limits are set by the
relevant tax authorities from time
to time.
Not performance related and no
performance conditions apply.
In accordance with best practice,
Executive Directors are required to
retain at least half of any share awards
vesting as shares (after paying any tax
due) until they have reached the
required level of holding.
Executive Directors are required to
build and retain a holding of Vectura
Group plc shares equivalent to at least
100% of their base salary.
Not performance related.
Chairman and Non-Executive Directors
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Fees
Set at a level that is sufficient to attract
and retain high-calibre Non-Executives.
The Chairman and the Non-Executive
Directors receive fees paid in cash,
with additional fees received for
chairing committees of the Board
or fulfilling the role of Senior
Independent Director.
Fees are paid monthly
and reviewed annually.
The Chairman and the Non-Executive
Directors do not participate in any
performance-related incentive
schemes, nor do they receive any
benefits, other than limited travel
and hospitality-related benefits
in connection with their roles.
When reviewing fee levels, account
is taken of market movements in
the fees of Non-Executive Directors,
Board committee responsibilities
and ongoing time commitments.
Not performance related.
Notes to the policy table
Performance conditions
The Committee selected the performance conditions outlined in the
remuneration policy because they are central to the Group’s overall
strategy and they are the key metrics used by the Executive Directors
to oversee the operations of the business. The Committee considers
that the performance targets for the LTIP and the bonus represent
an appropriate balance between the long-term and short-term
performance of the Group, as well as an appropriate balance
between external and internal assessments of performance.
The targets for the bonus scheme for the forthcoming year will be set
out in general terms, subject to limitations with regards to commercial
sensitivity. The full details of the targets will be disclosed when they
are in the public domain, usually following the end of the relevant
financial year in the Annual report on remuneration.
Committee discretion
The Committee operates under the powers it has been delegated
by the Board. In addition, it complies with rules that have either
been approved by shareholders (Long-Term Incentive Plan) or by
the Board (annual performance bonus scheme). These rules provide
the Committee with certain discretions which serve to ensure that
the implementation of the remuneration policy is fair, both to the
individual Director and to the shareholders. The Committee also
has discretions to set components of remuneration within a range,
from time to time. The extent of such discretions is set out in the
relevant rules, the maximum opportunity or the performance
metrics section of the policy table above.
64
Vectura Group plc Annual Report and Accounts 2014/15 Remuneration scenarios for Executive Directors
The charts below show hypothetical values of the remuneration
package for each Executive Director under three assumed performance
scenarios and these scenarios are based upon the remuneration
policy set out above. The information presented below uses the
level of salary, benefits and pension entitlements for each of the
Directors as at 1 April 2015. Refer to page 77 of this report for details
of base salary levels set for the coming year.
Below target remuneration receivable – this scenario assumes that there
is no annual bonus payment and no awards under the LTIP award vest.
On-target performance – this scenario assumes that the Directors
receive a 50% bonus payout. It is assumed that a face value limit
of 100% base salary applies to the LTIP award and that 25% of the
LTIP granted would ultimately vest.
Stretch remuneration receivable – this scenario assumes that the
Directors receive a maximum bonus payout of 100% of their salary.
It is assumed that a face value limit of 100% base salary applies to the
LTIP award and that 100% of the LTIP granted would ultimately vest.
To ensure the efficient administration of the variable incentive plans
outlined above, the Committee will apply certain operational discretions.
These include the following:
• selecting the participants in the plans on an annual basis;
• determining the timing of grants of awards and/or payments;
• determining the quantum of awards and/or payments
(within the limits set out in the policy table overleaf);
• determining the extent of vesting based on the assessment
of performance;
• making the appropriate adjustments required in certain
circumstances, for instance for changes in capital structure;
• determining “good leaver” status for incentive plan purposes
and applying the appropriate treatment; and
• undertaking the annual review of weighting of performance
measures and setting targets for the annual bonus plan and
other incentive schemes, where applicable, from year to year.
If an event occurs which results in the annual bonus plan or LTIP
performance conditions and/or targets being deemed no longer
appropriate (e.g. material acquisition or divestment), the Committee
will have the ability to adjust appropriately the measures and/or
targets and alter weightings, provided that the revised conditions
are not materially less challenging than the original conditions.
Remuneration scenarios for Executive Directors
Chris Blackwell
Below target
On target
Maximum
83%
17%
£513,600
51% 10%
26%
13%
£834,600
31% 7%
31%
31%
£1,369,600
Fixed elements
Base salary
Pension
Variable elements
Bonus
LTIP
Trevor Phillips and Andrew J Oakley
Below target
On target
Maximum
83%
17%
£338,250
51% 10%
26%
13%
£549,656
31% 7%
31%
31%
£902,000
The actual amounts earned by Executive Directors under these three scenarios will depend on share price
performance over the vesting period. For the purpose of these illustrations, any share price appreciation
has been ignored. For simplicity, the value of participating in the Company’s all-employee share schemes
has also been ignored.
65
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Other remuneration policies
Termination and loss of office payments
The Group’s policy on remuneration for Executive Directors who
leave the Group is consistent with general market practice and it
is set out below. The Committee will exercise its discretion when
determining amounts that should be paid to leavers, taking into
account the facts and circumstances of each case. When calculating
termination payments, the Committee will take into account a variety
of factors, including individual and Company performance, the length
of service of the Executive Director in question and, where appropriate,
the obligation for the Executive Director to mitigate loss.
In the case of a “good leaver”, the following policy will normally apply:
• notice period of twelve months and pension and contractual
benefits, or payment in lieu of notice;
• statutory redundancy payments will be made, as appropriate;
• executives have no entitlement to a bonus payment in the event
that they cease to be employed by the Group; however, they
may be considered for a prorated award by the Committee
in good leaver circumstances;
• the rules of the LTIP contain provisions setting out the treatment
of awards where a participant ceases to be employed by the
Vectura Group. Other than in good leaver circumstances, awards
will normally lapse. In the event of a participant’s death, retirement,
ill health, injury, disability or redundancy or the sale of his employing
company or business out of the Vectura Group or for any other
reason at the discretion of the Remuneration Committee, awards
will not be forfeited but will instead vest on the normal vesting
date. Vesting in these circumstances will be subject to the
satisfaction of the relevant performance conditions measured
at that time and time prorating. In exceptional circumstances,
the Remuneration Committee may allow the awards to vest
on cessation of the participant’s employment, subject to the
satisfaction of the performance conditions measured at that time
and time prorating. In either case, the Remuneration Committee
can decide to disapply time prorating if it thinks it is appropriate
to do so in the particular circumstances;
• any other share-based entitlements granted to an Executive Director
under the Company’s share and share option plans will be determined
based upon the relevant plan rules; and
• the Committee may also provide for the leaver to be
reimbursed for a reasonable level of legal fees in connection
with a settlement agreement.
In circumstances in which a leaving Director may be entitled to
pursue a legal claim, the Company may negotiate settlement terms
if it considers this to be in the best interests of the Company and,
with the approval of the Committee on the remuneration elements
therein, enter into a settlement agreement.
Non-Executive Directors’ dates of appointment
Executive Directors’ service contracts
It is the Group’s policy that Executive Directors should have contracts
with an indefinite term and which provide for a maximum period of
twelve months’ notice.
This applies to the contract of Chris Blackwell, which was effective
from 24 June 2004, Trevor Phillips’ contract, which was amended
with effect from 16 July 2012, and Andrew J Oakley’s contract,
which took effect from 1 January 2015. Executive Directors are subject
to re-election at an AGM at intervals of no more than three years.
The Executive Directors may accept outside appointments, with prior
Board approval, provided that these opportunities do not negatively
impact on their ability to fulfil their duties to the Group. Whether any
related fees are retained by the individual or are remitted to the Group
will be considered on a case-by-case basis. None of the Executive
Directors currently hold any outside directorships.
Non-Executive Directors’ terms of engagement
All Non-Executive Directors have specific terms of engagement which
are terminable on not less than three months’ notice by either party
and six months’ notice in the case of the Chairman. The remuneration
of Non-Executive Directors is determined by the Board within the limits
set by the Articles of Association and based on a review of fees paid
to Non-Executive Directors of similar companies. All Non-Executive
Directors are subject to re-election at an AGM at intervals of no more
than three years.
The dates of appointment of each of the Non-Executive Directors
serving at 31 March 2015 are summarised in the table below.
A Board evaluation has been performed and the results of
this exercise confirmed that all Non-Executive Directors were
independent, including John Brown, who has service greater than
nine years. John Brown’s independence is considered valid due to
the major change in the operating activities of the Group and the
refreshment of Non-Executive and Executive members of the
Board during the term of his appointment.
Remuneration for new appointments
Where it is necessary to recruit or replace an Executive Director,
the Committee has determined that the new Executive Director will
receive a compensation package in accordance with the provisions
of the policy.
In setting base salary for new Executive Directors, the Committee
will consider the existing salary package of the new Director, and the
individual’s level of experience. In setting the annual performance
bonus, the Committee may wish to set different performance metrics
(to those of other Executive Directors) in the first year of appointment.
Where it is appropriate to offer a below-median salary on initial
appointment, the Committee will have the discretion to allow phased
salary increases over a period of time for a newly appointed Director,
even though this may involve increases in excess of inflation and the
increases awarded to the wider workforce.
J R Brown
S E Foden
N W Warner
B F J Angelici
66
Date of appointment
13 May 2004
18 January 2007
1 February 2011
1 December 2013
Vectura Group plc Annual Report and Accounts 2014/15 The Committee wishes to retain the ability to make buyout awards
to a new Executive Director, to facilitate the recruitment process.
The amount of any such award would not exceed the expected value
being forfeited and, to the extent possible, would mirror the form
of payment, timing and degree of conditionality, etc. Where awards
are granted subject to performance conditions, these would be
relevant to Vectura Group plc. Any such award would only be made
in exceptional circumstances and shareholders would be informed
of any such payments at the time of appointment. Share-based
awards would be made using the existing share plans where possible
although the Committee may also use the flexibility provided under
the Listing Rules to make awards without prior shareholder approval.
In respect of internal appointments, any commitments entered into in
respect of a prior role, including variable pay elements, may be allowed
to pay out according to its prior terms.
For external and internal appointments, the Committee may consider
it appropriate to pay reasonable relocation or incidental expenses,
including payment of reasonable legal expenses. Tax equalisation
may be considered if an Executive Director is adversely affected
by taxation due to their employment with the Company.
The terms of appointment for a Non-Executive Director would be in
accordance with the policy for remuneration of Non-Executive Directors
as set out in the policy table.
Consideration of employment conditions elsewhere in the Group
Whilst the Committee does not consult directly with employees
regarding the policy, the Committee considers the general basic
salary increase for the broader employee population when determining
the annual salary increases and remuneration packages for the
Executive Directors. Accordingly, the Committee confirms that the
remuneration policy outlined above has been designed with due
regard to the policy for remuneration of employees across the Group.
The remuneration of senior executives below Board level is reviewed
by the Committee on an annual basis. The remuneration packages
of these executives are consistent with the policy outlined above,
save that lower bonus percentages and lower LTIP opportunities
are applicable. Variable pay elements for senior executives are
driven principally by market comparatives and the overall impact
of the role the individual holds at Vectura. Long-term incentives
are provided to those individuals identified as having significant
potential to influence Group performance.
Vectura aims to provide all employees with a market-competitive
remuneration package that includes certain key benefits such as life
assurance, permanent health insurance, private medical insurance,
access to the pension scheme, participation in Vectura’s all-employee
share schemes and eligibility to receive a bonus. The bonus scheme
for Directors and employees is designed to reward performance,
and all individuals are required achieve challenging personal goals.
How shareholders’ views are taken into account
The Committee takes an active interest in shareholders’ views and
voting on the Remuneration report. Throughout the year, the Committee
has engaged directly with major shareholders and their representative
bodies regarding the application of Vectura’s remuneration policy for
the financial year ended 31 March 2015. The Committee will continue
to engage directly with major shareholders and their representative
bodies should any material changes to the policy be proposed.
The Committee also considers shareholder feedback received
in relation to the AGM each year and guidance from shareholder
representative bodies more generally.
Annual report on remuneration
Remuneration Committee (“the Committee”)
Governance
The Committee consists entirely of independent Non-Executive Directors.
The Committee is chaired by Susan Foden and, during the year ended
31 March 2015, its members were Bruno Angelici, John Brown and
Neil Warner.
In accordance with the requirements of the UK Corporate Governance
Code, the Board has confirmed that Bruno Angelici was independent
upon his appointment to the Board, and he continues to be independent.
No conflicts of interest have arisen during the year and none of the
members of the Committee have any personal financial interest in
the matters discussed, other than as shareholders. The fees of the
Non-Executive Directors are determined by the Board on the joint
recommendation of the Chairman and the Chief Executive.
The Committee takes account of information from both internal and
independent sources, including New Bridge Street (an Aon Hewitt Ltd
company, part of Aon plc), which acts as the Committee’s principal,
and only material, advisor. New Bridge Street (NBS) advises on all
aspects of Vectura’s remuneration policy and reviews Vectura’s
remuneration structures against corporate governance best practice.
NBS is a founder member of the Remuneration Consultants Group
and complies with its Code of Conduct, which sets out guidelines
to ensure that its advice is independent and free of undue influence.
The Committee reviews the performance and independence of its
advisors on an annual basis. During the year, Vectura incurred fees
of £81,000 from NBS. The Committee also engaged the services of
PricewaterhouseCoopers LLP (PwC) to undertake total shareholder
return (TSR) calculations in respect of the LTIP award which vested
in 2014. PwC was paid £8,000 in respect of this engagement.
The Group’s Director of Human Resources provides updates to
the Committee, as required, to ensure that the Committee is fully
informed about pay and performance issues throughout the Group.
The Committee takes these factors into account when determining
the remuneration of the Executive Directors and senior executives.
No Executive Director or employee is allowed to participate in any
discussion directly relating to their conditions of service or remuneration.
Role
The Committee’s principal function is to support Vectura’s strategy by
ensuring that those individuals responsible for delivering the strategy
are appropriately incentivised by Vectura’s remuneration policy.
In determining the Group’s current policy, and in constructing the
remuneration arrangements for Executive Directors and senior
employees, the Board, advised by the Committee, aims to provide
remuneration packages that are competitive and designed to attract,
retain and motivate Executive Directors and senior employees
of the highest calibre.
67
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Annual report on remuneration continued
Remuneration Committee (“the Committee”) continued
Governance continued
Role continued
The Committee is responsible for:
Meetings and key decisions during FY14/15
The Committee met formally four times during the year ended
31 March 2015.
The key decisions made by the Committee during the year are
summarised below:
• setting a remuneration policy that is designed to promote the
• approval of overall pay levels for 2014/15 for the Group
long-term success of the Company;
as a whole;
• ensuring that the remuneration of the Executive Directors and
other senior executives reflects both their individual performance
and their contribution to the overall Group results;
• approval of base salary increases for Executive Directors and
other members of the Executive Management Team, ensuring
these are aligned appropriately both internally and externally;
• determining the terms of employment and remuneration of the
Executive Directors and senior executives, including recruitment
and retention terms;
• approving the design and performance targets for any
annual incentive schemes that include the Executive Directors
and senior executives;
• agreeing the design and performance targets, where applicable,
of all share incentive plans requiring shareholder approval;
• rigorously assessing the appropriateness and subsequent
achievement of the performance targets related to any share
incentive plans;
• recommending to the Board the fees to be paid to the Chairman.
The Chairman is excluded from this process; and
• selection and appointment of the external advisors to the Committee
to provide independent remuneration advice where necessary.
The Committee is formally constituted and operates on written
terms of reference, which are modelled on the Code and are
available on Vectura’s website, www.vectura.com.
• review of achievement against corporate goals and approval
of the percentage of the bonus pool to be paid out across the
Group and a review of achievement against personal goals for
Executive Directors;
• approval of the remuneration package for the new Chief Financial
Officer, following his appointment to the Board;
• determining the arrangements for outgoing Executive Directors;
• review of the performance conditions for the 2010 Long-Term
Incentive Plan (LTIP), including the approval of 100% of the option
awards vesting;
• approval of awards under the 2012 LTIP scheme; and
• review of Vectura’s remuneration policy for Executive Directors
and consultation with shareholders, and approval of overall pay
levels for 2015/16 for the Group as a whole.
Audited information
Directors’ remuneration – year ended 31 March 2015
The total remuneration of the individual Directors who served during the year is shown below. Total remuneration is the sum
of emoluments plus Company pension contributions and the value of long-term incentive awards vesting by reference to performance
in the year to 31 March 2015, being £1,460,000 (2013/14: £117,000).
Executive Directors
C P Blackwell
T M Phillips(1)
A J Oakley(2)
P S Oliver(3)
Non-Executive Directors
B F J Angelici
J R Brown
S E Foden
N W Warner
Base
salary(a)
£000
Benefits(b)
£000
Bonus(c)
£000
LTIP(d)
£000
Pension
entitlements(e)
£000
Other(f)
£000
SIP/SAYE
awards(g)
£000
Total
remuneration
£000
400
275
69
165
120
52
52
52
1,185
2
16
—
2
—
—
—
—
20
320
231
58
108
—
—
—
—
1,144
316
—
—
—
—
—
—
80
55
14
33
—
—
—
—
—
—
—
278
—
—
—
—
717
1,460
182
278
5
5
4
5
—
—
—
—
19
1,951
898
145
591
120
52
52
52
3,861
(1) T M Phillips receives benefits of £15,000 (US$24,541 at an average annual exchange rate) relating to US medical and dental insurance. T M Phillips also makes employee contributions towards this plan.
(2) A J Oakley was appointed to the Board on 1 January 2015.
(3) P S Oliver stepped down as Chief Financial Officer and Company Secretary with effect from 1 January 2015.
68
Vectura Group plc Annual Report and Accounts 2014/15 Directors’ remuneration – year ended 31 March 2014
The total remuneration of the individual Directors who served during the year is shown below. Total remuneration is the sum of emoluments
plus Company pension contributions and the value of long-term incentive awards vesting by reference to performance in the year 2014:
£117,000 (2013: £nil).
Base
salary(a)
£000
Benefits(b)
£000
Bonus(c)
£000
LTIP(d)
£000
Pension
entitlements(e)
£000
Executive Directors
C P Blackwell
A P Hyland(1)
T M Phillips(2)(3)(4)
P S Oliver(5)
Non-Executive Directors
B F J Angelici(6)
J P Cashman(7)
J R Brown
S E Foden
N W Warner
337
55
241
150
40
83
45
45
45
1,041
2
1
15
2
—
—
—
—
—
20
Other(f)
£000
—
178
91
—
—
—
—
—
—
SIP
awards(g)
£000
Total
remuneration
£000
5
3
5
2
—
—
—
—
—
15
748
365
641
334
40
83
45
45
45
2,346
337
—
241
150
—
—
—
—
—
—
117
—
—
—
—
—
—
—
67
11
48
30
—
—
—
—
—
728
117
156
269
(1) A P Hyland stepped down as Chief Financial Officer and Company Secretary, effective from 1 July 2013. Payments made to A P Hyland were disclosed in the prior year remuneration report.
(2) T M Phillips was paid in US$; the amount shown above is converted at the annual average exchange rate of US$1.59/£1.
(3) T M Phillips received benefits of £13,000 (US$21,357 at an average annual exchange rate) relating to US medical and dental insurance. T M Phillips also makes employee contributions
towards this plan.
(4) T M Phillips received a one-off relocation allowance of £90,909 during the year; this is shown within “other” remuneration in the single figure above.
(5) P S Oliver was appointed to the Board on 1 July 2013.
(6) B F J Angelici was appointed to the Board on 1 December 2013 and appointed Chairman of the Board on 1 February 2014.
(7) J P Cashman stepped down as Chairman of the Board on 1 February 2014.
(f) Other payments in 2014/15 relate to payments made under
an agreement with P S Oliver; these amounts are explained
on page 75 of this report.
(g) This relates to SIP and SAYE which have been granted during
the year. The benefit of the SIP awards is calculated as the
number of shares awarded multiplied by the share price on the
date of the award. The benefit of the SAYE award is calculated
as the number of options awarded multiplied by the discount
to the market share price on the date the option was awarded.
Only A J Oakley subscribed to Vectura’s Sharesave Scheme plan
during the current financial year.
Notes to the remuneration table
(a) This is the amount earned in respect of the financial year.
(b) This is the taxable value of benefits paid in respect of the
financial year. These benefits typically relate to death, disability
and medical insurance. As disclosed in note footnote (3) above,
T M Phillips also receives benefits in relation to US medical and
dental insurance.
(c) This is the total bonus earned under the annual bonus scheme
in respect of the financial year.
(d) The amount shown relates to the market value of LTIP awards
that vested during the year. Refer to page 71 for details of LTIP
awards which have vested during the year.
(e) UK tax legislation imposes penalty taxes on annual pension
contributions where prescribed maximum amounts are
exceeded. The Committee has previously determined that
impacted Executive Directors would receive pension benefits
limited by the prescribed maximum amounts and an additional
taxable supplementary cash payment equal to the cost to the
Company of the pension benefit foregone. The amount of the
allowance awarded to any Executive Director so impacted has
been set by the Committee so that there is no additional cost
to the Company resulting from this arrangement.
69
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Additional requirements in respect of the single
total figure table (audited information)
Performance-related pay earned in the year
Annual performance bonus
All employees are eligible for an annual discretionary cash bonus,
whereby performance objectives are established at the beginning
of the financial year by reference to suitably challenging corporate
goals. The scheme is offered to all staff below Board level and
maximum bonus opportunities range from 10% to 75% of salary,
depending on grade. Bonus payments are not pensionable.
The Committee has consistently set stretching corporate goals, including
goals around revenue generation, development pipeline progress,
partnering successes and control of cash expenditure, which are
weighted towards goals with the highest corporate significance.
In addition, a significant percentage of the bonus potential is set
against challenging personal objectives which are linked to the
overall business strategy. Bonuses are limited to a maximum
of 100% of basic salary for each Executive Director.
For the year ended 31 March 2015 the performance objectives
against which bonus payments were calculated are set out in
the table below.
The Committee assessed that a bonus of 80% to 84% (2013/14: 100%)
of salary was appropriate for the Executive Directors when judged
by the achievement of the metrics in the table below and this was
confirmed when looking at a broader picture of the Group’s corporate
performance over the period.
Performance measure
Weighting
Target
Achievement
Level of bonus
awarded as a
% of metric
(% of
full bonus)
Commentary (full disclosure has been
restricted due to commercial sensitivity)
EBITDA progression
Revenue growth
Cash balance
(excluding working capital)
Create strategic
growth opportunities
10%
10%
10%
37% growth
212% growth
100%
£52.4m
£90.8m
£58.0m
£103.5m
100%
100%
(10%)
(10%)
(10%)
20%
Qualitative assessment
70%
(14%)
Complete successful integration
of the Activaero business in line
with Vectura’s strategic and
operational objectives
15%
Qualitative assessment
80%
(12%)
Secure existing pipeline value
15%
Qualitative assessment
80%
(12%)
Personal objectives
20%
Qualitative assessment
65%–80% (13%–16%)
Total bonus payment as a %
of total salary
80%–84%
Strategic and portfolio
review complete; product
and technology strategies
were developed to optimise
commercial value
Delivery against agreed plans
Completed integration
of Activaero operations
Board approval of product and
technology strategy for acquired
programmes and technologies
Continued delivery of
pipeline value and programmes
progressed according to agreed
plans and timelines
Challenging personal objectives
were set for all Directors
LTIP scheme
Scheme interests vested during the year
In 2010, an award of LTIP options was made to the Executive Directors
who were in office at this time.
The award was made in two tranches and for the first tranche
performance was assessed over a performance period of three years.
The performance conditions for the first tranche of this award were
considered by the Committee in FY 13/14; the performance conditions
were not met and therefore 0% of this award vested.
The performance of the second tranche was assessed over a
four-year performance period ending 7 June 2014. During the
year, the Committee engaged PricewaterhouseCoopers LLP (PwC)
to independently assess Vectura’s performance against the LTIP
scheme performance conditions. Following this review, it was
determined that 100% of the second tranche award made in
2010 would vest.
70
Vectura Group plc Annual Report and Accounts 2014/15
Measure
Performance target
Actual performance
TSR against FTSE
SmallCap Index
Level of comparative performance
during the performance period
Percentage of LTIP award released
%
Below median
At or above median
Upper quartile
* Linear vesting between points.
—
30*
100*
Average share price
In order for any of the awards to vest, Vectura’s average share
price for the three months ending 7 June 2014 (vesting date)
must be no less than £1.27.
Vectura’s TSR exceeded that of the upper
quartile of the FTSE SmallCap Index over
the measurement period. Consequently,
up to 100% of the awards were eligible
to vest, subject to the average share
price requirement being met.
The average share price for the
three-month period ended 7 June 2014
was £1.40 and therefore 100% of the
award vested in full.
The value of LTIP options which have vested during the year is as follows:
Director
C P Blackwell
T M Phillips
Total
Share price
at vesting
p
130.25
130.25
Percentage
of award
vested
100%
100%
Exercise
price
p
0.025
0.025
Number
of options
awarded
878,684
242,664
1,121,348
Value of
LTIP awards
vesting
£
1,144,486
316,070
1,460,556
Scheme interests awarded during the year (audited)
LTIP
On 1 July 2014, the following awards of nominal cost options were granted to the Executive Directors under the 2012 LTIP scheme:
Director
C P Blackwell
T M Phillips
P S Oliver
Total
Number
of options
awarded
300,751
206,766
165,413
672,930
Share price
used to
determine
level of award
p
133.0
133.0
133.0
Value of
award
100%
100%
100%
Face
value
£
400,000
275,000
220,000
895,000
Exercise
price
p
0.025
0.025
0.025
% that vests
at threshold
Vesting
date
25% 01/07/2017
25% 01/07/2017
25% 01/07/2017
Award levels were calculated based on the closing share price of 133.0p on the trading day immediately preceding the date of grant.
The face value of each award shown above is based upon this share price.
The awards granted under the 2012 LTIP scheme on 1 July 2014 are subject to relative TSR measured over a three-year period against
two comparator groups (each representing 50% of the total award), as set out in the table below.
Below median
Median
Between median
and upper quartile
Upper quartile or above
TSR performance vs. FTSE SmallCap over three years
(% of award vesting)
TSR performance vs. Euro Stoxx Pharmaceuticals and
Biotechnology Index over three years (% of award vesting)
0%
12.5%
0%
12.5%
Between 12.5% and 50% on a straight-line basis
Between 12.5% and 50% on a straight-line basis
50%
50%
71
Annual Report and Accounts 2014/15 Vectura Group plcGovernance
REMUNERATION REPORT continued
Additional requirements in respect of the single
total figure table (audited information) continued
To the extent that the performance conditions are not met in full
at the end of the three-year performance period, awards lapse.
Scheme interests awarded during the year (audited) continued
LTIP continued
Performance against the conditions will be measured by the
Committee’s independent advisors.
Vesting of awards is also subject to an “underpin” enabling the
Committee to decrease or increase the percentage of the award
which vests based on its assessment of the Group’s underlying
performance over the period against a range of factors including
the Group’s underlying financial performance, absolute shareholder
return and progress against milestones. Any exercise of this discretion
by the Committee will be fully disclosed to shareholders with an
explanation of the Committee’s reasoning in the Report on remuneration
for the relevant year. Furthermore, the Committee will consult with
its major shareholders before exercising its discretion to increase
the percentage of any award that vests.
The Committee has the power to claw back all or part of the awards/
payments for one year following vesting in the event of a material
misstatement, an error in the calculation of performance against the
performance conditions of the plan or any other matter which it
deems relevant to this provision.
Free share awards
An award of free shares was made to all employees on 25 June 2014,
under Vectura’s Share Incentive Plan (SIP). The awards are subject to
a three-year holding period and no performance conditions are attached.
The awards made to Directors who held office on 25 June 2014 are
shown on the table below.
Director
C P Blackwell
T M Phillips
P S Oliver
Total
Number of
shares
awarded
2,727
2,727
2,727
8,181
Closing share
price on
date of grant
p
132.0
132.0
132.0
Face
value
£
3,600
3,600
3,600
10,800
% that vests
at threshold
Vesting
date
— 25/06/2017
— 25/06/2017
— 25/06/2017
Matching share awards
On 7 July 2014, the Directors listed below purchased shares through the SIP. For every one share purchased, Vectura awarded a free
matching share pursuant to the scheme rules. The value of the matching shares is shown below. The awards are subject to a three-year
holding period and no performance conditions are attached.
Director
C P Blackwell
T M Phillips
P S Oliver
Total
Closing share
price on
date of grant
p
148.5
148.5
148.5
Number of
shares
awarded
1,212
1,212
1,212
3,636
Face
value
£
1,800
1,800
1,800
5,400
% that vests
at threshold
Vesting
date
— 08/07/2017
— 08/07/2017
— 08/07/2017
Sharesave
Vectura Group plc also operates a Sharesave (SAYE) Share Option Scheme for both employees and Executive Directors. Under this scheme all
eligible employees and Executive Directors are invited to subscribe for options, which may be granted at a discount of up to 20% of market
value and which vest after three years. The Sharesave Share Option Scheme is an HMRC approved all-employee plan to which performance
conditions do not apply.
In March 2015, the following Sharesave options vested:
Share price
at vesting
p
145.75
145.75
Percentage
of award
vested
100%
100%
Exercise
price
p
47.0
47.0
Number
of options
awarded
18,987
18,987
37,974
Value of
SAYE awards
vesting
£
18,674
18,674
37,348
Director
C P Blackwell
P S Oliver
Total
72
Vectura Group plc Annual Report and Accounts 2014/15
In March 2015, the following options were awarded under Vectura’s Sharesave Scheme:
Director
A J Oakley
Total
Gain on exercise of share options
Executive Directors
C P Blackwell
C P Blackwell
T M Phillips
T M Phillips
T M Phillips
P S Oliver
P S Oliver
Non-Executive Directors
J R Brown
Aggregate gain on exercise of share options
Chris Blackwell exercised a total of 1,740,321 unapproved options
during the year. Of the total shares acquired through the exercise,
Chris Blackwell sold a total of 1,132,265 shares solely to cover the
cost of the exercise including related tax liabilities. Chris Blackwell
retained the balance of 608,056 shares.
Trevor Phillips exercised a total of 454,674 options during the
year. 242,664 of the options, which were exercised on 1 July 2014,
were nominal cost LTIP options. Trevor Phillips sold a total of 109,500
shares solely to cover the cost of the exercise including related tax
liabilities. Trevor Phillips retained the balance of 133,164 shares.
Number
of options
awarded
Share price
on invitation
date
p
Option
price
p
Face value
of award
£
15,734
143.0
114.4
22,500
15,734
22,500
Date of
exercise
Number of
options
exercised
Exercise
price
p
Market value
at date
of exercise
p
Gain on
exercise of
share options
£
29/05/2014
1,023,355
29/05/2014
716,966
36.00
56.00
131.00
131.00
1,740,321
01/07/2014
242,664
15/01/2015
3,133
15/01/2015
208,877
0.025
0.025
95.75
133.00
144.50
144.50
01/07/2014
01/07/2014
454,674
27,460
8,000
35,460
44.25
71.00
133.00
133.00
972,187
537,724
1,509,911
322,682
4,526
101,828
429,036
24,371
4,960
29,331
01/07/2014
238,989
56.00
133.00
184,022
238,989
184,022
2,152,300
On 15 January 2015, Trevor Phillips exercised a further 212,010
unapproved options. Trevor Phillips sold a total of 171,777 shares
solely to cover the cost of the exercise including related tax liabilities.
Trevor Phillips retained the balance of 40,233 shares.
Paul Oliver exercised a total of 35,460 approved options during the
year. Paul Oliver retained all the shares resulting from this exercise.
73
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Additional requirements in respect of the single
total figure table (audited information) continued
Gain on exercise of share options continued
John Brown exercised a total of 238,989 unapproved options during
the year. John Brown sold a total of 159,100 shares solely to cover the
cost of exercise, including related tax liabilities. John Brown retained
the balance of 79,889 shares. As explained in previous annual reports,
the share options awarded to John Brown were made prior to Vectura’s
public listing in 2004. No further share option awards have been made,
or will be made, to Non-Executive Directors. Following John Brown’s
exercise, there are no Non-Executive Directors that hold share options.
Approved and Unapproved Share Option Plans and the EMI Plan
Executive Directors hold options under the Approved and Unapproved
Share Option Plans as detailed above. Historically, no performance
conditions have been attached to the options granted under the
above schemes. The exercise price is equal to the market value
of Vectura Group plc’s shares at the time the options are granted.
Total pension entitlements
As stated in the notes to the single figure table, UK tax legislation
imposes penalty taxes on annual pension contributions where
prescribed maximum amounts are exceeded. Impacted Executive
Directors receive an additional taxable supplementary cash payment
in lieu of pension contributions in excess of any limits.
Executive Directors
C P Blackwell
T M Phillips
A J Oakley
P S Oliver
Paid into
pension
fund
£000
40
55
14
33
142
Received
in cash
£000
Total
pension
£000
40
—
—
—
40
80
55
14
33
182
Shares owned
Unvested
Vested(6)
Unvested
Vested
LTIP awards subject to performance conditions*
Share option awards not subject to performance conditions
31 March 2015
Ordinary shares
of 0.025p each
1,306,156
206,027
105,727
—
12,903
322,570
11,000
30,477
Value of
owned
shares as
a % of
salary
476%
109%
71%
—
—
—
—
—
Executive Directors
C P Blackwell(1)
T M Phillips(2)
P S Oliver(3)
A J Oakley(4)
Non-Executive Directors
B F J Angelici
J R Brown(5)
S E Foden
N W Warner
2012
award
2013
award
2014
award
Unapproved
scheme
Approved
scheme
Sharesave
Unapproved
scheme
Approved
scheme
Sharesave
401,889
410,659
34,785
458,110
611,246
158,489
300,751
206,766
82,857
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,149,833
906,605
37,383
18,987
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,718
15,734
—
—
—
—
—
—
119,063
18,987
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) The holding of C P Blackwell includes 64,281 ordinary shares of 0.025p each, which are held in the Vectura Group plc Employee Benefit Trust (Share Incentive Plan).
(2) The holding of T M Phillips includes 21,178 ordinary shares of 0.025p each, which are held in the Vectura Group plc Employee Benefit Trust (Share Incentive Plan).
(3) P S Oliver stepped down from the Board with effect from 1 January 2015. The shareholding shown for P S Oliver is his shareholding as at the date he ceased to be a Director of Vectura
Group plc, 1 January 2015. The percentage of his salary held in shares is calculated using the share price as at 31 March 2015 and his annual salary at the point of his departure, £220,000.
(4) A J Oakley was appointed to the Board with effect from 1 January 2015.
(5) The holding of J R Brown includes 20,457 ordinary shares of 0.025p each, which are held through nominees.
(6) Vested LTIP awards relate to outstanding awards granted between 2005 and 2010.
* Details of the performance conditions applicable to the unvested LTIP awards are set out on page 71.
74
Vectura Group plc Annual Report and Accounts 2014/15 Payments made for loss of office and payments to past Directors
(audited information)
On 18 November 2014, it was announced that Paul Oliver would
step down as Chief Financial Officer and Company Secretary of
Vectura, with effect from 1 January 2015.
The Company entered into an agreement with Paul Oliver and, pursuant
to this agreement, Paul Oliver received a payment of £341,622 as
settlement of his legal entitlement. This included £234,122 as payment
in lieu of salary and benefits during his twelve-month contractual
notice period and in respect of his accrued holiday entitlement.
The balance of £107,500 was a payment in respect of his pro-rata
bonus entitlement for the financial year ended 31 March 2015.
This is equivalent to 9/12ths of his bonus opportunity for FY 14/15
and it assumes a 65% payout against the relevant bonus objectives,
representing the Committee’s assessment of the likely payout under
the bonus scheme at the time of his departure. In addition, he will
receive a 20% pension contribution and will be provided with insured
benefits for the duration of his twelve month notice period.
The amounts paid to Paul Oliver under this agreement relate to his
service as a Director and therefore they have been included in the
“bonus” and “other” amounts disclosed in the total remuneration table.
Statement of Directors’ shareholding and share interests
(audited information)
As a direct link between executive remuneration and the interests of
shareholders, the Committee has implemented shareholding guidelines
for Executive Directors and key senior employees. The guidelines
require that Executive Directors build up and maintain an interest
in the ordinary shares of the Company that is equal in value to their
annual base salary. In assessing compliance with this requirement,
the value of the shareholding shown below is assessed using the share
price on 31 March 2015, being 145.75p. The value as a percentage
of salary has been calculated using base salary as at 31 March 2015,
as shown in the single figure remuneration table.
Until this level of shareholding has been attained, Executive Directors
are required to retain at least half of any share awards vesting as
shares (after paying any tax due) until they have a holding equivalent
to at least 100% of their base salary.
The Directors who have held office during the year ended
31 March 2015 and their interests (in respect of which transactions
are notifiable to the Company under the Financial Conduct Authority’s
Transparency Rules) in the share capital of Vectura Group plc at
31 March 2015 are shown in the table below.
In accordance with Vectura’s approved remuneration policy,
Paul Oliver was treated as a good leaver under the various share
schemes that the Group operates. Awards that may vest under
the 2012 LTIP scheme will vest at the normal vesting date and be
prorated, according to length of service. Awards made under the
Group’s Share Incentive Plan and Sharesave Scheme will vest in
accordance with the rules of those schemes.
There was no change in the Directors’ interests between
31 March 2015 and 19 May 2015, the date of this report.
Shares owned
Unvested
Vested(6)
Unvested
Vested
LTIP awards subject to performance conditions*
Share option awards not subject to performance conditions
31 March 2015
Ordinary shares
of 0.025p each
1,306,156
206,027
105,727
—
12,903
322,570
11,000
30,477
Value of
owned
shares as
a % of
salary
476%
109%
71%
—
—
—
—
—
Executive Directors
C P Blackwell(1)
T M Phillips(2)
P S Oliver(3)
A J Oakley(4)
Non-Executive Directors
B F J Angelici
J R Brown(5)
S E Foden
N W Warner
401,889
410,659
34,785
458,110
611,246
158,489
300,751
206,766
82,857
2,149,833
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) The holding of C P Blackwell includes 64,281 ordinary shares of 0.025p each, which are held in the Vectura Group plc Employee Benefit Trust (Share Incentive Plan).
(2) The holding of T M Phillips includes 21,178 ordinary shares of 0.025p each, which are held in the Vectura Group plc Employee Benefit Trust (Share Incentive Plan).
(3) P S Oliver stepped down from the Board with effect from 1 January 2015. The shareholding shown for P S Oliver is his shareholding as at the date he ceased to be a Director of Vectura
Group plc, 1 January 2015. The percentage of his salary held in shares is calculated using the share price as at 31 March 2015 and his annual salary at the point of his departure, £220,000.
(4) A J Oakley was appointed to the Board with effect from 1 January 2015.
(5) The holding of J R Brown includes 20,457 ordinary shares of 0.025p each, which are held through nominees.
(6) Vested LTIP awards relate to outstanding awards granted between 2005 and 2010.
* Details of the performance conditions applicable to the unvested LTIP awards are set out on page 71.
2012
award
2013
award
2014
award
Unapproved
scheme
Approved
scheme
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Sharesave
—
11,718
—
15,734
—
—
—
—
Unapproved
scheme
Approved
scheme
906,605
—
119,063
—
—
—
—
—
37,383
—
—
—
—
—
—
—
Sharesave
18,987
—
18,987
—
—
—
—
—
75
Annual Report and Accounts 2014/15 Vectura Group plcGovernance REMUNERATION REPORT continued
Unaudited information
Performance graph and table
The following graph shows Vectura Group plc’s cumulative total shareholder return (TSR) over the last six financial years relative to the
FTSE SmallCap Index. This index was chosen as Vectura is one of the constituent companies and the Committee feels that it is one of the most
appropriate against which to measure performance.
TSR is defined as the return on investment obtained from holding a company’s shares over a period. It includes dividends paid, the change
in the capital value of the shares and any other payments made to or by shareholders within the period.
Total shareholder return
Source: Thomson Reuters
350
300
250
)
£
(
e
u
a
V
l
200
150
100
50
0
31 March 2009
31 March 2010
31 March 2011
31 March 2012
31 March 2013
31 March 2014
31 March 2015
This graph shows the value, by 31 March 2015, of £100 invested in Vectura Group PLC on 31 March 2009 compared with the value of £100 invested in the
FTSE Small Cap Index. The other points plotted are the values at intervening financial year ends.
This graph shows the value, by 31 March 2015, of £100 invested in Vectura Group plc on 31 March 2009, compared with the value
of £100 invested in the FTSE SmallCap Index. The other points plotted are the values at intervening financial year ends.
Vectura Group plc
FTSE Small Cap
Aligning pay with performance
Chief Executive remuneration compared with annual growth in TSR:
Annual growth in TSR (%)
Salary, pensions and benefits
Annual performance bonus
Long-Term Incentive Plan vesting
Chief Executive total remuneration
Actual bonus as a % of the maximum
2009/10
£000
(13.8)
384
150
177
711
47%
2010/11
£000
29.8
383
196
90
669
62%
Actual share award vesting as a % of the maximum(1)
83.3%
62.9%
(1) No LTIP awards vested during FY 12/13 or FY 13/14.
2011/12
£000
(11.1)
396
174
401
971
53%
100%
2012/13
£000
67.3
401
193
—
594
59%
0%
2013/14
£000
68.9
411
337
—
748
100%
0%
2014/15
£000
(4.9)
487
320
1,144
1,951
80%
100%
Percentage change in remuneration of the Chief Executive
Set out below is the change over the prior period in base salary, benefits, pension and annual performance bonus of the Chief Executive
and the Group’s employees:
2014/15
£000
400
2
320
Chief Executive
All employees
Percentage change (FY 13/14 v FY 14/15)
Percentage change (FY 13/14 v FY 14/15)
19%
0%
(20%)
4%
0%
(15%)
Salary
Benefits
Bonus
76
Vectura Group plc Annual Report and Accounts 2014/15
Relative importance of Executive Director remuneration
Total employee remuneration
Revenue
Research and development expenditure
(Loss)/profit before tax
Distributions to shareholders
FY 14/15
£m
FY 13/14
£m
18.3
58.0
36.1
(6.2)
—
13.4
36.5
28.0
(4.8)
—
Change
£m
4.9
21.5
8.1
(1.4)
—
Statement of shareholder voting at 2014 AGM
At last year’s AGM held on 19 September 2014, votes cast by proxy and at the meeting in respect of the Directors’ remuneration were
as follows:
For (including
discretionary
votes)
Total votes cast
(excluding votes
withheld)
Against
Votes
withheld(1)
Total votes
cast (including
withheld votes)
To approve the Directors’ remuneration policy
298,881,466
5,521,975
304,403,441
4,655,592
309,059,033
% of votes cast
98.19
1.81
100
To approve the Remuneration report
199,895,156
107,436,092
307,331,248
1,727,785
309,059,033
% of votes cast
65.04
34.96
100
(1) A vote that is withheld does not constitute a vote in law and has therefore not been included in the totals above.
In the forthcoming year, the Committee will continue to engage with major shareholders and their representative bodies regarding the
development and implementation of Vectura’s remuneration policy.
Statement of implementation of remuneration policy in the
following financial year
Base salaries
As disclosed last year, the Committee planned to reposition
Chris Blackwell’s salary at a broadly mid-market level over two
years, taking into account his performance in the role and the
Company’s performance as a whole. In light of strong corporate
and personal performance, the Committee decided to complete this
review by increasing his salary by 7% with effect from 1 April 2015.
As a result, Chris Blackwell’s salary increased from £400,000
to £428,000.
The Committee determined that a 2.5% increase is appropriate
for the roles of Chief Operating Officer and Chief Financial Officer.
This increase is below the overall increase of 3.3% across the
wider workforce.
Non-Executive Directors’ fees
Non-Executive fees remain unchanged at £52,000 for the forthcoming
year. Per-Olof Andersson will receive fees of £44,000 per annum,
plus an allowance of £2,000 for each Board meeting requiring his
transatlantic travel.
The Chairman’s fee has been repositioned to £130,000 per annum.
Bonus
The performance targets set for the performance bonus for future
years will be disclosed in accordance with the policy set out on
pages 61 to 67 of this report.
LTIP
It is currently intended that the 2015 LTIP awards will be granted
shortly after the Company’s AGM in September 2015.
The Remuneration Committee’s philosophy is that the remuneration
arrangements for the Group as a whole should support value creation
for shareholders over the longer term and be subject to challenging
performance conditions measured over a period of at least three years
and ideally longer. We believe that long-term incentives should comprise
the most significant element of the remuneration package, with the
other elements of remuneration set at a mid-market level. Overall, the
Committee believes that Vectura’s Long-Term Incentive Plan should
be capable of delivering exceptional rewards, but only for
exceptional performance.
During the forthcoming year, the Committee will continue to review
Vectura’s existing long-term incentive arrangements to ensure that
they continue to be aligned to shareholder interests and Vectura’s
remuneration philosophy, as outlined above. The Committee will
continue to engage with major shareholders and their representative
bodies regarding the development and implementation of Vectura’s
remuneration policy in respect of long-term incentives and variable
pay arrangements.
On behalf of the Board
Performance measures will include targets relating to creating
strategic growth opportunities, securing existing pipeline value
and achieving financial growth.
Dr Susan Foden
Chair of the Remuneration Committee
19 May 2015
77
Annual Report and Accounts 2014/15 Vectura Group plcGovernance
Directors’ indemnities
The Company has granted an indemnity to its Directors against
liability in respect of proceedings brought by third parties, which
remains in force as at the date of approving the Directors’ report.
Other than the indemnity provisions described above, none of the
Directors had a material interest in any contract of significance to
which the Company or any of its subsidiary undertakings was a
party during the year ended 31 March 2015 and up to the date
of the publication of this report.
Shares
Share capital
At 15 May 2015, the nearest practical date to the date of this
report, the Company had a total of 3,244 ordinary shareholders
and 404,623,173 ordinary shares in issue.
Rights and obligations
The rights and obligations attaching to the ordinary shares are set
out in the Company’s Articles of Association (“the Articles”). The Articles
may only be amended by special resolution of the members of the
Company. A copy of the Articles is available upon request.
Share price
The mid-market share price as shown by the London Stock Exchange
Daily Official List on 31 March 2015 was 145.75p. The mid-market
share price ranged from 154.75p to 115.00p during the year to
31 March 2015. The average share price for the period was 135.55p.
Capital structure
Details of the authorised and issued share capital, together with
details of the movements in the Company’s issued share capital
during the year, are shown in note 22. The Company has one class
of ordinary shares which carry no right to fixed income. Each share
carries the right to one vote at general meetings of the Company.
The redeemable preference shares carry no interest, nor do they
carry voting rights. The percentage of the issued nominal value
of the ordinary shares is 74.8% of the total issued nominal value
of all share capital.
There are no specific restrictions on the size of a holding nor on the
transfer of shares, which are both governed by the general provisions
of the Articles of Association and prevailing legislation. The Directors
are not aware of any agreements between holders of the Company’s
shares that may result in restrictions on the transfer of securities or
on voting rights.
Details of employee share schemes are set out in note 23. Shares held
by the Vectura Group plc Employee Benefit Trust abstain from voting.
No person has any special rights of control over the Company’s share
capital and all issued shares are fully paid.
DIRECTORS’ REPORT
The following matters are reported by the Directors in accordance
with the Companies Act 2006 requirements in force at the date
of this Annual Report and Accounts.
Principal activity
The principal activity of the Group undertaken during the year was
research, development and commercialisation of novel therapeutic
products and drug delivery systems for human use.
Review of business
The consolidated income statement for the year ended 31 March 2015
is set out on page 86. Key events during the past year are described
in the Strategic report; highlights of FY 14/15 are shown on pages 1 to 3
and are referred to in more detail in the Chairman’s statement, the
Chief Executive’s statement and the Financial review. These reports,
together with the Chairman’s introduction, the Corporate governance
statement, the Audit Committee report, the Nomination Committee
report and the Remuneration Committee report, are incorporated
into this report by reference and should be read as part of this report.
The Group’s risk management process and the Board’s assessment
of the key risks and uncertainties facing the business are set out on
pages 20 to 25. During the year, the Board has reviewed the risk
management policies in place, as summarised in the Corporate
governance statement on pages 47 to 52. Key performance
indicators are set out on pages 18 and 19.
Group’s result and dividend
The consolidated profit after tax for the year was £3.7m
(2013/14: loss of £2.3m). The Directors do not recommend
the payment of a dividend (2013/14: £nil).
Financial instruments
The policy and practice of the Group with regard to financial
instruments is disclosed in note 21 of the financial statements.
Directors
The Directors listed on pages 44 to 45 served throughout the year
with the exception of Andrew J Oakley and Dr Per-Olof Andersson.
Andrew J Oakley was appointed as Chief Financial Officer and Company
Secretary on 1 January 2015 and Dr Per-Olof Andersson was appointed
as a Non-Executive Director with effect from 1 April 2015.
In addition, Paul Oliver served as an Executive Director during the
financial year from 1 April 2014 to 31 December 2014.
Brief biographical details of each Director are set on pages 44 to 45.
Details of Directors’ remuneration and their interests in the share capital
of the Company are given in the Remuneration report. None of the
Directors has any interest in any contract of significance to the
financial statements.
With regard to the appointment and replacement of Directors, the
Company is governed by its Articles of Association, the UK Corporate
Governance Code, the Companies Act 2006 and related legislation.
The Articles of Association themselves may be amended by special
resolution of the shareholders. The powers of Directors are described
in the Board’s terms of reference, copies of which are available on
request, and the Corporate governance report on pages 47 to 52.
78
Vectura Group plc Annual Report and Accounts 2014/15 Significant shareholdings
On 15 May 2015, the Directors were notified of the following substantial holdings in the Company’s share capital:
Invesco Asset Management Limited
Legal & General Investment Management Limited
Baillie Gifford & Co
Neptune Investment Management Limited
OppenheimerFunds Inc.
Franklin Resources Inc.
AXA SA
Number of shares
‘000
%
58,256
34,100
26,372
20,760
19,000
18,955
16,691
14.4%
8.43%
6.52%
5.13%
4.70%
4.86%
4.12%
Employee engagement
The Group’s policies on the environment, health and safety, ethical
and social issues and its employees are disclosed in the Strategic
review; refer to pages 36 to 39.
Auditor
Deloitte LLP has expressed a willingness to continue in office
as auditor and a resolution to reappoint them will be put to
the members at the forthcoming Annual General Meeting.
Political and charitable donations
Vectura encourages employee involvement in charitable causes, but
does not contribute itself because it is loss-making. There were no
political donations during the year (2013/14: £nil).
The Directors that were members of the Board at the time
of approving the Directors’ report are listed on pages 44 and 45.
Having made enquiries of fellow Directors and of the Company’s
auditor, each of these Directors confirms that:
• to the best of each Director’s knowledge and belief, there is no
information relevant to the preparation of their report of which
the Company’s auditor is unaware; and
• each Director has taken all the steps a director might
reasonably be expected to have taken to be aware of relevant
audit information and to establish that the Company’s auditor
is aware of that information.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
By order of the Board
Andrew J Oakley
Company Secretary
19 May 2015
Going concern
The accounts have been prepared on the going concern basis.
Although certain economic conditions may place pressures on
customers and suppliers who may face liquidity issues, the Group’s
product diversity and customer and supplier base substantially
mitigate these risks. In addition, the Group operates in the relatively
defensive pharmaceutical industry, which we expect to be less
affected compared to other industries.
The Group made a profit after tax of £3.7m for the financial year ended
31 March 2015 (2013/14: loss after tax of £2.3m) and had £90.0m
of cash and cash equivalents as at 31 March 2015 (2014: £81.7m).
The Board operates an investment policy under which the primary
objective is to invest in low-risk cash or cash equivalent investments
to safeguard the principal. The Group’s forecasts, taking into account
likely revenue streams, show that the Group has sufficient funds to
operate for the foreseeable future.
After reviewing the Group’s forecasts and assessing the uncertain
nature of some of the Group’s forecast revenues, the Directors
believe that the Group is adequately placed to manage its business
and financing risks successfully. Accordingly, they continue to adopt
the going concern basis in preparing the Annual Report and Accounts.
Annual General Meeting
The Annual General Meeting will be held at the offices
of Covington & Burling LLP, 265 Strand, London WC2R 1BH
on 24 September 2015 at 12.00 noon. Details of the business to
be transacted at the forthcoming AGM will be given in a separate
circular to shareholders.
79
Annual Report and Accounts 2014/15 Vectura Group plcGovernance STATEMENT OF DIRECTORS’ RESPONSIBILITIES
STICKING TO OUR VALUES
Directors’ responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with IFRSs
as adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation taken as a whole;
• the Strategic report includes a fair review of the development
and performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties which they face; and
• the Annual Report and financial statements, taken as whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s performance,
business model and strategy.
Andrew J Oakley
Director
19 May 2015
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare such financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in accordance
with International Financial Reporting Standards (IFRSs) as adopted
by the European Union and Article 4 of the IAS Regulation and have
also chosen to prepare the parent company financial statements
under IFRSs as adopted by the European Union. Under company
law the Directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of affairs
of the Company and of the profit or loss of the Company for that
period. In preparing these financial statements, IAS 1 requires
that directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information;
• provide additional disclosures when compliance with the specific
requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
80
Vectura Group plc Annual Report and Accounts 2014/15 INDEPENDENT AUDITOR’S REPORT
to the members of Vectura Group plc
Opinion on the financial statements of Vectura Group plc
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 March 2015
and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
The financial statements comprise the Consolidated Statement of Comprehensive Income, the Balance Sheet, the Cash Flow Statement, the
Statement of Changes in Equity and the related notes 1 to 30. The financial reporting framework that has been applied in their preparation
is applicable law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in
accordance with the provisions 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, in addition to complying with its legal obligation to apply IFRSs as adopted
by the European Union, the Group has also applied IFRSs as issued by the International Accounting Standards Board (IASB).
In our opinion the Group financial statements comply with IFRSs as issued by the IASB.
Going concern
As required by the Listing Rules we have reviewed the Directors’ statement contained on page 79 that the Group is a going concern.
We confirm that:
• we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements
is appropriate; and
• we have not identified any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to
continue as a going concern.
81
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements INDEPENDENT AUDITOR’S REPORT continued
to the members of Vectura Group plc
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below, which are unchanged from the prior year, are those that had the greatest
effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:
Risk
Acquisition accounting
The Group acquired Activaero GmbH on 18 March 2014 for a total consideration
of €130m. Management exercised judgement in the prior year in determining their
provisional valuation of the intangible assets, land and buildings, liabilities and resultant
goodwill associated with the acquisition. In the current year management has finalised
its provisional acquisition accounting by assessing any facts and circumstances which
arose subsequent to the initial acquisition accounting which might indicate an
adjustment was required within one year from the date of acquisition. This process
has resulted in material adjustments to the allocation of the fair value of the intangible
assets acquired between different product categories. The key consideration relates
to when the information was obtained, whether it meets the requirements of IFRS 3
for adjustment to the initial acquisition accounting and the assumptions used in the
revised cash flows.
See notes 1 and 29 to the financial statements, where the key assumptions around the
acquisition accounting have been disclosed.
Goodwill and intangible asset impairment
The carrying value of goodwill (31 March 2015: £56.8m; 31 March 2014: £57.8m)
and intangible assets (31 March 2015: £104.3m; 31 March 2014: £138.9m) relies on
assumptions and judgements made by management concerning the estimated future
cash flows from a combination of early and late-stage research and development
programmes, future royalty receipts and regulatory milestones; associated discount
rates; and clinical commercial risk and market growth rates. Management have
performed an impairment review under IAS 36.
See notes 1 and 9 to the financial statements, where the key assumptions used in their
impairment model have been disclosed.
How the scope of our audit
responded to the risk
We focused our audit work on the key
judgements taken by management around the
finalisation of the valuation of intangible assets.
We have reviewed the forecasts for the relevant
products and held discussions with operational
management to validate the facts surrounding
the revisions made to the acquisition accounting.
In conjunction with the firm’s valuation experts,
we have critically assessed and challenged
management on the most recent information
presented in respect of the acquired intellectual
property to assess whether the information
was obtained within the twelve month window
prescribed by IFRS 3, and that it reflected
conditions that existed at the date of acquisition,
and is not indicative of new information that
would not result in adjustment to the
provisional acquisition accounting.
We assessed management’s assumptions used
in its impairment model for goodwill, including:
• the cash flow projections by discussing
with senior operational management
and considering the consistency of the
forecasts with clinical and licensing partner
data and contractual agreements;
• discount rates by engaging our valuation
specialists to independently recalculate
the group’s weighted average cost of capital
(WACC) and then performing an assessment
of the risk adjustments applied by
management; and
• sensitivity analysis of management’s
forecasts including assessing the impact
of applying further sensitivities.
82
Vectura Group plc Annual Report and Accounts 2014/15 Our assessment of risks of material misstatement continued
Risk
Revenue recognition
The Group’s two principal revenue streams are licence milestones and royalty income:
• recognition of revenue on product and technology licence milestones (31 March 2015:
£26.4m; 31 March 2014: £17.6m) can be subjective and management exercises judgement
in determining whether the Group has fulfilled all of its performance obligations, such
as a regulatory approval or transfer of intellectual property, under that contract and
therefore the relevant period over which to recognise revenue. This is a material
judgement that impacts the financial statements; and
• royalty income (31 March 2015: £25.2m; 31 March 2014: £16.3m) needs
to be accrued for at year end based on management’s estimate of the licence
partners’ global sales in the final quarter or statements received from the licence
partners. This requires management to exercise judgement in ensuring all royalty
streams are recognised as revenue in the year, which has a material impact on the
financial statements.
See notes 1 and 2 to the financial statements, where the key assumptions in relation
to revenue recognition have been disclosed.
How the scope of our audit
responded to the risk
We reviewed the key contracts for the
Group and management’s calculations for
each milestone to assess consistency with the
Group’s accounting policies and compliance
with IAS 18 ‘Revenue’. We challenged
management’s assumptions through discussions
with the development team and review of
supporting documentation and regulatory
announcements to assess whether the period
of recognition for each milestone was appropriate.
Our audit work focused on the royalty income
accrued in the final quarter of the year and we
reviewed a range of sources, such as third-party
announcements, news feeds, royalty statements
and post year end correspondence with the
licensing partners to challenge the completeness
of management’s estimates around the
amount accrued.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on
pages 54 and 55.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to
express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the
risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
We determined materiality for the Group to be £2m (2014: £2m), which is approximately 1% of equity (2014: 1%). Equity has been
used as the basis for determining materiality as it represents the most stable aspect of the business, with year on year fluctuations seen
in revenues and loss before tax as the Group progresses its R&D programmes; equity also reflects the Group’s focus on cash generation
and cash management.
We agreed with the Audit Committee that we would report to the Committee all misstatements identified in excess of £40,000 (2014: £40,000),
as well as misstatements below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing
the risks of material misstatement at the Group level.
Based on that assessment, we focused our Group audit scope on the UK businesses which are managed from Chippenham, UK.
These were subject to a full scope audit by the Group audit team using component materialities which were lower than Group materiality.
Component materialities range from £1m to £1.9m. The UK businesses account for 100% (2014: 99%) of the components with net assets,
95% (2014: 99%) of the Group’s revenue and 100% of the components with a profit before tax (2014: 85% of the Group’s loss before tax).
In addition, audit procedures were performed by the Group audit team in respect of the German business using a component materiality
which is lower than Group materiality. Including goodwill and intangible assets this business accounts for 99% of the components with
net liabilities (2014: 1% of Group’s net assets), 5% (2014: 1%) of the Group’s revenues and 96% of the components with a loss before
tax (2014: 15% of the Group’s loss before tax).
At the parent entity level we also tested the consolidation process and performed analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject
to audit or audit of specified account balances.
83
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements INDEPENDENT AUDITOR’S REPORT continued
to the members of Vectura Group plc
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• 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.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not
been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns.
We have nothing to report arising from these matters.
Corporate Governance Statement
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the company’s
compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual
report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course
of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the
audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual
report appropriately discloses those matters that we communicated to the audit committee which we consider should have been
disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
Respective responsibilities of directors and auditor
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. Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1
(UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied.
Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
84
Vectura Group plc Annual Report and Accounts 2014/15 Matters on which we are required to report by exception continued
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether
the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the
financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies
with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for our report.
David Hedditch (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Bristol, United Kingdom
19 May 2015
85
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements CONSOLIDATED INCOME STATEMENT
for the year ended 31 March 2015
Revenue
Cost of sales
Gross profit
Research and development expenses
Other administrative expenses
Non-recurring acquisition costs
Amortisation of intangible assets
Share-based compensation
Total administrative expenses
Operating loss
Presented as:
EBITDA(2)
Non-recurring acquisition costs
Amortisation of intangible assets
Depreciation of assets
Share-based compensation
Operating loss
Investment income
Finance gains/(costs)
Share of result of joint venture
Loss before taxation
Taxation
Profit/(loss) after taxation attributable to equity holders of the Company
Earnings/(loss) per ordinary share: basic
Earnings/(loss) per ordinary share: diluted
Adjusted earnings per ordinary share: basic
Adjusted earnings per ordinary share: diluted
2015
£m
58.0
(2.4)
55.6
Restated(1)
2014
£m
36.5
(1.0)
35.5
(36.1)
(28.0)
(4.5)
—
(20.9)
(1.1)
(26.5)
(7.0)
16.2
—
(20.9)
(1.2)
(1.1)
(7.0)
0.5
1.7
(1.4)
(6.2)
9.9
3.7
0.9p
0.9p
4.0p
3.9p
(3.4)
(2.5)
(6.9)
(0.9)
(13.7)
(6.2)
5.2
(2.5)
(6.9)
(1.1)
(0.9)
(6.2)
1.6
(0.2)
—
(4.8)
2.5
(2.3)
(0.7p)
(0.7p)
1.5p
1.5p
Note
2
5
4
4
13
7
8
8
8
8
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
(2) Earnings before investment income, finance gains/(costs), tax, depreciation, amortisation, share-based compensation and adjusted for non-recurring items.
All results are derived from continuing activities.
86
Vectura Group plc Annual Report and Accounts 2014/15
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 March 2015
Profit/(loss) after taxation attributable to equity holders of the Company
Other comprehensive loss:
Items that may be subsequently reclassified through the income statement
Foreign currency translation differences for foreign operation
Other comprehensive expense
Total comprehensive loss attributable to equity holders of the Company
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Note
22f
2015
£m
3.7
Restated(1)
2014
£m
(2.3)
(11.4)
(11.4)
(7.7)
(1.6)
(1.6)
(3.9)
87
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements BALANCE SHEET
at 31 March 2015
Assets
Goodwill
Intangible assets
Property, plant and equipment
Investments in subsidiary undertakings
Investment in joint venture
Other receivables
Non-current assets
Inventories
Trade and other receivables
Amounts due from subsidiary undertakings
Cash and cash equivalents
Current assets
Total assets
Liabilities
Trade and other payables
Deferred income
Deferred consideration
Current liabilities
Deferred income
Deferred consideration
Deferred tax liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Special reserve
Other reserve
Share-based compensation reserve
Translation reserve
Retained (loss)/profit
Total equity
Group
Company
Note
2015
£m
Restated(1)
2014
£m
9
10
11
12
13
14
15
16
17
21
18
19
29
19
29
20
2015
£m
2.0
—
—
2014
£m
2.0
—
—
234.3
233.8
—
—
—
—
56.8
104.3
11.5
—
1.7
0.4
57.8
138.9
11.6
—
3.4
0.4
174.7
212.1
236.3
235.8
0.9
27.9
—
90.0
118.8
293.5
(20.6)
(0.2)
(25.6)
(46.4)
(1.5)
—
(23.7)
(25.2)
(71.6)
1.0
13.7
—
81.7
96.4
—
—
89.2
—
89.2
—
—
86.7
—
86.7
308.5
325.5
322.5
(17.4)
(0.1)
—
(17.5)
(1.7)
(28.7)
(33.9)
(64.3)
(81.8)
—
—
(25.6)
(25.6)
—
—
—
—
(25.6)
—
—
—
—
—
(28.7)
—
(28.7)
(28.7)
221.9
226.7
299.9
293.8
22a
22b
22c
22d
22e
22f
0.1
99.2
8.2
124.9
14.9
(13.0)
(12.4)
0.1
97.4
8.2
0.1
99.2
8.2
0.1
97.4
8.2
124.9
123.7
123.7
13.8
(1.6)
(16.1)
14.9
—
53.8
13.8
—
50.6
221.9
226.7
299.9
293.8
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
The financial statements of Vectura Group plc, registered number 03418970, were approved and authorised for issue by the Board
of Directors on 19 May 2015 and were signed on its behalf by:
Dr C P Blackwell
Director
A J Oakley
Director
88
Vectura Group plc Annual Report and Accounts 2014/15
CASH FLOW STATEMENT
for the year ended 31 March 2015
Operating loss
Depreciation and amortisation
Share-based compensation
Decrease in inventories
Increase in trade and other receivables
Increase in inter-company receivables
Increase/(decrease) in payables
(Decrease)/increase in deferred income
Exchange movements
Net cash inflow/(outflow) from operations
Research and development tax credits received
Net cash inflow/(outflow) from operating activities
Cash flows from investing activities
Interest received
Purchase of property, plant and equipment
Disposal of investments
Acquisition of Activaero GmbH
Non-recurring acquisition costs
Net cash outflow from investing activities
Net cash inflow/(outflow) before financing activities
Cash flows from financing activities
Proceeds from issue of ordinary shares
Costs of raising equity
Net cash inflow from financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Group
Company
2015
£m
(7.0)
22.1
1.1
0.1
(14.2)
—
0.6
(0.1)
1.8
4.4
3.6
8.0
0.4
(1.4)
—
(0.5)
—
(1.5)
6.5
1.8
—
1.8
8.3
81.7
90.0
Restated(1)
2014
£m
(6.2)
8.0
0.9
0.2
(3.9)
—
(4.6)
0.4
(0.2)
(5.4)
4.7
(0.7)
0.4
(2.3)
1.2
(37.8)
(2.5)
(41.0)
(41.7)
55.3
(2.0)
53.3
11.6
70.1
81.7
2015
£m
(1.0)
—
—
—
—
2014
£m
(2.6)
—
—
—
—
(2.5)
(9.6)
—
—
3.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(12.2)
—
(12.2)
—
—
—
(37.8)
—
(37.8)
(50.0)
52.0
(2.0)
50.0
—
—
—
89
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements STATEMENT OF CHANGES IN EQUITY
for the year ended 31 March 2015
Group
At 1 April 2013
Loss for the year
Other comprehensive loss
Total comprehensive loss
Share-based compensation
Shares issued on acquisition
On placement of new shares
Costs of raising equity
Exercise of share options
At 31 March 2014
Profit for the year
Other comprehensive loss
Total comprehensive loss
Share-based compensation
Exercise of share options
At 31 March 2015
Share
capital
£m
0.1
—
—
—
—
—
—
—
—
0.1
—
—
—
—
—
0.1
Share
premium
£m
Special
reserve
£m
Other
reserve
£m
Share-based
compensation
reserve
£m
Translation
reserve
£m
Retained
(loss)/profit
£m
Restated(1)
Total
equity
£m
2.8
—
—
—
—
41.3
52.0
(2.0)
3.3
97.4
—
—
—
—
1.8
99.2
8.2
124.9
12.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.9
—
—
—
—
8.2
124.9
13.8
—
—
—
—
—
—
—
—
—
—
—
—
—
1.1
—
—
—
(1.6)
(1.6)
—
—
—
—
—
(1.6)
—
(11.4)
(11.4)
—
—
(13.8)
135.1
(2.3)
—
(2.3)
—
—
—
—
—
(2.3)
(1.6)
(3.9)
0.9
41.3
52.0
(2.0)
3.3
(16.1)
226.7
3.7
—
3.7
—
—
3.7
(11.4)
(7.7)
1.1
1.8
8.2
124.9
14.9
(13.0)
(12.4)
221.9
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Share
capital
£m
0.1
—
—
—
—
—
—
0.1
—
—
—
0.1
Share
premium
£m
Special
reserve
£m
Other
reserve
£m
Share-based
compensation
reserve
£m
Translation
reserve
£m
Retained
profit
£m
Total
equity
£m
2.8
—
—
41.3
52.0
(2.0)
3.3
97.4
—
—
1.8
99.2
8.2
123.7
12.9
—
—
—
—
—
—
8.2
—
—
—
8.2
—
—
—
—
—
—
123.7
—
—
—
123.7
—
0.9
—
—
—
—
13.8
—
1.1
—
14.9
—
—
—
—
—
—
—
—
—
—
—
—
52.8
200.5
(2.2)
—
—
—
—
—
(2.2)
0.9
41.3
52.0
(2.0)
3.3
50.6
293.8
3.2
—
—
3.2
1.1
1.8
53.8
299.9
Company
At 1 April 2013
Loss for the year and total
comprehensive loss
Share-based compensation
Shares issued on acquisition
On placement of new shares
Costs of raising equity
Exercise of share options
At 31 March 2014
Profit for the year and total
comprehensive income
Share-based compensation
Exercise of share options
At 31 March 2015
90
Vectura Group plc Annual Report and Accounts 2014/15 NOTES TO THE FINANCIAL STATEMENTS
for the year ended 31 March 2015
1. Significant accounting policies
General information
Vectura Group plc is a public limited company incorporated in the United Kingdom under the Companies Act. The address of the registered
office and principal place of business is given on the final page of this Annual Report. The nature of the Group’s operations and its principal
activities are set out in the Strategic report on pages 1 to 42.
The Company’s ordinary shares are traded on the London Stock Exchange (LSE) under the ticker VEC.
These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which
the Group operates. Foreign operations are included in accordance with the policies set out below.
Adoption of new and revised standards
The following amendments to International Financial Reporting Standards (IFRSs) and a new interpretation issued by the International Accounting
Standards Board (IASB) have been applied by the Group in the current year. Their adoption has not had any significant impact on the amounts
reported in these financial statements.
• Amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities
The Group has adopted the amendments to IAS 32 – Offsetting Financial Assets and Financial Liabilities for the first time in the current
year. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically,
the amendments clarify the meaning of “currently has a legally enforceable right of set-off”, “simultaneous realisation and settlement”.
• Amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets
The Group has adopted the amendments to IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets for the first time in the
current year. The amendments to IAS 36 remove the requirement to disclose the recoverable amount of a cash-generating unit (CGU)
to which goodwill or other intangible assets with indefinite useful lives have been allocated when there has been no impairment or reversal
of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the
recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value
hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by IFRS 13 – Fair Value Measurement.
At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these
financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
• IFRS 9 – Financial Instruments
• Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
• Amendments to IFRS 10, IFRS 12 and IAS 28 – Investment Entities: Applying the Consolidation Exception
• Amendments to IFRS 11 – Accounting for Acquisitions of Interests in Joint Operations
• IFRS 14 – Regulatory Deferral Accounts
• IFRS 15 – Revenue from Contracts with Customers
• Amendments to IAS 1 – Disclosure Initiative
• Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation
• Amendments to IAS 19 – Defined Benefit Plans: Employee Contributions
• Amendments to IAS 27 – Equity Method in Separate Financial Statements
• Annual IFRS Improvements Process 2010–2012 Cycle (December 2013): Amendments to: IFRS 2 – Share-based Payments,
IFRS 3 – Business Combinations, IFRS 8 – Operating Segments, IFRS 13 – Fair Value Measurement, IAS 16 – Property, Plant and Equipment,
IAS 24 – Related Party Disclosures and IAS 38 – Intangible Assets
• Annual IFRS Improvements Process 2011–2013 Cycle (December 2013): Amendments to: IFRS 1 – First-time Adoption of International
Financial Reporting Standards, IFRS 3 – Business Combinations, IFRS 13 – Fair Value Measurement and IAS 40 – Investment Property
• Annual IFRS Improvements Process 2012–2014 Cycle (September 2014): Amendments to: IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations, IFRS 7 – Financial Instruments: Disclosures, IAS 19 – Employee Benefits and IAS 34 – Interim Financial Reporting
The Directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the
Group in future periods, except as follows:
• IFRS 15 is effective for annual periods beginning on or after 1 January 2017 and replaces all existing revenue requirements in IFRS.
The core principle is that revenue will be recognised at an amount reflecting the consideration to which the Company expects to be
entitled in exchange for transferring goods or services to a customer. It may have an impact on revenue recognition and related disclosures.
• IFRS 9 will impact both the measurement and disclosures of financial instruments.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review
has been completed.
91
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements
1. Significant accounting policies continued
Basis of preparation
The financial statements have been prepared in accordance with the Companies Act 2006 and IFRSs and related interpretations as adopted
by the European Union and, therefore, the Group financial statements comply with Article 4 of the EU International Accounting Standard
(IAS) Regulation. The Group and Company financial statements are also consistent with International Financial Reporting Standards (IFRSs)
as issued by the IASB.
The separate financial statements of the Company are presented as required by the Companies Act 2006 and have been prepared in
accordance with IFRSs as adopted by the European Union. The Company is taking advantage of the exemption in section 408 of the
Companies Act 2006 not to present its individual statement of comprehensive income and the related notes that form a part of these
approved financial statements. The parent company profit for the year ended 31 March 2015 is £3.2m (2013/14: £2.2m loss).
The financial statements have been prepared on the historical cost basis, revised for use of fair values where required by applicable IFRSs.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating
the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if a market participant would
take those characteristics into account when pricing the asset or liability at the measurement date. Fair value measurements and/or disclosures
in these consolidated financial statements are determined on such basis, except for share-based payment transactions that are within the
scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but
are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
The principal accounting policies adopted are set out below.
Going concern
The accounts have been prepared on the going concern basis. Although certain economic conditions may place pressures on customers
and suppliers who may face liquidity issues, the Group’s product diversity and customer and supplier base substantially mitigate these
risks. In addition, the Group operates in the relatively defensive pharmaceutical industry, which we expect to be less affected compared
to other industries.
The Group made a profit after tax of £3.7m for the financial year ended 31 March 2015 (2013/14: £2.3m loss) and had £90.0m of cash
and cash equivalents as at 31 March 2015 (2014: £81.7m). The Board operates an investment policy under which the primary objective
is to invest in low-risk cash or cash equivalent investments to safeguard the principal. The Group’s forecasts, taking into account likely
revenue streams, show that the Group has sufficient funds to operate for the foreseeable future.
After reviewing the Group’s forecasts and assessing the uncertain nature of some of the Group’s forecast revenues, the Directors believe
that the Group is adequately placed to manage its business and financing risks successfully. Accordingly, they continue to adopt the going
concern basis in preparing the Annual Report and Accounts.
Basis of consolidation
The consolidated annual financial statements comprise the financial statements of Vectura Group plc and entities controlled by the Company
(its subsidiaries) as at 31 March each year. Control is achieved when the Company:
• has power over the investee;
• is exposed, or has rights, to variable return from its involvement with the investee; and
• has the ability to use its power to affect its returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more
of the three elements of control listed above.
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on
which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include
the results for the part of the reporting year during which the Group had control.
The financial statements of subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting
policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.
All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Revenue recognition
Revenue represents the amount receivable for goods and services provided and royalties earned, net of trade discounts, VAT and other
sales-related taxes. Revenue is recognised as follows:
Royalty income
Royalty income is recognised on an accruals basis and represents income earned as a percentage of product sales in accordance with the
substance of the relevant agreement net of amounts payable to other licensees.
92
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 1. Significant accounting policies continued
Revenue recognition continued
Technology and product licensing
Technology and product licensing income represents amounts earned for licences provided under licensing agreements, including up-front
payments, milestone payments and technology access fees. Revenues are recognised where they are non-refundable; the Group’s obligations
related to the revenues have been discharged and their collection is reasonably assured. Refundable licensing revenue is treated as deferred
until such time that the above criteria have been met. Milestone payments relating to scientific or technical achievements are recognised
as income when the milestone is accomplished.
Development Services
Development Services revenues principally comprise contract product development and contract clinical trial manufacturing fees invoiced
to third parties. Revenues are recognised upon the completion of agreed tasks or numbers of person days and in the period to which
they relate.
Device sales
Device sales are recognised when goods are delivered to customers.
Interest income
Interest income is recognised on a time-proportion basis using the effective interest method.
Business combinations
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate
of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in
exchange for control of the acquiree. Acquisition-related costs are recognised in the consolidated income statement as they are incurred.
In accordance with IFRS 3 – Business Combinations, the Group has a twelve-month period in which to finalise the fair values allocated to
assets and liabilities determined provisionally on acquisition.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree,
and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of
the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable
assets acquired and the liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interest
in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in
profit or loss as a bargain purchase gain.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the
Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during
the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances
that existed as of the date of acquisition that, if known, would have affected the amounts recognised as of that date.
Goodwill
Goodwill recognised under UK Generally Accepted Accounting Principles (GAAP) prior to 1 April 2004 is stated at net book value at that
date. Goodwill arising on the acquisition of subsidiary or associate undertakings and businesses subsequent to 1 April 2004, representing
any excess of the fair value of the consideration given over the fair value of the identifiable assets, liabilities and contingent liabilities
acquired, is capitalised.
After initial recognition, goodwill is stated at cost less any accumulated impairment losses, with the carrying value being reviewed for
impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may be impaired. For the
purpose of impairment testing, goodwill is allocated to the related cash-generating units monitored by management. Where the recoverable
amount of the cash-generating unit is less than its carrying amount, including goodwill, an impairment loss is recognised in the consolidated
income statement. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination
of the profit or loss on disposal.
Intangible assets
Intangible assets acquired separately from a business combination are carried initially at fair value. An intangible asset acquired as part
of a business combination is recognised outside goodwill if the asset is separable or arises from contractual or other legal rights and its
fair value can be measured reliably.
93
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 1. Significant accounting policies continued
Intangible assets continued
Development expenditure on internally developed intangible assets is taken to the consolidated income statement in the year in which it is
incurred except where expenditure relating to clearly defined and identifiable development projects meets the following criteria, in which case
development expenditure will be recognised as an intangible asset, in accordance with IAS 38:
• the project’s technical feasibility and commercial viability can be demonstrated;
• the availability of adequate technical and financial resources and an intention to complete the project have been confirmed;
• the correlation between development costs and future revenues has been established; and
• the economic benefit is expected to flow to the entity.
Following initial recognition, the historic cost model is applied, with intangible assets being carried at cost less accumulated amortisation
and accumulated impairment losses. Intangible assets with a finite life have no residual value and are amortised on a straight-line basis
over their expected useful lives with charges included in administrative expenses as follows:
Patents, trademarks and licence agreements – between three and ten years
The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicate the carrying
value may not be recoverable.
Property, plant and equipment
Property, plant and equipment is stated at cost, net of depreciation and provision for impairment. Depreciation is provided on all property,
plant and equipment at rates calculated to write off the cost of each asset, less its estimated residual value, on a straight-line basis over its
expected useful life, as follows:
Buildings – twenty years
Laboratory equipment – three to seven years
Office and IT equipment – three years
Freehold land is not depreciated.
The carrying values of property, plant and equipment are reviewed for impairment when events or circumstances indicate the carrying
values may not be recoverable. Useful life and residual value are reviewed annually.
Assets are classified as “under the course of construction” until such a time as the asset is capable of being used in the manner intended.
Impairment of tangible and intangible assets excluding goodwill
At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there
is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is
estimated to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from
other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and
consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they
are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.
An intangible asset with an indefinite useful life is tested for impairment at least annually and whenever there is an indication that the
asset may be impaired.
Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market assessments for the time value of money
and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the
asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated income
statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate
of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined
had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised
immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is
treated as a revaluation increase.
94
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 1. Significant accounting policies continued
Investments in subsidiaries
Investments in subsidiaries are eliminated upon consolidation. In the Company accounts investments are carried at historic cost, less provision
for impairment.
Investments in associates and joint ventures
The Group’s interests in its associates, being those entities over which it has significant influence and which are neither subsidiaries nor
joint ventures, are accounted for using the equity method of accounting. The Group’s interests in its joint ventures are also accounted for
using the equity method of accounting. Under the equity method, the investment is carried in the balance sheet at cost plus post-acquisition
changes in the Group’s share of net assets of the entity, less distributions received and less any impairment in value of individual investments.
The Group’s consolidated income statement reflects the Group’s share of any income and expense recognised by the associate or joint
venture outside profit and loss. The Group does not recognise losses in excess of the value of its investments.
Inventories
Inventories comprise goods held for resale and are stated at the lower of cost and net realisable value. Costs include the direct costs and,
where applicable, an attributable proportion of distribution overheads incurred in bringing inventories to their current location and condition.
Cost is determined on a first-in, first-out basis. Net realisable value is based on estimated selling price, less any further costs expected to be
incurred to completion and disposal.
Financial instruments
Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition
or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are
added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs
directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately
in profit or loss.
Financial assets
Financial assets are recognised when the Group becomes party to the contracts that give rise to them and are classified as financial assets
at fair value through profit or loss, loans and receivables, held-to-maturity investments, or as available-for-sale financial assets, as appropriate.
The Group determines the classification of its financial assets at initial recognition and re-evaluates this designation at each financial year end.
When financial assets are recognised, initially they are measured at fair value, being the transaction price plus, in the case of financial assets
not at fair value through profit or loss, directly attributable transaction costs.
Cash and cash equivalents
Cash and short-term deposits in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of
three months or less. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined
above, net of outstanding bank overdrafts.
Trade and other receivables
Trade receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. Provision is made when
there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery
is assessed as being remote.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at fair value, less directly attributable transaction costs. After initial recognition, interest-bearing
loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses arising on the
repurchase, settlement or cancellation of liabilities are recognised respectively as finance income or finance costs. The effective interest rate
is the rate that exactly discounts estimated future cash payments (including all fees on points paid or received that form an integral part
of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability or, where
appropriate, a shorter period.
Financial liabilities
Financial liabilities are initially measured at fair value and, if material, are subsequently measured at amortised cost using the effective
interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments throughout
the expected life of the financial liability.
95
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 1. Significant accounting policies continued
Leasing
Operating leases and the annual rentals are charged to the consolidated income statement on a straight-line basis over the period of the
lease in accordance with the terms of the lease agreements.
Foreign currencies
Transactions in foreign currencies are recorded at the rate of exchange at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Any gain or loss
arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the statement
of comprehensive income.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the
dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates
at the date when the fair value was determined.
For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated
at the exchange rate prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the
period. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity.
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 the
Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance
sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using cash flows
estimated to settle the present obligation, its carrying amount is the value of those cash flows.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is
recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
Taxation
Current tax assets and liabilities are measured as the amounts expected to be recovered from or paid to the taxation authorities, based on
tax rates and laws that are enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts
in the financial statements, with the following exceptions:
• where the temporary difference arises from the initial recognition of goodwill, or from an asset or liability in a transaction that is not
a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss;
• in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing
of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the
foreseeable future; and
• deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible
temporary differences, carried forward tax credits or tax losses can be utilised.
Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related
asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date.
Deferred tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, deferred tax
is recognised in the consolidated income statement.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and
liabilities on a net basis.
Research and development tax credits are recognised on an accruals basis.
Post-retirement benefits
The Group contributes a set proportion of employees’ gross salary to defined contribution personal pension plans. The amount charged
to the consolidated income statement in respect of pension costs is the contribution payable in the year. Differences between contributions
payable in the year and contributions actually paid are shown either as prepayments or as payables in the balance sheet.
96
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 1. Significant accounting policies continued
Borrowing costs
Borrowing costs directly attributed to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted
from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in profit or loss in the period in which they are incurred.
Share-based payments
The Group operates a number of executive and employee share option schemes, including a Long-Term Incentive Plan (LTIP), under which
shares may be granted to staff members. The level of grant to members of staff under the LTIP is dependent upon the total shareholder
return of Vectura (a market condition) compared to a peer group of UK pharmaceutical and biotechnology companies. In accordance with
IFRS 2, for all grants of share options and awards, the cost of equity-settled transactions is measured by reference to their fair value at the
date at which they are granted. The Black-Scholes model is used to determine fair value for options and the Monte Carlo binomial model
for LTIP awards.
The cost of equity-settled share transactions is recognised, together with a corresponding increase in equity, over the period until the award
vests. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition,
which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions
are satisfied. At each reporting date, the cumulative expense recognised for equity-based transactions reflects the extent to which the vesting
period has expired and the number of awards that, in the opinion of the Directors at that date, will ultimately vest. The Group has taken
advantage of the exemptions afforded by IFRS 1 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards
granted after 7 November 2002 and not vested at 1 January 2005.
Critical accounting judgements and key sources of estimation uncertainty
In preparing the financial statements, management is required to make estimates and assumptions, in accordance with IFRSs, that affect
the amounts of assets, liabilities, revenues and expenses reported in the financial statements. The estimates and associated assumptions
are based on historical experience and other factors that are considered to be relevant. Actual amounts and results could differ from those
estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the
revision affects both current and future periods.
The critical accounting judgements and key sources of estimation uncertainty that have a significant risk of causing material adjustment
to the carrying amounts of assets and liabilities within the next financial year are the determination of the fair value of acquired intangible
assets, the measurement and review for impairment of definite and indefinite-life intangible assets (goodwill), revenue recognition and the
treatment of research and development expenditure in line with the relevant accounting policy.
Estimation uncertainty – Intangible assets
The measurement of intangible assets other than goodwill on a business combination involves estimation of future cash flows and the selection
of a suitable discount rate. In determining the fair value of acquired intangibles, the Group uses market-observable data to the extent that
is available. To the extent that such inputs are not available, the Group works closely with external valuation experts to establish the appropriate
valuation techniques and inputs to the model.
Estimation uncertainty – Impairment of goodwill
The Group determines on an annual basis whether goodwill is impaired and this requires the estimation of the value in use of the
cash-generating units to which goodwill is allocated. The value in use calculation requires the entity to estimate the future cash flows
expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the present value.
Critical accounting judgements – Revenue recognition
The recognition of milestone revenue income requires an assessment of the Group’s future obligations under a given contract, which
determines the period over which the revenue is recognised.
Critical accounting judgements – Research and development costs.
The treatment of research and development expenditure requires an assessment of the expenditure in order to determine whether or not
it is appropriate to capitalise onto the balance sheet in accordance with IAS 38.
97
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 2. Revenue
Revenue represents amounts invoiced to third parties, derived from the provision of licences and services that fall within the Group’s sole
principal activity, the research, development and commercialisation of novel therapeutic products and drug delivery systems for human use.
Revenue by category
Royalties
Product licensing
Technology licensing
Development services
Device sales
Investment income:
Total investment income (note 4)
Total revenue per IAS 18
Revenue by customer location
United Kingdom
Rest of Europe
United States of America
Rest of World
2015
£m
25.2
19.8
6.6
3.9
2.5
2014
£m
16.3
13.3
4.3
1.7
0.9
58.0
36.5
0.5
58.5
2015
£m
6.0
29.0
23.0
—
58.0
1.6
38.1
2014
£m
2.8
17.4
16.2
0.1
36.5
Information about major customers
Revenue earned from the Group’s major customers was as follows: Customer A – £26.4m (2013/14: £14.9m), Customer B – £12.4m
(2013/14: £12.9m), and Customer C – £5.8m (2013/14: £2.5m).
3. Segmental information
The Group is engaged in a single business activity of pharmaceuticals and the Group does not have multiple operating segments. The Group’s
pharmaceutical business consists of the research, development and commercialisation of pharmaceutical products. The Executive Management
Team is the Group’s chief operating decision-making body, as defined by IFRS 8, and all significant operating decisions are taken by the
Executive Management Team. In assessing performance, the Executive Management Team reviews financial information on an integrated
basis for the Group as a whole, substantially in the form of, and on the same basis as, the Group’s IFRS financial statements. Resources are
allocated between activities and products on a Group-wide basis on merit.
All revenue and losses before taxation originate in the United Kingdom and Germany. Revenues from external customers in the United Kingdom
were £54.3m (2013/14: £36.2m) and non-current assets originating in the United Kingdom were £174.4m (2014: £179.3m).
4. Investment income and finance gains/(costs)
Investment income:
Income from sale of investments
Interest receivable on bank deposits and similar income
Total investment income
Finance gains/(costs):
Foreign exchange gains/(losses)
Finance costs
Total finance gains/(costs)
98
2015
£m
0.1
0.4
0.5
1.8
(0.1)
1.7
2014
£m
1.2
0.4
1.6
(0.2)
—
(0.2)
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 5. Operating loss
Operating loss is the result for the Group before investment income, finance gains/(costs) and taxation, and is stated after charging:
Amortisation of intangible assets
Depreciation of property, plant and equipment
Share-based compensation
Cost of inventories recognised as expense
Staff costs (note 6)
Non-recurring acquisition costs
Operating lease rentals:
– land and buildings
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Auditor’s remuneration
The analysis of auditor’s remuneration is as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for other services to the Group:
– the audit of the Company’s subsidiaries
Total audit fees
Audit-related assurance services
Taxation compliance services
Other taxation advisory services
Other services
Total non-audit fees
Total fees
2015
£m
20.9
1.2
1.1
0.3
18.3
—
Restated(1)
2014
£m
6.9
1.1
0.9
0.3
13.4
2.5
0.5
0.5
2015
£000
20
72
92
17
4
—
—
21
113
2014
£000
20
63
83
15
4
20
315
354
437
Details of the Group’s policy on the use of the auditor for non-audit services, the reasons why the auditor was used rather than another
supplier and how the auditor’s independence and objectivity was safeguarded are set out in the Audit Committee report on page 56.
No services were provided pursuant to contingent fee arrangements.
In the prior year, other services included financial due diligence work to support the acquisition of Activaero GmbH.
6. Employees
The average monthly number of employees (including Executive Directors) employed by the Group during the year was as follows:
Research and development
Business development and administration
2015
Number
2014
Number
228
15
243
199
16
215
99
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 6. Employees continued
The aggregate remuneration comprised:
Wages and salaries
Social security costs
Other pension costs
2015
£m
15.4
2.2
0.7
18.3
2014
£m
11.5
1.3
0.6
13.4
In addition to the wages and salaries analysis above are the effects of the charge for share-based compensation under IFRS 2 during the year
of £1.1m (2013/14: £0.9m).
The ultimate parent company, Vectura Group plc, had no employees during the years ended 31 March 2015 and 31 March 2014.
7. Taxation
The major components of the income tax credit for the years ended 31 March 2015 and 31 March 2014 were as follows:
Research and development tax credits:
– current year
– in respect of prior years
Decrease/(increase) in net deferred tax liability
Total
2015
£m
2.5
0.6
6.8
9.9
Restated(1)
2014
£m
3.3
0.9
(1.7)
2.5
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Research and development tax credits are accrued based on the estimated receipt from Her Majesty’s Revenue and Customs (HMRC).
The credit for the year can be reconciled to the loss per the consolidated income statement as follows:
Loss before tax
Loss before tax multiplied by standard rate of UK corporation tax of 21% (2013/14: 23%)
Effects of:
Expenses not deductible for tax purposes
Unrecognised tax losses carried forward
(Decrease)/increase in net deferred tax liability
Research and development tax credits:
– current year
– in respect of prior years
Total tax credit for the year
2015
£m
(6.2)
(1.3)
0.2
1.1
(6.8)
(2.5)
(0.6)
(9.9)
Restated(1)
2014
£m
(4.8)
(1.1)
0.2
0.9
1.7
(3.3)
(0.9)
(2.5)
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
In March 2014 the UK government announced the main rate of UK corporation tax would reduce to 20% with effect from 1 April 2015.
This change has been substantively enacted and therefore UK deferred tax assets and liabilities are recognised at a rate of 20% (2014: 20%).
Factors that may affect future tax charges are set out in note 20.
100
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 8. Earnings/(loss) per ordinary share
The calculation of earnings/(loss) per share is based on the following data:
Profit/(loss) after tax for the year (£m)
EBITDA for the year (£m)
Weighted average number of ordinary shares – basic earnings per share (m)
Effect of dilutive potential ordinary shares (share options) (m)
Weighted average number of ordinary shares – diluted earnings per share (m)
Earnings/(loss) per ordinary share
Basic
Diluted
EBITDA per ordinary share
Basic
Diluted
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
9. Goodwill
Group
Cost:
At 1 April
Recognised on acquisition of a subsidiary (note 29)
Effect of movements in foreign exchange
At 31 March
Net book value:
At 1 April
At 31 March
The carrying value of goodwill is made up of balances arising on acquisition of the following companies:
Group
Co-ordinated Drug Development Limited (since renamed Vectura Limited)
Vectura Delivery Devices Limited
Innovata Limited
Activaero GmbH(2)
2015
3.7
16.2
401.6
10.0
411.6
0.9p
0.9p
4.0p
3.9p
2015
£m
57.8
—
(1.0)
56.8
57.8
56.8
2015
£m
1.5
0.5
47.6
7.2
56.8
Restated(1)
2014
(2.3)
5.2
337.8
10.8
348.6
(0.7p)
(0.7p)
1.5p
1.5p
Restated(1)
2014
£m
49.6
8.3
(0.1)
57.8
49.6
57.8
Restated(1)
2014
£m
1.5
0.5
47.6
8.2
57.8
Goodwill is allocated to cash-generating units (CGUs), which are tested for impairment on an annual basis, or more frequently if there are
indications that goodwill might be impaired. The recoverable amounts of the cash-generating units are assessed using a value-in-use model.
An impairment provision is recognised only if the goodwill carrying value exceeds this value in use.
The key assumptions for the value-in-use calculations are those regarding the discount rates, growth rates and expected changes to contribution
during the period. The model has been based on the most recent pre-tax cash flow forecasts prepared by management, which consist of
detailed probability weighted product-by-product analyses. These forecasts are based on development timings and specific projections for
sales volumes over the likely period in which cash flows could be expected. No terminal values have been included in the cash flow forecasts.
No general growth rates are assumed. The discount rates used in the forecasts range from 10.5% to 11.5%. Following the acquisition of
Activaero GmbH in March 2014, and for the purpose of impairment testing of goodwill, the Group is split into two CGUs, being the Vectura
CGU and the Activaero CGU.
101
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 9. Goodwill continued
Goodwill has been allocated to the following cash-generating units:
Vectura CGU
Activaero CGU(2)
2015
£m
49.6
7.2
56.8
Restated(1)
2014
£m
49.6
8.2
57.8
The Group has conducted a sensitivity analysis on the impairment test of each CGU’s carrying value. In each case the valuations indicate
sufficient headroom such that a reasonably possible change in a key assumption is unlikely to result in an impairment of the related goodwill.
Company
Carrying amount:
At 31 March 2014 and 31 March 2015
£m
2.0
The goodwill in the Company arose on the acquisition of the Centre for Drug Formulation Studies, an unincorporated entity, in 1999.
Amortisation of £0.7m was applied prior to 1 April 2004. Goodwill in the Company is tested for impairment using the same discount
rates and on the same basis as for the Group.
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
(2) The underlying currency of the goodwill associated with Activaero GmbH CGU is the euro. The restated goodwill balance of €9.9m is translated into sterling at the prevailing exchange rate
on the balance sheet date. Any foreign exchange gain or loss is taken to the translation reserve, as shown in the statement of comprehensive income. The movement of £1m shown in the
table above relates solely to movements in the £/€ exchange rate between 31 March 2014 and 31 March 2015.
10. Intangible assets
Group
Cost:
At 1 April 2013
Acquired on acquisition of subsidiary (note 29)
Effect of movements in foreign exchange
At 31 March 2014
Effect of movements in foreign exchange
At 31 March 2015
Amortisation:
At 1 April 2013
Charge for the year
At 31 March 2014
Charge for the year
Effect of movements in foreign exchange
At 31 March 2015
Net book value:
At 31 March 2014
At 31 March 2015
Restated(1)
Patents and
trademarks
£m
Licences
£m
Total
£m
3.5
115.6
(1.7)
117.4
(13.1)
104.3
(3.5)
(0.5)
(4.0)
(13.5)
0.9
(16.6)
74.6
15.1
(0.3)
89.4
(1.7)
87.7
(57.5)
(6.4)
(63.9)
(7.4)
0.2
78.1
130.7
(2.0)
206.8
(14.8)
192.0
(61.0)
(6.9)
(67.9)
(20.9)
1.1
(71.1)
(87.7)
113.4
87.7
25.5
16.6
138.9
104.3
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
Intangible assets are being amortised on a straight-line basis over a period of between eight and ten years. The ultimate parent company,
Vectura Group plc, had no intangible assets at 31 March 2015 or 31 March 2014.
102
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 11. Property, plant and equipment
Group
Cost:
At 1 April 2013
Additions
Acquired on acquisition of Activaero GmbH (note 29)
At 31 March 2014
Additions
Disposals
At 31 March 2015
Depreciation:
At 1 April 2013
Charge for the year
At 31 March 2014
Charge for the year
Disposals
At 31 March 2015
Net book value:
At 31 March 2014
At 31 March 2015
Assets in
the course of
construction
£m
Freehold land
and buildings
£m
Lab
equipment
£m
Office and IT
equipment
£m
4.8
1.6
—
6.4
—
—
6.4
—
—
—
—
—
—
6.4
6.4
0.9
—
0.3
1.2
—
—
1.2
—
—
—
—
—
—
1.2
1.2
13.0
0.9
0.9
14.8
1.4
(0.9)
15.3
(9.8)
(1.1)
(10.9)
(1.1)
0.6
(11.4)
3.9
3.9
0.5
—
—
0.5
—
—
0.5
(0.4)
—
(0.4)
(0.1)
—
(0.5)
0.1
—
The ultimate parent company, Vectura Group plc, had no property, plant and equipment at 31 March 2015 or 31 March 2014.
12. Investments in subsidiary undertakings
Company
Cost:
At 1 April 2013
Additions (note 29)
At 31 March 2014
Additions (note 29)
At 31 March 2015
Amounts written off:
At 1 April 2013, 31 March 2014 and 31 March 2015
Net book value:
At 31 March 2014
At 31 March 2015
Total
£m
19.2
2.5
1.2
22.9
1.4
(0.9)
23.4
(10.2)
(1.1)
(11.3)
(1.2)
0.6
(11.9)
11.6
11.5
Shares in
subsidiary
undertakings
£m
125.7
108.2
233.9
0.5
234.4
(0.1)
233.8
234.3
103
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements
12. Investments in subsidiary undertakings continued
Details of the Company’s significant subsidiary undertakings are as follows:
Name of undertaking
Vectura Group Investments Limited
Vectura Limited(1)
Vectura Delivery Devices Limited(1)
Vectura Inc.
Innovata Limited(1)
Innovata Biomed Limited(2)
Vectura GmbH (formerly Activaero GmbH)
(1) A subsidiary of Vectura Group Investments Limited.
(2) A subsidiary of Innovata Limited.
Country of
incorporation
England
England
England
USA
England
Scotland
Germany
Holding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Proportion
held
100%
100%
100%
100%
100%
100%
100%
Nature of
Business
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
In addition, the Group has a number of subsidiaries that are dormant or whose residual activities are not material to the Group.
13. Investments in joint venture
The investment balance shown below relates to the Group’s investment in Ventaleon GmbH, whose principal activity is the research and
development of pharmaceuticals. Ventaleon is incorporated in Germany and its principal place of business is also Germany. The Group holds
a 48% share in the Company.
Group
Cost:
At 1 April 2013
Additions (note 29)
Effect of movements in foreign exchange
At 31 March 2014
Share of result of joint venture
Effect of movements in foreign exchange
At 31 March 2015
Net book value:
At 31 March 2014
At 31 March 2015
£m
—
3.5
(0.1)
3.4
(1.4)
(0.3)
1.7
3.4
1.7
14. Other receivables
Group
Other receivables represent an investment bond of £0.4m (2014: £0.4m) in respect of a rental deposit paid under the terms of a lease
agreement for the Company’s premises at Chippenham. The deposit is for a fixed period of one year and is renewed annually. Under the
terms of the lease agreement the deposit must be maintained until the Group has made three years of consecutive profits. The interest
rate is 1% below the Royal Bank of Scotland base rate and was 0% for the year ended 31 March 2015. Interest is recognised using the
effective interest method.
15. Inventories
Finished goods
104
Group
Company
2015
£m
0.9
2014
£m
1.0
2015
£m
—
2014
£m
—
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 16. Trade and other receivables
Trade receivables
Other receivables(1)
Prepayments and accrued income
VAT recoverable
Group
Company
2015
£m
16.2
2.9
8.3
0.5
2014
£m
4.4
3.4
5.0
0.9
27.9
13.7
2015
£m
—
—
—
—
—
(1) Includes research and development tax credits of £2.8m (2014: £3.3m).
The Directors consider that the carrying value of trade and other receivables approximates to their fair value.
17. Amounts due from and owed to subsidiary undertakings
2014
£m
—
—
—
—
—
2014
£m
86.7
86.7
Group
Company
2015
£m
—
—
2014
£m
—
—
2015
£m
89.2
89.2
Group
Company
2015
£m
2.5
1.0
17.1
20.6
Restated(1)
2014
£m
2015
£m
2014
£m
2.3
1.0
14.1
17.4
—
—
—
—
—
—
—
—
Amounts falling due within one year:
Due from subsidiary undertakings
18. Trade and other payables
Amounts falling due within one year:
Trade payables
Other payables
Accruals
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
The Directors consider that the carrying value of trade and other payables approximates to their fair value.
19. Deferred income
Deferred income relates to amounts received under product licensing agreements. Vectura continues to provide services to these licensing
partners over a period of time. Milestone payments under these licensing agreements are therefore spread over future periods and income
is deferred as follows:
Amounts due within one year
Amounts due in more than one year
Group
Company
2015
£m
0.2
1.5
1.7
2014
£m
0.1
1.7
1.8
2015
£m
—
—
—
2014
£m
—
—
—
105
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 20. Deferred tax liability
A net deferred tax liability of £23.7m (2014: £33.9m) has been recognised on the Group balance sheet, being a deferred tax liability
of £29.0m (2014: £37.6m), offset by a deferred tax asset of £5.3m (2014: £3.7m).
A total deferred tax liability of £29.0m exists as at 31 March 2015. This balance is broken down as follows:
£m
At 1 April 2014
Credited to the consolidated income statement
Effect of movements in foreign exchange
At 31 March 2015
Restated(1)
Arising on
acquisition
of Activaero
(34.6)
4.2
3.6
(26.8)
Arising on
acquisition
of Innovata
Other
temporary
differences
Total
(1.8)
0.8
—
(1.0)
(1.2)
(37.6)
—
—
5.0
3.6
(1.2)
(29.0)
(1) Restated to reflect the final allocation of the cost of the acquisition of Activaero GmbH (see note 29).
This liability is offset by a deferred tax asset in respect of German and UK cumulative tax losses. UK cumulative tax losses of approximately
£54.0m (2014: £66.9m), subject to agreement with HMRC, are available within the Group to carry forward against future taxable profits.
The total potential deferred tax asset in respect of UK tax losses, calculated at the rate of 20% (2014: 20%), is £10.7m (2014: £13.2m) and
of this total an asset of £2.2m (2014: £1.1m) has been recognised.
The total recognised deferred tax asset of £5.3m is broken down as follows:
£m
At 1 April 2014
Credited to the consolidated income statement
Effect of movements in foreign exchange
At 31 March 2015
The Group has the following unrecognised potential deferred tax assets as at 31 March 2015:
On UK cumulative tax losses
On unclaimed capital allowances
On unexercised share options
21. Financial instruments
Categories of financial instruments
Unless stated otherwise, all disclosures relate to the Group.
Recognised
on German
cumulative
tax losses
Recognised
on UK
cumulative
tax losses
2.6
0.7
(0.2)
3.1
1.1
1.1
—
2.2
2015
£m
8.5
0.2
1.0
9.7
Total
3.7
1.8
(0.2)
5.3
2014
£m
12.1
0.3
0.6
13.0
Under IFRS 7, and for the purposes of risk management, the following classes of financial assets and their carrying values have been identified:
Cash and cash equivalents
Loans and receivables
2015
£m
90.0
28.3
118.3
2014
£m
81.7
14.1
95.8
All financial assets fall due within the first quarter of the year, with the exception of the investment bond which is included within loans
and receivables in the table above, the repayment of which is determined by the Group’s results (see note 14).
There were no provisions against impaired assets at 31 March 2015 (31 March 2014: £nil). There are no amounts past due but not impaired
(2014: £nil).
106
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 21. Financial instruments continued
Categories of financial instruments continued
Cash and cash equivalents comprise current accounts held by the Group with immediate access and short-term bank deposits with a maturity
value of three months or less.
Under IFRS 7, and for the purposes of risk management, the following classes of financial liabilities and their carrying values (at amortised
cost) have been identified:
Other
All financial liabilities fall due within one year.
2015
£m
2014
£m
(20.6)
(17.4)
Fair value of financial assets and liabilities
The Directors consider there to be no material difference between the book value and the fair value of the Group’s financial assets
and liabilities at the balance sheet date.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern whilst maximising the
return to stakeholders. The capital structure of the Group consists of cash and cash equivalents and equity attributable to equity holders
of Vectura Group plc, comprising issued share capital (note 22), reserves and retained earnings as disclosed in the statement of changes
in equity.
Externally imposed capital requirement
The Group is not subject to externally imposed capital requirements.
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the
basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are
disclosed in note 1 to the financial statements.
Financial risk management
The Group’s objective in using financial instruments is to maximise the returns on funds held on deposit, to minimise exchange rate risk where
appropriate, and to generate additional cash resources through the issue of shares where appropriate. Balance sheets at 31 March 2015 and
31 March 2014 are not necessarily representative of the positions throughout the year, as cash and short-term investments fluctuate
considerably depending on when share issues have occurred.
It is, and has been throughout the year, the Group’s policy that no speculative trading in financial instruments is undertaken.
The Group is funded principally with equity and invests its funds in short-term bank deposits. The Group has access to the majority of these
deposits at a maximum of 24 hours’ notice. The Group’s policy throughout the period has been to minimise the risk by placing funds in
low-risk cash deposits, but also to maximise the return on funds placed on deposit.
Interest on overnight cash deposits is calculated on the basis of a floating rate set at between 5 and 10 basis points below seven-day
sterling London Interbank Offered Rate (LIBOR).
Foreign currency risk management
The Group’s principal functional currency is sterling. However, the Group undertakes certain transactions denominated in foreign currencies.
The Group’s policy is to offset its currency exposure by matching foreign currency revenues with expenditure in the same foreign currency.
Where there are no imminent foreign exchange transactions, the balances are exchanged for sterling at spot rate.
All assets and liabilities are denominated in sterling other than those shown below:
Net assets:
Euro
US dollar
Group
Company
2015
£m
1.9
22.9
24.8
2014
£m
5.7
2.5
8.2
2015
£m
—
—
—
2014
£m
—
—
—
107
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 21. Financial instruments continued
Foreign currency sensitivity analysis
The following table details the Group’s sensitivity to a 10% increase and decrease in sterling against the euro and US dollar; 10% represents
management’s assessment of a reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding
foreign currency denominated items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive
number below indicates an increase in profit and other equity where sterling weakens against the relevant currency and a negative number
indicates a decrease in profit and other equity where sterling strengthens against the relevant currency.
Group
Euro currency impact – gain
US dollar currency impact – gain
Euro currency impact – loss
US dollar currency impact – loss
2015
£m
0.2
2.5
(0.2)
(2.1)
Company
The sensitivity analysis includes only outstanding foreign currency denominated items, being the euro deferred consideration liability.
As explained above, the sensitivity analysis is conducted assuming a 10% increase and decrease in sterling against the euro. A positive
number below indicates an increase in profit and other equity where sterling strengthens against the euro and a negative number
indicates a decrease in profit and other equity where sterling weakens against the relevant currency.
Euro currency impact – gain
Euro currency impact – loss
2015
£m
2.3
(2.8)
2014
£m
0.5
0.2
(0.5)
(0.2)
2014
£m
2.6
(3.2)
The Group and Company have a legal right of offset between all foreign currency bank accounts and all sterling bank accounts.
Interest rate risk management
The Group has no external borrowings and is not exposed to interest rate risk through borrowings. Cash and cash equivalents earned
£0.4m of finance income during the year (2013/14: £0.4m). If interest rates had been 0.5% higher/lower, being management’s assessment
of a reasonably possible change in interest rates, and all other variables were constant, the Group’s operating loss for the year ended
31 March 2015 would decrease/increase by £0.4m (2013/14: £0.3m).
All of the Group’s monetary assets and liabilities are held at floating rates.
Liquidity risk management
The Group manages liquidity risk by maintaining adequate reserves and by continually monitoring forecast and actual cash flows and matching
the maturity profiles of financial assets and liabilities.
Credit risk management
The Group’s credit risk is primarily attributed to its cash and cash equivalents. The Board operates an investment policy, under which the
primary objective is to invest in a diverse portfolio of low-risk cash or cash equivalent investments to safeguard the principal.
The Group’s credit risk on trade and other receivables is low as the amounts are owed by large, multinational pharmaceutical companies.
For the same reason, the Directors assess the quality of these assets as high.
Market risk management
The Group’s exposure to market risk primarily comprises interest rate exposure. Group funds are invested in cash deposits with the
objective of maintaining a balance between accessibility of funds and competitive rates of return.
108
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 22. Equity
(a) Share capital
Allotted, called up and fully paid:
Ordinary shares of 0.025p each:
At 1 April
Issued on exercise of share options
Issued on exercise of Sharesave options
Issued on exercise of LTIP options
Issued on placement of shares
Issued on acquisition of subsidiary (note 29)
At 31 March
Redeemable preference shares of £1 each:
At 1 April and 31 March
2015
£m
No. ‘000
2014
£m
No. ‘000
0.1
399,654
0.1
334,456
—
—
—
—
—
3,062
181
561
—
—
—
—
—
5,174
172
646
— 33,565
— 25,641
0.1
403,458
0.1
399,654
—
34
—
34
The rights attaching to the redeemable preference shares are summarised as follows: (a) the shares do not confer any right to dividend
or other distributions; (b) on a return of capital on liquidation or otherwise, the assets of the Company available for distribution among the
members are to be applied first in repaying to the holders of the redeemable preference shares the amounts paid up or credited as paid
up in respect of such shares; (c) holders of redeemable preference shares have the right to receive notice of and attend general meetings,
but have no right to vote thereat; (d) the price per share at which redeemable preference shares are transferred may not exceed the
amount paid or credited as being paid up; and (e) the Company may specify by notice in writing the date upon which it intends to redeem
all (but not some only) of the shares. The price per share payable by the Company to the holders of the redeemable preference shares on
their redemption shall be the amount paid up or credited as paid up on each such share.
Between 1 April 2014 and 31 March 2015 the Company did not issue any ordinary shares to the Vectura Group plc Employee Benefit Trust
(2013/14: nil).
Between 1 April 2014 and 31 March 2015 the Company issued 3,062,229 (2014: 5,173,784) ordinary shares of 0.025p each on the exercise of
employee share options at a weighted average exercise price of 56.38p per share (2014: 61.19p).
Between 1 April 2014 and 31 March 2015 the Company issued 180,691 (2014: 171,736) ordinary shares of 0.025p each on the exercise of
Sharesave options at a weighted average exercise price of 64.25p (2014: 55.5p) per share.
Between 1 April 2014 and 31 March 2015 the Company issued 561,253 (2014: 646,484) ordinary shares of 0.025p each on the exercise of
LTIP nil-cost options.
During 2013/14, the Company placed 33,565,280 new shares at a price of £1.55 per share and the Company issued 25,641,398 to the
shareholders of Activaero GmbH as part of the purchase consideration for 100% of its ordinary share capital. The ordinary shares issued
have the same rights as the other shares in issue. The fair value of the shares issued amounted to £41m (£1.609 per share).
(b) Share premium
The share premium account consists of the proceeds from the issue of shares in excess of their par value (which is included in the share
capital account) less amounts transferred to distributable reserves through capital conversion. Certain costs relating to share issues have
also been charged to the share premium account.
(c) Special reserve
The special reserve was created on 19 May 2004 as part of the process prior to the Company’s initial public offering (IPO) on 2 July 2004,
to enable re-registration as a public company. It is a non-distributable reserve.
109
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements
22. Equity continued
(d) Other reserve
The other reserve was created on the acquisition by the Company of Co-ordinated Drug Development Limited (since renamed Vectura Limited)
in August 1999, of Vectura Delivery Devices Limited in February 2002 and of Innovata plc in January 2007. It is a non-distributable reserve.
(e) Share-based compensation reserve
The share-based compensation reserve represents the credit arising on the charge for share options, matching and free shares awarded
under the Vectura Group plc Share Incentive Plan, calculated in accordance with IFRS 2.
(f) Translation reserve
Exchange differences relating to the translation of the net assets of the Group’s foreign operations, which relate to subsidiaries only, from
their functional currency into the parent’s functional currency, being sterling, are recognised directly in the translation reserve.
23. Equity-settled share option schemes and Long-Term Incentive Plan
The Company’s Directors, officers and employees hold options under the Vectura Unapproved Share Option Plan (“Unapproved Plan”) and
under the Vectura Approved Share Option Plan (“Approved Plan”). Options are granted to acquire shares at the opening market price ruling
on the date of grant. In general, options vest after three years and are exercisable during a period ending ten years from the date of grant.
On 18 January 2007, upon the acquisition of Innovata plc and in accordance with a scheme of arrangement, options over Innovata shares
issued and outstanding at that date under the ML Laboratories plc 1989 Executive Option Scheme and the ML Laboratories plc 1999 Executive
Option Scheme were exchanged for options over Vectura shares in accordance with the rules of the relevant Innovata Option Scheme.
The exchange was on the basis that the option holders received new options representing 0.2858 Vectura shares for every one Innovata share.
The Company operates a Sharesave Scheme. All employees and Executive Directors are invited to subscribe for options to acquire shares
in the Company, which may be granted at a discount of up to 20% of the market value on the offer date. The options granted vest after
three years and are exercisable during a period of six months of the vesting date.
The Company also operates a Long-Term Incentive Plan (LTIP) under which Executive Directors and certain senior managers are granted
conditional rights in the form of nil-cost options to receive a maximum number of shares at the beginning of a three-year period, a proportion
of which they will be entitled to receive at the end of that period, depending on the extent to which the challenging performance conditions
set by the Remuneration Committee at the time the allocation was made are satisfied. The nil-cost option entitlement is exercisable from
the beginning of the fourth year to the end of the tenth year following the date of grant. Further information on the performance conditions
of the LTIP is detailed in the Remuneration report. At 31 March 2015, Executive Directors and eligible senior managers hold rights to ordinary
shares awarded under the LTIP, as follows:
Ordinary
shares
vesting
315,745
257,565
104,758
446,636
1,348,100
1,739,647
1,551,964
1,963,022
983,594
Date of vesting
12 September 2008
22 November 2009
2 March 2010
25 May 2010
23 May 2011
7 June 2014
18 September 2015(1)
7 June 2016(1)
1 July 2017(1)
(1) Maximum number of shares, subject to performance conditions.
110
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 23. Equity-settled share option schemes and Long-Term Incentive Plan continued
Fair value calculations
With the exception of the LTIP awards, the fair value of the options was determined using the Black-Scholes pricing model. The fair value of
the LTIP awards has been estimated using the Monte Carlo model, using the same basis for the assumptions for volatility, option life, expected
dividend yield and risk-free rate of return as used for the Black-Scholes model. For the purposes of calculating the fair value of the LTIP, it was
considered equally probable that the Company’s performance would be such that it would perform in each of the quartiles established
under the LTIP scheme, as described in the Remuneration report.
Year of grant
2015
2014
The assumptions input into the Black-Scholes model were as follows:
Weighted average share price of grants during the year
Weighted average exercise price of grants during the year
Expected volatility(1)
Expected life(2)
Expected dividends
Risk-free interest rate(3)
The assumptions input into the Monte Carlo model were as follows:
Weighted average share price of grants during the year
Weighted average exercise price of grants during the year
Expected volatility(1)
Expected life(2)
Expected dividends
Risk-free interest rate(3)
136.3p
114.4p
39%–41%
3 years
Nil
163.0p
130.4p
41%–45%
3–5 years
Nil
0.6%–1.4%
0.3%–1.2%
135.3p
0.025p
40%
3 years
Nil
1.5%
81.0p
0.025p
43%
3 years
Nil
0.6%
(1) Expected volatility has been calculated by reference to the Company’s historic share price since the IPO in July 2004, considered alongside the volatility of similar companies. The expectation
of the cancellation of options has been considered in determining the fair value expense charged in the consolidated income statement.
(2) The expected life used in the models is based on management’s best estimate of behavioural consideration based on historic exercise patterns.
(3) The risk-free interest rate is the UK gilt rate at the date of grant, commensurate with the expected term.
The charge is spread over the expected vesting period, utilising the fair value calculated by using the two models described above,
and after adjusting for the likelihood of cancellation of options when employees leave.
The share-based compensation charge for the year ended 31 March 2015, including the LTIP, was £1,060,000 (2013/14: £890,000).
111
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 23. Equity-settled share option schemes and Long-Term Incentive Plan continued
Fair value calculations continued
The aggregate of the estimated fair value of options granted under share option schemes and Share Incentive Plan during the year ended
31 March 2015 was £373,000 (2013/14: £493,000) and under the SAYE Scheme £241,000 (2013/14: £59,000). The estimated fair value of
LTIP awards during the year ended 31 March 2015 was £768,000 (2013/14: £780,000).
Share option schemes
SAYE Scheme
LTIP
Options outstanding
At 1 April 2013
Options granted
Options exercised
Options cancelled
At 31 March 2014
Options granted
Options exercised
Options cancelled
At 31 March 2015
Range of exercise prices
Weighted average remaining
contractual life (years)
Options vested
At 31 March 2014
At 31 March 2015
Weighted average remaining
contractual life (years)
(1) Weighted average exercise price.
24. Analysis of net funds
Group
Cash and cash equivalents
Number of
options
12,689,439
—
(5,167,784)
—
7,521,655
—
(3,062,229)
(55,597)
4,403,829
WAEP(1)
p
60.64
—
61.19
—
61.67
—
56.38
62.63
65.34
Number of
options
1,559,668
115,930
(171,736)
(37,539)
1,466,323
621,775
(180,691)
(75,693)
1,831,714
WAEP(1)
p
Number of
options
WAEP(1)
p
53.50
130.40
55.50
47.95
59.41
114.40
64.25
85.12
77.16
9,999,733
2,004,878
(646,484)
(3,015,107)
8,343,020
1,076,791
(561,253)
(147,527)
8,711,031
0.025
0.025
0.025
0.025
0.025
0.025
0.025
0.025
0.025
0.025p
36.0p–104.0p
47.4p–130.4p
1.77 (2014: 2.19)
1.71 (2014: 1.67)
5.65 (2014: 6.05)
6,986,739
4,276,365
59.75
65.30
1.60 (2014: 1.80)
—
—
—
—
—
—
2,791,393
4,212,451
0.025
0.025
1.53 (2014: 2.82)
1 April
2014
£m
81.7
Cash flow
£m
31 March
2015
£m
8.3
90.0
The Company had no net funds at 31 March 2015 and 31 March 2014.
25. Retirement benefit plans
The Group operates a number of defined contribution personal pension plans for all qualifying employees. The assets of the schemes are
held separately from those of the Group and are independently administered. The total cost charged to the consolidated income statement
is detailed in note 6.
26. Operating lease arrangements
At the balance sheet date, the Group has aggregate outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Group
Expiry date:
Within one year
In the second to fifth years inclusive
112
Land and buildings
Other
2015
£m
0.5
0.5
1.0
2014
£m
0.5
0.8
1.3
2015
£m
0.1
—
0.1
2014
£m
—
0.1
0.1
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015
26. Operating lease arrangements continued
On 26 July 2002, the Group entered into a 25-year lease agreement in respect of the lease of premises at One Prospect West, Chippenham,
Wiltshire. The Group has the right to break the lease in July 2017.
On 29 September 2011, the Group entered into an agreement in respect of the lease of premises at Five Prospect West, Chippenham, Wiltshire.
The Group has the right to break the lease in September 2015.
On 13 November 2014, the Group extended two leases for adjacent premises at Cambridge Science Park, Milton Road, Cambridge for
a further three years commencing 25 December 2014 and expiring on 24 December 2017. The Group and the landlord have the option
to cancel the leases on 31 December 2015 or at any time thereafter on giving six months’ prior written notice.
On 18 March 2014, the Group acquired, as part of the Activaero GmbH acquisition, an agreement in respect of premises at Gauting, Germany.
The Group has the right to break the lease with a maximum of nine months’ notice.
The Company had no operating lease arrangements at 31 March 2015 or 31 March 2014.
27. Capital and other commitments
At 31 March 2015 the Group had no capital commitments contracted, but not provided for (2013/14: £0.3m). The Company had no capital
and other commitments at 31 March 2015 or 31 March 2014.
28. Related party transactions
Group
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation. Except as
disclosed below, no Group company entered into a transaction with a related party that is not a member of the Group.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below.
Short-term employee benefits
Post-employment benefits
Share-based compensation
2015
£m
3.8
0.2
0.3
4.3
2014
£m
2.3
0.2
0.3
2.8
Three Directors are members of money purchase pension schemes.
Please refer to the Remuneration report on page 68 for the single figure of remuneration for each Director.
Company
Details of the Company-related party transactions with parties outside of the Group are noted above. In addition, the following details
of trading within the Group are disclosed in accordance with IAS 24.
Related party
Subsidiaries:
2014
2015
Recharge
from
related
parties
£m
Recharge
to
related
parties
£m
Amounts
owed by
related
parties
£m
Amounts
owed to
related
parties
£m
—
—
0.9
1.1
86.7
89.2
—
—
Amounts outstanding are unsecured. No provisions have been made for doubtful debts owed by related parties.
29. Business combinations
On 18 March 2014, the Group acquired 100% of the issued share capital and obtained control of Activaero GmbH (“Activaero”), a company
focused on the development of products for the treatment of respiratory diseases.
In accordance with IFRS 3 – Business Combinations, the fair values assigned to the identifiable assets, liabilities and contingent liabilities
acquired with the Activaero business on 18 March 2014 were determined provisionally on that date and these provisional estimates have
been revised in the period to 18 March 2015 to reflect new information about facts and circumstances that existed as of the acquisition
date. The revised amounts have been recognised as though they were the amounts known at the acquisition date and so comparative
information for the prior year has been restated.
113
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements 29. Business combinations continued
During the year, an additional payment of €0.6m was made in respect of working capital items that were acquired during the acquisition.
Accordingly, the goodwill associated with the transaction has increased from €9.3m to €9.9m.
The following table shows the original fair values of the net assets acquired from Activaero and the adjustments made to the original
fair values.
Identifiable intangible assets (note 10)
Property, plant and equipment (note 11)
Investment in joint venture (note 13)
Inventories
Trade and other payables
Deferred tax liability
Total identifiable assets
Goodwill
Acquisition value
£m
Provisional
£m
Revisions
130.7
1.2
3.5
0.4
(2.7)
(32.7)
100.4
7.8
108.2
—
—
—
—
—
—
—
0.5
0.5
£m
Final
130.7
1.2
3.5
0.4
(2.7)
(32.7)
100.4
8.3
108.7
The transaction contains certain translations of euros into amounts in pounds sterling based on the exchange rate of £1.00 = €1.1913,
being the published exchange rate by the Financial Times at the close of business on 18 March 2014, the date of acquisition.
Satisfied by:
Cash
Equity instruments (25,641,398 ordinary shares)
Additional cash payment
Deferred consideration payable in August 2015
Total consideration
£m
37.8
41.3
0.5
29.1
108.7
The initial cash payment of €45m (£37.8m) and the equity component of the consideration were payable upon legal completion of the
acquisition. During the year, an additional payment of €0.6m (£0.5m) was made to reflect working capital items acquired.
The final element of consideration, being the deferred consideration of €35m, is payable in August 2015. The deferred cash consideration
is non-contingent. The total liability has been translated into sterling at the prevailing £/€ exchange rate on the balance sheet date and is
shown as a current liability of £25.6m on the balance sheet as at 31 March 2015.
30. Post-balance sheet events
In April 2015, the share capital of Ventaleon GmbH increased following an additional capital injection by certain of the Company’s
investors. Vectura did not participate in this round of funding and, accordingly Vectura’s percentage holding in this joint venture
decreased from 48% to 42%.
114
Vectura Group plc Annual Report and Accounts 2014/15NOTES TO THE FINANCIAL STATEMENTS continuedfor the year ended 31 March 2015 FIVE-YEAR SUMMARY
year ended 31 March
Unaudited
Year ended 31 March
Consolidated statement of comprehensive income
Revenue
Gross profit
Gross profit margin
Research and development expenses
Other administrative expenses
EBITDA
Non-recurring acquisition costs
Amortisation of intangible assets
Depreciation of assets
Share-based compensation
Operating loss
Investment income
Finance gains/(costs)
Share of result of joint venture
Loss before taxation
Taxation
Profit/(loss) after taxation
Earnings/(loss) per ordinary share
Cash flow statement
Operating loss
Depreciation and amortisation
Share-based compensation
(Increase)/decrease in working capital
(Decrease)/increase in deferred income
Exchange movements
Taxation paid
Research and development tax credits received
Net cash inflow/(outflow) from operating activities
Net capital expenditure
Free cash flow inflow/(outflow)
Balance sheet
Cash and cash equivalents
Shareholders’ equity
Net current assets
2011
£m
42.9
40.2
94%
(36.4)
(3.3)
0.5
—
(10.7)
(1.3)
(1.8)
2012
£m
33.0
30.8
93%
2013
£m
30.5
29.8
98%
2014
£m
36.5
35.5
97%
(31.7)
(29.9)
(26.9)
(3.3)
(4.2)
—
(7.5)
(1.1)
(1.1)
(3.3)
(3.4)
—
(6.3)
(1.0)
(0.9)
(13.3)
(13.9)
(11.6)
0.8
(0.8)
—
(13.3)
4.5
(8.8)
(2.7p)
(13.3)
12.0
1.8
0.2
2.8
(0.8)
(0.1)
8.2
10.8
(1.4)
9.4
0.7
—
—
(13.2)
8.8
(4.4)
(1.3p)
0.5
0.7
—
(10.4)
4.5
(5.9)
(1.8p)
(13.9)
(11.6)
8.6
1.1
2.4
(0.7)
—
—
4.6
2.1
(4.2)
(2.1)
7.3
0.9
(1.1)
(3.4)
0.7
—
4.4
(2.8)
(3.8)
(6.6)
2015
£m
58.0
55.6
96%
(36.1)
(4.5)
16.2
—
(20.9)
(1.2)
(1.1)
(7.0)
0.5
1.7
(1.4)
(6.2)
9.9
3.7
(3.4)
5.2
(2.5)
(6.9)
(1.1)
(0.9)
(6.2)
1.6
(0.2)
—
(4.8)
2.5
(2.3)
(0.7p)
0.9p
(6.2)
8.0
0.9
(8.3)
0.4
(0.2)
—
4.7
(0.7)
(2.3)
(3.0)
(7.0)
22.1
1.1
(13.5)
(0.1)
1.8
—
3.6
8.0
(1.4)
6.6
74.4
140.3
59.6
75.5
139.5
61.7
70.1
135.1
60.3
81.7
226.7
79.4
90.0
221.9
72.4
115
Annual Report and Accounts 2014/15 Vectura Group plcFinancial statements REFERENCES
The references listed below relate to the sourced text
on pages 10 to 13 of this report.
1) WHO (World Health Organization)
2) Global Initiative for Chronic Obstructive Lung Disease.
“Global strategy for the diagnosis, management, and prevention
of chronic obstructive pulmonary disease.”
www.goldcopd.org/uploads/users/files/GOLD_Report_2014
3) www.who.int/respiratory/copd/en/
4) Hoyert DL, Xu JQ (2012). “Deaths: preliminary data for 2011.”
Natl Vital Stat Rep. 61(6): 1–65. Hyattsville, MD: National Center
for Health Statistics.
5) “Influenza (seasonal) fact sheet N°211” (March 2014).
www.who.int/mediacentre/factsheets/fs211/en/
6) Ebell MH, Call M, Shinholser J (2013). “Effectiveness of oseltamivir
in adults: a meta-analysis of published and unpublished clinical trials.”
Family Practice. 30(2): 125–33. doi:10.1093/fampra/cms059.
PMID 22997224.
7) Michiels B, Van Puyenbroeck K, Verhoeven V, Vermeire
E, Coenen S (2013). “The value of neuraminidase inhibitors
for the prevention and treatment of seasonal influenza: a
systematic review of systematic reviews.” PLoS ONE. 8(4):
e60348. doi:10.1371/journal.pone.0060348. PMC 3614893.
PMID 23565231.
8) www.who.int/genomics/public/geneticdiseases/en/index2.html
9) www.cdc.gov/rsv/about/infection.html
10) Peacock AJ, Murphy NF, McMurray JJV, et al. (2007).
“An epidemiological study of pulmonary arterial hypertension.”
Eur Respir J. 30: 104–9.
11) Benza RL, Miller DP, Barst RJ, Badesch DB, Frost AE, McGoon MD
(2012). “An evaluation of long-term survival from time of
diagnosis in pulmonary arterial hypertension from the REVEAL
Registry.” Chest. 142(2): 448–56. doi:10.1378/chest.11–1460.
PMID 22281797.
12) www.census.gov/population/international/data/idb/
worldpoptotal.php (Accessed 8 May 2015).
13) World Population Ageing 1950–2050 – Population Division,
DESA, United Nations.
14) Data on file – Source IMS Disease Insight Series 2014.
116
Vectura Group plc Annual Report and Accounts 2014/15 SHAREHOLDER INFORMATION
Directors
Bruno F J Angelici
(Non-Executive Chairman)
Dr Christopher P Blackwell
(Chief Executive)
Andrew J Oakley
(Chief Financial Officer)
Dr Trevor M Phillips
(Chief Operations Officer and President
of US Operations)
Dr John R Brown
(Non-Executive and Senior Independent
Director)
Corporate broker
J.P. Morgan Cazenove
25 Bank Street
Canary Wharf
London
E14 5JP, UK
Registrars
Computershare Investor Services plc
PO Box 82
The Pavilions
Bridgwater Road
Bristol
BS99 7NH, UK
Public relations
Citigate Dewe Rogerson
3 London Wall Buildings
London Wall
London
EC2M 5SY, UK
Auditor
Deloitte LLP
3 Rivergate
Temple Quay
Bristol
BS1 6GD, UK
Dr Susan E Foden
(Non-Executive)
Neil W Warner
(Non-Executive)
Dr Per-Olof Andersson
(Non-Executive)
Company Secretary
Andrew J Oakley
Corporate broker
Peel Hunt LLP
Moor House
120 London Wall
London
EC2Y 5ET, UK
Bankers
Barclays Bank plc
28 Chesterton Road
Cambridge
CB4 3AZ, UK
Legal advisors
Olswang
90 High Holborn
London
WC1V 6XX, UK
Legal advisors
Covington & Burling LLP
265 Strand
London
WC2R 1BH, UK
Vectura Group plc
One Prospect West
Chippenham
Wiltshire
SN14 6FH, UK
Vectura trade marks
Adept® is a registered trade mark of Innovata Limited
AKITA® and FAVOLIR® are registered trade marks of Activaero GmbH
Clickhaler® and Duohaler® are registered trade marks of Innovata Biomed Limited.
These trade marks are in the process of being transferred to Tianjin Kinnovata
Pharmaceutical Company Limited, in certain territories
FOX™ is a trade mark of Vectura GmbH
GyroHaler® and Omnihaler® are registered trade marks of Vectura Delivery Devices Limited
PowderHale® and Vectura® are registered trade marks of Vectura Limited
Third-party trade marks
ADVATE® and Extraneal® are registered trade marks of Baxter International Inc.
Anoro® Ellipta®, Relvar® Ellipta®/Breo® Ellipta® and Incruse® Ellipta® are registered
trade marks of GSK
Breezhaler®, Onbrez®, Seebri®, Ultibro® AirFluSal® and Forspiro® are registered trade marks
of Novartis AG
Bluetooth® is a trade mark of Bluetooth SIG
Vectura Group plc
One Prospect West
Chippenham
Wiltshire SN14 6FH
United Kingdom
T +44 (0)1249 667700
F +44 (0)1249 667701
www.vectura.com
Registered in England and Wales
Number: 03418970
The Group’s commitment to environmental issues is reflected in this Annual Report, which has
been printed on FSC® certified uncoated Edixion offset. It was printed in the UK using environmental
Waterless printing technology, and vegetable-based inks were used throughout.
Both the manufacturing mill and the printer are registered to the Environmental Management
System ISO14001 and are FSC® chain-of-custody certified. The unavoidable carbon emissions
generated during the manufacture and delivery of this document have been reduced to net zero
through a verified carbon offsetting project.
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