RNS Number:8208L
Aortech International PLC
3 June 2003
AORTECH INTERNATIONAL plc
Preliminary Results for the year ended 31 March 2003
Chairman's Statement
Introduction
The year to 31 March 2003 has clearly been extremely traumatic for the company.
Faced with low profitability in our core markets for heart valves, a significant
set back in our Tri-leaflet heart valve development project and with little sign
of revenue growth in the truCCOMS Continuous Cardiac Output Monitoring System,
it was clear that a major change in strategy was required. The Board decided to
significantly reduce the company's cash burn in order to survive beyond the
early months of 2003.
Financials
As previously reported, in the year to 31 March 2002 the company made a loss of
#12.9m and consumed #16.0m of cash. In the six months through to 30 September
2002 the company's losses continued at about the same rate with the half-year
results showing a loss of approximately #7.6m and a cash reduction of #7.6m.
Both numbers, however, reflected one-off rationalisation costs of #1.2 m and
#0.5 m of cost associated with the aborted Becton Dickinson acquisition,
previously reported. This further decline left the company, at the end of
September, with a cash balance of #9.0m
For the year to 31 March 2003 the loss before exceptional items and the
provision for the impairment of goodwill was #11.9m with a negative cash flow of
#9.7m and remaining cash reserves of #6.9m. However, in view of the significant
changes to the business that were undertaken during the second half of the year,
this has led to a number of major write-offs and rationalisation costs. These
included losses incurred on the disposal of commercial heart valve operations
and the termination of truCCOMS activity, restructuring costs and, notably, the
write down of our investment in the biomaterials business. After all exceptional
costs were accounted for, the loss on ordinary activities before interest was
#39.7m and the total loss for the year was #39.4m.
Business Activities
When I joined the Board in November 2002, I found that Bill Strachan, the newly
appointed CEO, and his management team, had already reviewed the activities of
the company in some depth, had identified the size and causes of the problems
and started to implement an action plan to correct them.
At the heart of these problems was the fact that the company was divided into
four "divisions" each with its own management structure, all absorbing cash,
with little or no synergy between them. It had also become apparent that it
would take significant time and cash before the company could begin to trade
profitably. The Board did not have the luxury of either of these key resources
and therefore continued with the action plan as a matter of urgency.
I would like to review the action plans for each of these business activities in
turn to explain our decisions:
Mechanical and Tissue Heart Valves
In the earlier part of the year sales were extremely disappointing and
significant losses continued to accumulate. The company had less than 1% of the
world market, lacked critical mass, had a good product, but it was not
measurably better than the competition. Furthermore, it did not have adequate
margins to support the sales and marketing effort in all but a few countries.
Manufacturing costs for tissue valves were too high due to low volumes, limited
economies of scale and high raw material costs.
Attempts were made to divest the business to one of the major competitors but
without success. In January 2003 Koehler Chemie GmbH of Germany acquired the
business for #2.7m. The sale price was below asset value, however in view of the
losses and the lack of interest among the more likely buyers, the Board
considered this a realistic outcome, which also protected jobs in Leeds.
truCCOMS
As stated in the interim report, the performance characteristics of the product
had restricted its use to the relatively small off pump open-heart surgery
market. Consequently, sales were low and the business showed no prospect of
reaching break-even in the foreseeable future. Much of the company's strategy
had been predicated on a rapid uptake in truCCOMS usage by intensive care
physicians, but there were both operational and manufacturing problems with the
product, and significantly, it had failed to sell in the key US market.
It was concluded that a major and very costly redevelopment programme would have
to be implemented before the product could be sold into the very much larger
critical care market. The company clearly could not afford this redevelopment
and therefore the Board decided that every attempt should be made to divest the
business. Over twenty companies were contacted but little interest was
generated. Most saw the need for a major redevelopment and were reluctant to
take on the product. The business was closed down at the end of March 2003,
although the company continues to try to sell the intellectual property.
Tri-Leaflet Valve
As reported in May 2002, the product failed to perform satisfactorily during its
initial regulatory testing programme. The problems were identified and related
to the valve design and manufacturing processes which the company was confident
that it could overcome. However, the costs of doing this were significant and
would have further depleted the company's very limited cash resources.
Additionally, the costs of the full clinical trials that would have to follow
the initial programme were far too large for the company to assume and
discussions over the past 18 months had not identified a commercial partner. The
Board decided that it would be financially irresponsible to proceed with a new
regulatory testing programme without first having the support of a commercial
partner.
The number of major companies in this market with sufficient resources to fund a
development project of this magnitude is limited. However, they were all
contacted and detailed meetings were held with those who expressed an interest.
Unfortunately, none were prepared to assist in the funding of this project. This
was partly due to a general view that the market had changed since the project
had started, questioning the need for a polymer valve now that longevity of
tissue valves had increased to 15 - 17 years. At the end of March 2003, the
Board reached a decision to discontinue research and development for the tri-
leaflet valve. Nevertheless, new intellectual property has been filed to cover
the improvements that have been made to valve design and discussions will
continue with interested parties to exploit this technology.
Elast-Eon Material
This small biomaterials business based in Australia is also absorbing cash
although, for the moment, at a level that the company can sustain.
During the third quarter of the financial year, an initiative was undertaken to
exploit the value of Elast-Eon outside of cardiovascular applications. Elast-Eon
is the proprietary silicone/polyurethane material which was a strategic
acquisition made by AorTech in 2000, motivated by the polymer heart valve
project. This new AorTech Biomaterials initiative included investment in
operational facilities in anticipation of the start of routine production of the
polymer, the development of a business model and associated revenue generating
activities.
The material has now been investigated by some of the major companies in the
medical device/implant industry and has been judged to have unique properties
with strong intellectual property. It has good potential particularly in the
implant sector where this unique and patented mixture of polyurethane and
silicone gives bio-stability, biocompatibility and mechanical strength and
fatigue resistance.
After a detailed strategic review the Board decided that this should form the
basis of the new Aortech business and work has already started on developing a
customer base.
Company Outlook
The Board continues to believe that there are considerable opportunities for the
company in the specialist biomaterials market, particularly for implants where
material specifications are challenging and added value can be high.
However, we are investigating additional avenues to improve shareholder value
and to utilise the cash reserves in the most appropriate manner. In order to
give maximum flexibility in the future, the company intends to put a resolution
to the forthcoming Annual General Meeting to provide for a capital
reconstruction which would be subject to court confirmation.
A new business plan has been developed which shows our first cautious steps with
what is effectively a new "start up" business. Importantly, we can afford to
fund this activity during its early stages and cash demands will not be
excessive. Our vision for the future business is to develop an innovative
biomaterials business in conjunction with strategic partners.
It is our plan to develop and license applications for novel polymers using
Elast-Eon and its derivatives and to use this emerging biomaterials business as
a vehicle to generate additional growth through licensing-in new materials and
appropriate product mergers and/or acquisitions.
There are a number of exclusive and non-exclusive licenses being negotiated for
applications in cardiovascular surgery, orthopaedics, plastics surgery, cardiac
rhythm management, coronary and peripheral stents and central venous access
ports and catheters.
We are encouraged by the reception of this novel material in the medical device
marketplace.
It is not intended that the company should remain just a materials supplier, but
should move up the value chain by developing new applications utilising our new
materials and with this application work funded by our commercial partners. At
some point in the future, the company may move into the manufacture of
proprietary components and/or products.
In this way I believe that we have an opportunity to generate shareholder value.
It is certainly not without risk but the Board believes that it is a realistic
option.
Board Changes
Reflecting the new focus of the company Bill Strachan will step down as CEO on
30 June 2003. I would like to thank Bill for his very considerable efforts in
leading the restructuring of the business.
I am delighted to report that Bill has agreed to become a non-executive director
of the company with effect from 1 July 2003.
On 1 July 2003 Frank Maguire will become the CEO and will join the Board. Frank
has been with the company since July 2002 and has considerable skills and
expertise in biomaterials together with a significant knowledge of the industry,
the major players and their requirements.
In Conclusion
As I said in my opening paragraph, this has been a traumatic year for the
company. Many of the changes have been dramatic and the cuts have been deeply
wounding. We have witnessed a company that employed 250 people at its peak, be
reduced to its current 15 employees. I believe that most employees have reacted
to these changes with understanding and for this I thank them. The changes had
to be made to try to ensure the very survival of the company. It is now the
Directors and the remaining employees' responsibility to re-build shareholder
value.
Laurie Rostron, Chairman
03 June 2003
ENQUIRIES:
AorTech International plc Tel: 01698 746 699
Bill Strachan, Chief Executive
College Hill Tel: 020 7457 2020
Nicholas Nelson
Clare Warren
Consolidated Profit and Loss Account
For the year ended 31 March 2003
Notes 2003 2002
# #
Turnover 2
Continuing operations 73,407 171,148
Discontinued operations 1,305,731 4,455,807
1,379,138 4,626,955
Cost of sales 3 ( 1,067,379) ( 2,555,856)
Gross profit 311,759 2,071,099
Net operating expenses 3 (12,165,968) ( 15,886,350)
Net operating expenses include:
Development expenditure ( 4,182,296) ( 6,811,308)
Amortisation of intangible fixed assets ( 1,206,732) ( 1,247,469)
Costs of aborted acquisition ( 250,281) ( 1,267,474)
Group operating loss before provision for impairment of goodwill 3 (11,854,209) ( 13,815,251)
Provision for impairment of goodwill 3 ( 16,535,412) -
Group operating loss
Continuing operations 3 ( 18,587,192) ( 2,542,267)
Discontinued operations 3 (9,802,429) ( 11,272,984)
(28,389,621) ( 13,815,251)
Exceptional items 4 ( 11,335,504) -
Loss on ordinary activities before interest (39,725,125) ( 13,815,251)
Interest receivable 366,947 931,594
Loss on ordinary activities before taxation (39,358,178) ( 12,883,657)
Tax on loss on ordinary activities - -
Loss for the financial year (39,358,178) ( 12,883,657)
Loss per ordinary share
Basic 5 (103.29p) (34.69p)
Fully diluted (103.29p) (34.69p)
Statement of Total Recognised Losses for the year ended 31 March 2003
Notes 2003 2002
# #
Loss for the financial year (39,358,178) ( 12,883,657)
Currency translation differences arising on consolidation 58,190 ( 47,487)
Total recognised losses relating to the year (39,299,988) ( 12,931,144)
Prior year adjustment 6 - ( 53,487)
Total losses recognised since last annual report (39,299,988) ( 12,984,631)
Consolidated Balance Sheet
As at 31 March 2003
2003 2002
# #
Fixed assets
Intangible assets 1,536,185 21,075,294
Tangible assets 319,976 4,828,832
1,856,161 25,904,126
Current assets
Stocks - 3,992,311
Debtors 532,912 2,381,808
Cash at bank 6,851,343 16,558,880
7,384,255 22,932,999
Creditors: amounts falling due within one year ( 2,061,585) ( 2,508,234)
Net current assets 5,322,670 20,424,765
Total assets less current liabilities 7,178,831 46,328,891
Creditors: amounts falling due after more than one year - -
Accruals and deferred income ( 270,000) ( 120,072)
Net assets 6,908,831 46,208,819
Capital and reserves
Called up share capital 9,525,696 9,525,696
Share premium account 63,359,593 63,359,593
Other reserve ( 2,003,143) ( 2,003,143)
Profit and loss account (63,973,315) ( 24,673,327)
Equity shareholders' funds 6,908,831 46,208,819
Consolidated Cash Flow Statement
For the year ended 31 March 2003
2003 2002
# #
Operating activities
Net cash outflow before exceptional items
Continuing operations ( 828,455) ( 1,344,269)
Discontinued operations ( 9,892,434) ( 12,476,750)
( 10,720,889) ( 13,821,019)
Outflow related to exceptional items (excluding disposals) ( 1,709,737) -
Net cash outflow from operating activities ( 12,430,626) ( 13,821,019)
Returns on investment and servicing of finance 498,976 832,425
Capital expenditure and financial investment ( 401,251) ( 2,982,325)
Disposals 2,618,697 -
Cash outflow before management of liquid resources and financing ( 9,714,204) ( 15,970,919)
Management of liquid resources 9,438,942 ( 8,335,126)
Financing - 24,186,714
Decrease in cash in year ( 275,262) ( 119,331)
Notes
1. Statutory Accounts
The financial statements for AorTech International plc have yet to be signed for
the year ended 31 March 2003. The financial information set out in the
announcement does not constitute the Company's statutory accounts for the years
ended 31 March 2003 or 31 March 2002. The financial information for the year
ended 31 March 2002 is derived from the statutory accounts for that year which
have been delivered to the Registrar of Companies. The auditors reported on
those accounts; their report was unqualified and did not contain a statement
under either Section 237(2) or Section 237(3) of the Companies Act 1985. The
statutory accounts for the year ended 31 March 2003 will be finalised on the
basis of the financial information presented by the directors in this
preliminary announcement and will be delivered to the Registrar of companies
following the Company's Annual General Meeting.
2. Segmental ananysis by class of business and geographical area
(a) Class of business The group operates in one class of business
(b) Geographical area The analysis by geographical area of the group's
turnover is set out below :
2003 2002
destination origin destination origin
# # # #
Geographical segment
United Kingdom 545,090 1,025,329 1,170,269 3,541,413
Rest of Europe 781,789 309,217 2,918,684 818,863
Rest of World 52,259 44,592 538,002 266,679
1,379,138 1,379,138 4,626,955 4,626,955
3. Cost of sales, gross profit, selling and marketing costs and administrative expenses
2003 2002
Continuing Discontinued Total Continuing Discontinued Total
# # # # # #
Turnover 73,407 1,305,731 1,379,138 171,148 4,455,807 4,626,955
Cost of sales - ( 1,067,379) ( 1,067,379) - ( 2,555,856) ( 2,555,856)
Gross profit 73,407 238,352 311,759 171,148 1,899,951 2,071,099
Selling and marketing - (2,227,838) (2,227,838) - ( 2,863,689) ( 2,863,689)
costs
Administrative
expenses:
Development ( 483,567) ( 3,698,729) ( 4,182,296) ( 1,075,569) ( 5,735,739) ( 6,811,308)
expenditure
Amortisation of ( 1,060,820) ( 145,912) ( 1,206,732) ( 1,059,290) ( 188,179) ( 1,247,469)
intangible fixed
assets
Costs of aborted - ( 250,281) ( 250,281) - ( 1,267,474) ( 1,267,474)
acquisition
Other ( 580,800) (3,718,021) (4,298,821) ( 578,556) ( 3,117,854) ( 3,696,410)
Total administrative ( 2,125,187) (7,812,943) (9,938,130) ( 2,713,415) ( 10,309,246) ( 13,022,661)
expenses
Net operating expenses ( 2,125,187) (10,040,781) (12,165,968) ( 2,713,415) ( 13,172,935) ( 15,886,350)
Group operating loss
before provision
for impairment of ( 2,051,780) (9,802,429) (11,854,209) ( 2,542,267) ( 11,272,984) ( 13,815,251)
goodwill
Provision for ( 16,535,412) - ( 16,535,412) - - -
impairment of goodwill
Group operating loss ( 18,587,192) (9,802,429) (28,389,621) ( 2,542,267) ( 11,272,984) ( 13,815,251)
The provision for impairment of goodwill arose following a full review, in
accordance with FRS 10 "Goodwill and Intangible Assets", of the carrying value
of goodwill relating to the acquisition of AorTech Biomaterials Pty Limited in
March 2000.
4. Exceptional items
2003
Continuing Discontinued Total
# # #
Loss on disposal of commercial
valve operations - ( 2,210,589) ( 2,210,589)
Loss on termination of TruCCOMS
operations - ( 4,338,964) ( 4,338,964)
Loss on termination of trileaflet
heart valve project - ( 924,570) ( 924,570)
Fundamental restructuring costs ( 186,267) ( 3,675,114) ( 3,861,381)
( 186,267) ( 11,149,237) ( 11,335,504)
There were no exceptional items during the year ended 31 March 2002.
#
Loss on disposal of commercial
valve operations:
Assets sold:
Intangible fixed assets 779,298
Tangible fixed assets 1,289,138
Stocks 2,290,850
4,359,286
Costs associated with disposal 281,303
4,640,589
Cash consideration 2,700,000
Less held in escrow for 12 months (270,000)
2,430,000
Loss on disposal (2,210,589)
The losses on termination of truCCOMS operations and of the trileaflet heart
valve project comprise primarily the write-off of assets held within these
activities.
Fundamental restructuring costs comprise the write-off of corporate assets
and redundancy costs.
5. Loss per ordinary share
The basic loss per ordinary share is calculated on the loss of the group of
#39,358,178 (2002 - #12,883,657) and on 38,102,783 (2002 - 37,137,110) equity
shares, being the weighted average number of shares deemed to be in issue.
6. Prior Year Adjustment
The prior year adjustment during the year ended 31 March 2002 arose from a
change of accounting policy with regard to revenue recognition with effect from
1 April 2001. Previously, revenue was recognised in respect of bill and hold
sales where customers take title to goods but the Company continues to hold
them. Revenue was recognised in such transactions on transfer of title rather
than delivery to customers. Under the new accounting policy, revenue is
recognised only when goods are invoiced and shipped to customers.
The effect of this change in accounting policy on the previous year was to
decrease sales by #82,197, to decrease cost of sales by#10,236 and to increase
the loss for the year by #71,961. The change of policy reduced shareholders'
funds by #53,487 as at 1 April 2001.
This information is provided by RNS
The company news service from the London Stock Exchange
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