Financial review

The Group ended the year with £74.4m of cash. Revenues of £42.9m (2009/10: £40.1m) were 7% higher than the previous year and the operating loss of £13.3m (2009/10: £15.3m), which includes £2.5m for non-recurring restructuring costs, has reduced by 13%. Loss after tax fell by 14% to £8.8m (2009/10: £10.2m).

Revenue

Revenue includes fee income from royalties, product licensing, technology licensing, development fees and device sales.

Royalties were in line with the previous year at £13.6m. ADVATE® royalties increased by 4% in the period to £10.2m (2009/10: £9.8m) and contributed 75% of the royalties generated in the year. ADVATE® sales are continuing to grow, approaching $1.8bn in 2010, compared with sales of $1.7bn in 2009. Vectura receives a net royalty of under 1% at these high levels of cumulative annual sales. Extraneal® royalties were £2.4m, a 17% decrease from the previous year (2009/10: £2.9m). Extraneal® royalties are expected to continue to decline. The majority of the remaining royalties were generated from Adept® (£0.8m; 2009/10: £0.8m).

Product licensing revenues in the period were £10.6m (2009/10: £8.8m), which includes the final £2.6m of the £4.5m ($7.5m) NVA237 milestone received from Novartis in 2009. Product licensing revenues also include £4.8m of the £6.2m ($9.5m) milestone received from Sandoz for VR315 US with the final £1.4m to be recognised in 2011/12. £2.7m of the £5.1m ($7.5m) milestone received from Novartis for QVA149 was also recognised in the period with a final £2.4m to be recognised in 2011/12. A £0.5m (€0.6m) VR632 milestone was received in October 2010 and this was recognised in the second half of the year.

Technology licensing revenues of £12.9m (2009/10: £9.4m) include a £10m upfront payment from GSK under a non-exclusive agreement to license certain of Vectura’s dry powder formulation patents.

Pharmaceutical development services (PDS) revenues decreased by £3.4m to £4.2m (2009/10: £7.6m). We expect these revenues to continue to decline in the next financial year as we complete our work on some partnered programmes. Future PDS revenues will depend on the extent and nature of feasibility studies and new licensing deals as the development of inhalation products is a very specialist area, with partners frequently requiring Vectura’s involvement in the continuing development of a product.

The significant increase in device sales to £1.6m (2009/10: £0.7m) was mainly due to sales of the GyroHaler® device.

Although information is given here about the different revenue types, the Group has one operating segment as set out in note 3 of the notes to the financial statements.

Gross profit

The gross profit in the year to 31 March 2011 was £40.2m, a £3.6m improvement on the prior year (£36.6m). Gross profit represents 94% of revenue (2009/10: 91%) with the improvement arising from the increased proportion of milestones earned during the year.

Research and development expenses

Total investment in research and development was £37.7m, a 4% increase on the previous year (2009/10: £36.4m). This expenditure includes £2.5m that relates to the costs of restructuring our development operations, encompassing closure of the Nottingham facility and a reduction in the number of R&D employees. It is estimated that the restructuring will result in a £6m annual reduction in our infrastructure costs.

Taxation

The tax credit for the year was £4.5m (2009/10: £3.6m) which includes a research and development tax credit of £2.5m relating to the year ended 31 March 2011. The £2.5m research and development tax credit is included in other receivables in the balance sheet at 31 March 2011. Research and development tax credits of £8.2m were received during the year (2009/10: £0.7m) of which £7.1m was included in other receivables as at 31 March 2010 and £1.1m was an under provision for the year ended 31 March 2010. This exceptionally high receipt relates to two years of reclaim (years ended 31 March 2009 and 31 March 2010).

As the Group’s losses reduce, research and development tax receipts will decline significantly.

A full reconciliation of the tax credit for the year is shown in note 8.

Intangible assets

Intangible assets of £30.9m (2010: £41.6m) have been amortised by £10.7m during the year. Intangible assets will continue to be amortised over their expected useful life.

Deferred income

Deferred income relates to milestones received in cash but not yet recognised as revenue. The £5.5m on the balance sheet at 31 March 2011 (2010: £2.7m) will be recognised as revenue in 2011/12. This includes £2.4m for QVA149, £1.4m for VR315 and £1.7m for technology licensing deals.

Foreign exchange rates

The following foreign exchange rates were used during the year:

  2011 2010
Average rates:
£/$ 1.56 1.60
£/€ 1.18 1.13
Period end rates:
£/$ 1.60 1.52
£/€ 1.13 1.12

Cash flow

Cash increased by £10.3m in the period. This increase is due mainly to the £21.3m milestones received (Sandoz, £6.2m; Novartis, £5.1m; GSK, £10m), together with a net £8.1m tax receipt. At 31 March 2011, Vectura had cash and cash equivalents of £74.4m (2010: £64.1m), which is equivalent to 23p per share in issue.

Anne Hyland
Chief Financial Officer
22 May 2011