Avacta Group Regulatory News (AVCT)

Avacta Group plc

("Avacta" or the "Group")

Interim Results

Avacta Group plc (AIM: AVCT), a global provider of innovative diagnostic tools, consumables and reagents for human and animal healthcare, announces its interim results for the period ended 31 January 2014.

Financial highlights

· Revenues increase by 40% to £1.61m (2013: £1.15m)

· Avacta Animal Health revenues up 12% to £0.82m (2013: £0.73m)

· Avacta Analytical revenues increased 2.5 times to £0.79m (2013: £0.31m)

· 9 Optim units sold (2013: 2 units)

· Gross margins up to 64% (2013: 56%) - due to re-engineering of Optim and product mix

· Underlying operating loss reduced to £0.65m (2013: £0.96m)

· Reported loss after tax reduced to £0.50m (2013: £0.81m)

· Loss per share reduced to 0.01p (31 January 2013: 0.03p)

· Cash at bank £3.25m (31 July 2013: £0.58m)

Operational highlights

· Good progress in Affimers with significant de-risking and advancement of microarray development

· Unique canine lymphoma test launched

· Solid progress in Optim sales particularly in Europe

· Appointment of Dr Trevor Nicholls as Chairman, Dr Matt Johnson to lead Affimer product development and Mr Craig Slater as Group COO

· Placing to raise net proceeds of £4.55m completed in August 2013

Post-period end highlights

· First Affimer revenues through custom Affimer service

· Development of canine pancreatitis test completed

· Dr Michael Albin appointed as Non-executive Director

Alastair Smith, Chief Executive Officer, commented: "I am pleased with the performance across the Group overall and in particular with the excellent progress in Avacta Life Sciences. The technical performance of Affimers which demonstrates their competitive advantage against antibodies is now established with good supporting data and it is particularly pleasing to see first revenues.

"It is an exciting time for the Group which is poised for growth not only through its existing businesses in Avacta Animal Health and Avacta Analytical, which are both growing and now contributing positively, but also through the enormous potential for the commercial exploitation of our Affimer platform and I look forward to reporting on progress in all areas in the coming months."

About Avacta Group plc - www.avacta.com

Avacta Group plc is a global provider of innovative technologies, consumables and reagents for the life science markets, from drug discovery to diagnostics. Avacta operates through three divisions:

Avacta joined AIM in August 2006 and is based in Wetherby, England.

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S REPORT

Business Overview

Group revenues improved by 40% to £1.61m (2013: £1.15m) through an increased volume of nine Optim units placed through the Avacta Analytical business (2013: two) and through increased volumes in animal allergy testing within the Avacta Animal Health business resulting in revenues of £0.82m (2013: £0.73m). In line with the current strategy, Avacta Life Sciences has not yet contributed materially to revenue, although first revenues from Affimer reagents were generated post period end.

Gross margins have improved in both of the Group's revenue generating businesses. We now have a re-engineered Optim product with a lower build cost and, through buying efficiencies and a favourable shift to higher margin products in animal allergy testing, overall gross margins improved to 64%. With overheads remaining tightly controlled, the Group reported a reduced operating loss of £0.65m (2013: £0.96m) and a reduced loss after tax of £0.50m (2013: £0.80m). Accordingly, the loss per share reduced to 0.01p (2013: 0.03p).

The Group's development activities continue apace across all of the businesses; Avacta Life Sciences, Avacta Animal Health and Avacta Analytical with some important milestones being met. These are discussed in detail below.

The Group has made some very strong appointments to the Board and has also made an excellent appointment in Avacta Life Sciences, from both a technical and commercial perspective, with Dr Matt Johnson joining the Group from Abcam plc as Head of R&D.

Avacta Life Sciences

Avacta Life Sciences has been established to develop and commercialise Affimers which are an engineered alternative to antibodies. Affimers were designed to address many of the negative performance issues currently experienced with antibodies; namely, the time taken to generate new antibodies, poor specificity and batch-to-batch variation.

Affimers are based on a small protein called stefin A that can be engineered to bind with high specificity and affinity to a wide range of targets. These reagents are generated without the use of animals in a relatively high throughput process generating vast libraries of Affimers. This creates the potential to develop a wide range of affinity reagents capable of addressing gaps in the market where antibody products do not or cannot meet the present need or capable of competing directly with existing antibody products where the performance of those antibodies is suboptimal.

Several significant steps have been made during the reporting period.

Firstly, the recruitment of Dr Matt Johnson who joined Avacta from Abcam plc, one of the leading providers of research antibodies, where he was Head of R&D. This appointment is a strong validation of the core Affimer technology as a competitive and technologically superior alternative to many antibodies and it has added a depth of technical, commercial and strategic experience to the Avacta Life Sciences team.

Secondly, a milestone has been reached in the demonstration, with good data, that the technical performance of Affimers meets the targets required to compete successfully in the research antibody market against the negative performance issues currently experienced with antibodies, namely; the time taken to generate new antibodies, specificity and batch-to-batch variation.

· The time taken to generate high quality monoclonal antibodies can be up to a year in some instances and is a major issue for many end users. Having now carried out the screening process numerous times against internal targets and the first commercial academic customer targets, Avacta can confirm that the process of finding an Affimer that binds to its target is as rapid as expected, taking around six weeks from receipt of the target to the identification and supply of a characterised Affimer. Further, the Group has established the "hit rate" of the screening process is very high. In fact a 100% success rate has been experienced with the targets screened to date.

· Affimers have been validated in the two most common applications of western blot and ELISA. The data being generated confirms that Affimers perform well in these key applications with good specificity and assay performance.

· Multiple batches of the same Affimer have been produced with high levels of reproducibility and consistency confirming that Affimers do not suffer from batch-to-batch variation.

Thirdly, early commercial traction has been demonstrated through the recently launched custom Affimer service which capitalises on the short development time for finding an Affimer that binds to a customer's specific target. Customers provide the target for which they wish to have an affinity reagent and this target is screened through the Affimer libraries which generates one or more Affimers that bind to the target. These "hits" are then characterised and a small quantity is provided to the customer for evaluation with the potential for future supply of larger quantities. The first customers' targets have been successfully put through the screening process.

Fourthly, the development of microarrays for drug and biomarker discovery is also progressing well. Avacta's first microarray product will be a very large proteomics tool, referred to as a Discovery Array, comprising of tens of thousands of Affimers printed on a specially prepared glass microscope slide. The high throughput production of Affimers for the arrays has been optimised and since the New Year the output rate has doubled to around two thousand new Affimers per week.

Finally, whilst Avacta Life Sciences is not planning on developing Affimers for therapeutic applications itself, it will actively seek therapeutic license deals. The first of these, with Blueberry Therapeutics Limited ('Blueberry'), was agreed during the reporting period. Under the terms of the deal, Avacta will provide proprietary Affimers to Blueberry for their drug development programmes in infectious diseases. As part of this deal, Avacta has already supplied the first lead Affimer and will be able to access technical data arising from Blueberry's development of this Affimer which will be used alongside data generated internally in Avacta Life Sciences to support higher value license deals in future.

Avacta's near term targets for Affimers, which now focus on commercialisation, process optimisation and scale up, are:

· Continue to drive early commercial traction for Affimer reagents through its custom Affimer service;

· Grow its catalogue of Affimer reagents by screening internally selected targets, with a targeted on-line launch during 2014;

· Secure first distribution partners for Affimers in key geographies;

· Expand operations to support growth in Affimer reagent sales; and

· Rigorously validate microarray performance with clinical, academic and commercial partners to support commercialisation which is expected to begin at the end of 2014.

Avacta Animal Health

Avacta Animal Health is a niche provider of animal testing services on two laboratory based delivery platforms, the SensiTest reference laboratory service and the SensiPak testing kits supplied to third party reference laboratories. Its two strategic objectives are to expand outside of the core specialism in animal allergy and to establish the SensiPod in-clinic diagnostic system as a third platform for delivery. The business has introduced two new non-allergy tests that are delivered on the SensiTest and SensiPak platforms. The first new test is a canine lymphoma blood test ('cLBT') which is the only serum-based objective diagnostic of this high incidence cancer. The second new test is a canine pancreatitis test which has recently been completed. Several more non-allergy diagnostics are in development for the SensiTest and SensiPak platforms.

The completion of the cLBT in September 2013 marked the first major diagnostic product outside of allergy for the business and it is now being provided in the UK through the businesses own reference laboratory. A strong relationship has been developed with UK and US key opinion leaders for canine oncology and, in particular, with Professor Carolyn Henry of the Veterinary Medical Teach Hospital in the University of Missouri.

Lymphoma is one of the most common malignancies to affect dogs, accounting for approximately 20% of all canine tumours. The new cLBT relies on the results of two acute phase protein tests (CRP and haptoglobin) being combined by a proprietary algorithm to yield both a diagnostic of the condition and an effective remission monitoring test to be used regularly following chemotherapy. The cLBT enables detection of lymphoma up to eight weeks prior to physical symptoms (swollen lymph nodes) becoming easily detectable by palpation. This simple blood test is more objective and sensitive than palpation, is able to differentiate clearly between benign and malignant lymphadenopathy, and is aimed at allowing veterinarians to diagnose and treat lymphoma patients earlier in the disease progression which should lead to better outcomes. The cLBT has also been shown in clinical trials to be effective in remission monitoring if used monthly following chemotherapy.

Pancreatitis is the most common disorder of the pancreas in dogs and cats. Most dogs present with common gastrointestinal signs of upset, such as vomiting, anorexia and diarrhoea. Consequently, the disease incidence level correlates more closely with the incidence of dogs with gastrointestinal problems which is large. Presently, there is limited choice in the market for canine pancreatitis diagnostics, in part owing to the fact that one vendor has exclusive access to an antibody against canine specific pancreatic lipase which is the best biomarker for the disease.

Avacta Animal Health's canine pancreatitis blood test ('cPBT') relies on the measurement of two common biomarkers (amylase and lipase) in canine serum, which are combined with other information about the dog (age, sex, breed etc) into an algorithm in the same approach pioneered with the cLBT which yields a diagnostic result that is superior to the measurement of a single biomarker. The benefits of the cPBT are excellent diagnostic performance, and faster turn round and lower cost than the existing test.

The SensiPod in-clinic blood testing system was launched during the autumn of 2013 and a measured roll out of SensiPod units has been carried out in order to provide an opportunity to respond to early adopter feedback on the SensiPod unit and cartridges, as well as to stress test manufacturing processes of the cartridges. In summary, the feedback has confirmed that the SensiPod Analyser unit is reliable and easy to use. The measured roll out has allowed Avacta to identify improvements which are currently being implemented in the manufacturing of cartridges to maximize reproducibility and ultimately to provide best performance in use. These improvements will be of benefit to all future SensiPod test cartridges.

The good progress achieved in growing the Avacta Animal Health business outside of animal allergy has, to some extent, been at the expense of slower than targeted progress in expanding the SensiPod in-clinic system test menu. Four new SensiPod canine tests (CRP, HAP, amylase and lipase) are in development which, as well as being stand alone tests, will allow the cLBT and pancreatitis tests to be carried out in-clinic on SensiPod. Veterinarians will be able to combine the results of these tests with other information about the animal by accessing the multivariate algorithm through an internet portal on a pay-per-click basis. A further equine test for SensiPod is also in development and all of these are expected to launch later in 2014. A considerable pipeline of further tests for all three of the business's platforms continues to grow and will be addressed as existing developments are completed.

Revenues for the period improved by 12% to £0.82m (2013: £0.73m). This improvement was due to successful efforts to re-establish relationships with lapsed SensiTest customers and also from a strong export performance from SensiPak. The new tests referred to above are expected to start to contribute modestly in the second half of this financial year.

Margins were slightly improved in the period, with gains at a product level and some improvement also from a revenue mix toward higher margin SensiPak revenues. These positive margin shifts enabled the business to contribute positively before development costs in the period.

In preparation for the impact of further launches and new tests outside of animal allergy, the business has improved its development processes and is adding commercial resource.

Avacta Analytical

Avacta Analytical sells the Optim product and associated consumable cartridges. Optim is an innovative analytical instrument designed to provide multiple stability-indicating parameters at high throughput using ultra-low sample volumes of proteins and other molecules.

Optim was substantially re-engineered to reflect the views of early users and to widen its range of applications; launching with improved features, a reduced footprint and much improved analysis software at a lower build cost on 1 February 2013. It is sold and supported directly by Avacta Analytical in Europe and by two partner distributors in North America, India and Asia and in Japan.

The business strategy is to support existing users who are mainly involved in formulation of protein products with high quality, independently attested applications and technical support and then to widen the use of the machine into other areas. This is expected to drive both Optim unit sales and consumable cartridge sales.

Nine units were sold in the period (2013: 2) with improved margins due to the re-engineered lower cost unit and a reduced cost base supporting the product. The business contributed positively before development costs in the period.

The development roadmap includes two new variants of Optim intended to widen its potential applications, related software development and a series of high quality applications and technical papers. Additionally, further geographical coverage is possible and the viability of alternative approaches to new markets is being assessed.

Financial Overview

Revenue for the six months period ended 31 January 2014 was £1.61 million (2013: £1.15 million) due primarily to the increased volume of sales of the Optim product. Nine Optims were shipped during the period (2013: 2).

Revenue from Optim and its consumable cartridge increased to £0.79 million (2013: £0.31 million) which included £0.06 million from the consumable cartridge (2013: £0.14 million). Revenue from the Avacta Animal Health diagnostic testing business increased £0.82 million (2013: £0.73 million) before any contribution from the recently launched canine lymphoma blood test, the completed pancreatitis test or the SensiPod in-clinic diagnostic platform.

Gross margins improved significantly to 64% (2013: 56%) due to the improved margins earned on the re-engineered Optim product which was launched on 1 February 2013 and through improved buying efficiencies and a favourable sales mix on the animal allergy products.

Overheads remain tightly controlled and were broadly flat before amortization of intangible assets and share based payment charges at £1.68 million (2013: £1.60 million).

The Group's operating loss before amortisation and share based payment charges reduced to £0.65 million (2013: £0.96 million) and the reported operating loss reduced to £0.78 million (2013: £0.97 million).

The loss per share was reduced to 0.01 pence against 0.03 pence in the same period last year.

The Group capitalised £0.97 million (2013: £0.88 million) of development costs. This increase is a result of the accelerated development programmes of the Affimer technology. These development costs are recognised within the total Intangible asset value of £15.49 million (31 July 2013: £12.97 million) which represented 79% (31 July 2013: 80%) of net asset value.

There was a cash outflow from operations of £0.58 million (31 January 2013: £0.86m) and an outflow from investing activities of £1.31m (31 January 2013: £1.27m) during the period. These outflows were supported with a cash inflow of £4.55m, net of expenses, from the Placing of new Ordinary shares which completed on 5 August 2013. The Group ended the period with £3.25 million net cash (31 July 2013: £0.58 million).

Outlook

Avacta Group is in an exciting transition having spent several years developing multiple products, consumables and reagents for the life sciences.

Affimers represent an enormous opportunity for the Group and have, over the past six months, become technically de-risked and are generating first revenues with considerable growth expected through sales of reagents and assay products in the coming years.

Avacta Animal Health has started to launch new tests with significant markets outside of its historical focus on allergy on its SensiTest and SensiPak platforms with multiple further tests in the pipeline. The SensiPod platform is still in the very early stages of commercialisation and needs to grow the test menu before this will accelerate. This development has been slower than planned but these tests are moving through development and the measured roll out of the product to early adopters has, as was intended, allowed Avacta to improve operational processes to ensure delivery of high quality manufactured tests into the future.

Optim is now an established product with a growing installed base and all efforts are focused on growing the number of units in the field and driving consumable usage.

These proprietary, disruptive technologies with recurring revenues from consumables and reagent sales address some very large global market opportunities in bio-research, biotech and healthcare and the Group is now looking forward to focusing on the challenges of commercialising these products.

Condensed consolidated income statement

for the six month period ended 31 January 2014

The profit for the period is wholly attributable to equity holders of the parent Company.

All results arise from continuing operations.

Condensed consolidated statement of comprehensive income

for the six months ended 31 January 2014

Condensed consolidated statement of changes in equity

as at 31 January 2014

Condensed consolidated balance sheet

at 31 January 2014

Total equity is wholly attributable to equity holders of the parent Company.

Condensed consolidated cash flow statement

for the six month period ended 31 January 2014

Unaudited notes

Basis of preparation and accounting policies

Avacta Group plc is a company incorporated in England and Wales under the Companies Act 2006.

The condensed financial statements are unaudited and were approved by the Board of Directors on 22 April 2014.

The interim financial information for the six months ended 31 January 2014, including comparative financial information, has been prepared on the same basis of preparation and using the same accounting policies as set out in the last annual report and accounts and in accordance with International Financial Reporting Standards ("IFRS"), including IAS 34 (Interim Financial Reporting), as issued by the International Accounting Standards Board and adopted by the European Union.

The preparation of the interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may subsequently differ from those estimates. In preparing the interim financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same, in all material respects, as those applied to the consolidated financial statements for the year ended 31 July 2013.

Information extracted from 2013 Annual Report

The financial figures for the year ended 31 July 2013, as set out in this report, do not constitute statutory accounts but are derived from the statutory accounts for that financial year.

The statutory accounts for the year ended 31 July 2013 were prepared under IFRS and have been delivered to the Registrar of Companies. The auditors reported on those accounts. Their report was unqualified, did not draw attention to any matters by way of emphasis and did not include a statement under Section 498(2) or 498(3) of the Companies Act 2006.

The Board confirms that to the best of its knowledge:

By Order of the Board