Avacta Group Regulatory News (AVCT)

Avacta Group plc

("Avacta" or the "Group")

Preliminary Results

Avacta Group plc (AIM:AVCT), a leading provider of proprietary analytical and diagnostic technology, consumables and reagents, to the drug development and healthcare sectors, today announces its audited preliminary results for the year ended 31 July 2011.

Highlights

Note 1: Reported revenue for the prior year includes £0.35 million related to a non-recurring project

Note 2: Adjusted operating loss means operating profit before amortisation of customer related intangibles and development costs and share-based payment charges

Commenting on the results, Dr Alastair Smith, Chief Executive Officer, said: "The Board is very pleased to report on the substantial commercial and financial progress made by Avacta during the last financial year.

"Avacta Analytical has now established a global network of high quality distributors to accelerate the penetration of Optim into its target markets and this is working well and starting to reap substantial rewards. We have taken a further eight orders already this year, ahead of target, and the pipeline for the longer term continues to strengthen markedly. The extension of our Optim distribution agreement with Pall into South East Asia is further validation of the product and its potential and we are delighted also to be extending our collaboration with Pall into joint analytical services. There is scope to improve the margins of both the Optim units and consumables and these development programmes are underway and on schedule to deliver benefits during 2012.

"Avacta Animal Health has now resolved the technical problems related to the injection moulding of the AX-1 consumable cartridge and the Group will be showcasing the product at the London Vet Show during November 2011. We can now push forwards and get AX-1 into the hands of vets after what has been a frustrating delay.

"The Group has clear visibility on its short and long term commercial, technical and financial objectives and has a solid platform from which to achieve them. We are focused on commercialising our first two innovative products and on growing the recurring revenue streams by expanding our Optim applications and AX-1 test menu. By continuing to grow our range of proprietary reagents for diagnostic and analytical tests to go through our products we will add value to the Group in the long term and will drive margin growth in the near term; this is therefore an important aspect of our growth strategy. As our first two products transfer into commercialisation we will also be able to consider the next phase of product development and we look forward to updating the market on these opportunities to accelerate growth in the future."

Enquiries:

The Group's Preliminary Results are available on its website www.avacta.com

Notes to editors:

Avacta Group plc is a leading provider of proprietary analytical and diagnostic technology, consumables and reagents, to the drug development and healthcare sectors through two operating divisions:

Avacta Analytical provides high-end analytical instrumentation, consumables and services to the biopharmaceutical sector, expected to be a US$200 billion market by 2013 and the fastest growing part of the pharmaceutical industry. The Group's technologies are aimed at reducing the risks and expense associated with biological drug development and thereby reducing the final cost of drugs to patients. The Group's lead analytical instrument, Optim, is distributed through Pall Corporation in the US and South East Asia, Isogen Life Sciences in Europe, Cold Spring Biotech Corp in China and Taiwan and DKSH in Japan. Avacta sells Optim directly in the UK.

Avacta Animal Health provides diagnostic products, reagents and services for the US$1.5 billion global veterinary diagnostics market. Its aim is to equip veterinary professionals with high quality animal health and well-being information, through point of care diagnostics, reagents and testing kits and laboratory based testing. Avacta's AX-1 point of care immunoassay system is aimed at providing the veterinarian with rapid blood test results in the clinic. The initial range of tests launched with the AX-1 relates to Avacta's world leading allergy testing brand Sensitest®. Avacta is currently developing further assays for the AX-1 system to diagnose other diseases in companion animals. Longer term this technology will be transferred into the human clinical diagnostics market.

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

Chairman's and Chief Executive Officer's Report

Business overview

The Group made solid progress during the year, reporting increased revenue of £2.45 million, up 42% against the underlying revenue of £1.72 million in the prior year (reported revenue for the prior year included £0.35 million related to a non-recurring acquired project).

The Avacta Analytical division, which is aimed at reducing the costs and risks associated with biopharmaceutical drug development, shipped and installed fourteen Optim units which contributed to a 150% increase in revenue in the Group's analytical business to £1.24 million (2010: £0.50 million).

Within the Avacta Animal Health division, revenue from the Group's veterinary diagnostics service based business remained flat at £1.21 million (2010: £1.22 million). Technical issues encountered in the manufacturing scale up of the plastic consumable cartridge for AX-1, the diagnostic device aimed at delivering rapid test results at the point of care in both the veterinary and human health sectors, have delayed the commercial launch of the product into the vet market and, accordingly, that device has not yet contributed to the Group's revenue.

Avacta Analytical

Avacta Analytical provides high-end analytical instrumentation, consumables and services to the biopharmaceutical sector. Commercialisation of its lead product, Optim, has advanced very strongly during the year. Fourteen units were shipped during the period which was ahead of expectations and the Group now has installed units across all major geographies. Revenue from Optim and its consumable cartridge advanced substantially to £0.81 million (2010: £0.05 million).

Order intake during the first quarter of the current financial year is strong with a further eight sales confirmed. The sales pipeline has also continued to strengthen which supports the Directors confident view for the longer term prospects for Optim in its markets.

The Group sells direct in the UK and during the 2011 financial year has put in place four distributors to cover export markets:

- Isogen Life Sciences ("ISL") became mainland Europe distributor in September 2010 and is a well established and respected distributor of instruments, reagents and consumables in the areas of cell biology, molecular biology and biochemistry. Accordingly ISL has strong relationships with a large number of biopharmaceutical and biotech customers throughout Europe. Avacta chose ISL as the European distributor for Optim because of its strong track record in sales into the biopharmaceutical development area and ISL's strong commitment to high quality customer support.

- Agreement was made with Pall Corporation ("Pall") in February 2011 for distribution of Optim in North America and this has recently been extended to include the South East Asian markets. Pall is a leader in filtration, separation and purification providing solutions to meet the critical fluid management needs of customers across the broad spectrum of life sciences and industry. Pall Life Sciences, the subsidiary with whom the distribution agreement has been made, provides cutting-edge products and services to meet the demanding needs of customers discovering, developing and producing biotech drugs, vaccines and classic pharmaceuticals. During May 2011 a separate agreement was signed with Pall to include the marketing and provision of a global analytical services collaboration.

- Cold Spring Biotech Corp ("CSB") became Avacta Analytical's representative in China, Hong Kong and Taiwan in February 2011 and is a market leading life sciences distribution company with commercial operations throughout Hong Kong and mainland China (offices in Beijing, Shanghai, Guangzhou, Chengdu, and Wuhan). Founded in 1983, CSB is an established distributor with many years of experience in selling high value instrumentation and consumables in the rapidly growing Asian Biotech and Life Sciences market, representing major technology innovators such as Affymetrix and Caliper Life Sciences.

- DKSH Japan ("DKSH") partnered with Avacta Analytical in March 2011 to distribute Optim in Japan and has nearly 50 years experience in supporting the Japanese pharmaceutical industry through its dedicated technology business unit.

Growth in the recurring consumables revenue from Optim is a key performance target for Avacta Analytical. This will be achieved through an increase in the installed base of units and expansion of the range of applications delivered by the technology to encompass a broader range of solutions in addition to high throughput formulation and stability. A programme to take production cost out of the Optim unit and the associated consumable is ongoing and on schedule to deliver margin improvement for 2012.

Revenue from analytical contract services remained flat at £0.43 million (2010: £0.45 million).

Avacta Animal Health

Avacta Animal Health provides diagnostic products, reagents and services for the US$1.5 billion global veterinary diagnostics market. Its aim is to equip veterinary professionals with high quality animal health and well-being information, through point of care diagnostics, reagents and testing kits and laboratory based testing. Its lead product, the AX-1 point of care immunoassay system, is aimed at providing the veterinarian with rapid serological blood test results in the clinic. Technical issues encountered in the manufacturing scale up of the injection moulded plastic consumable cartridge used in the AX-1 have delayed the commercial launch of the product by approximately nine months. These technical issues have now been resolved and AX-1 will take centre stage on Avacta Animal Health's stand at London Vet Show during November 2011.

The initial range of tests that will be provided to run on the AX-1 for canine, feline and equine healthcare relates to Avacta's world leading allergy testing brand Sensitest® and its acute phase protein tests acquired in 2010 with Reactivlab, the Glasgow University Veterinary School spin-out. Expansion of the AX-1 test menu beyond this initial range is key to supporting the growth of recurring revenue and extensive clinical and commercial work over the past year has delivered a candidate panel of twelve further diagnostics tests split equally between companion animal and equine healthcare applications. Avacta Animal Health will be providing these tests for the AX-1 platform as quickly as possible and with current resources expects to be able to develop two or three new tests per year.

Revenue from diagnostic testing services remained flat at £1.21 million (2010: £1.22 million).

The integration of the Reactivlab operation into the Animal Health business has progressed well. The first two products derived from the Reactivlab intellectual property - test reagent kits for the c-reactive protein in dogs and haptoglobin in dogs and cats - are completed and a further two similar acute phase protein test reagent kits are in the pipeline. The two completed tests are for the most common and clinically informative of the acute phase proteins in these animals for the early detection of acute or chronic inflammation or infection. The global market for these tests is expected to be substantial and to grow as they become more widely available to vets. The Group has identified, and is now working closely with, a substantial partner that is expected to provide a global route to market for these and other new products.

Financial overview

Adjusted revenue grew 42% to £2.45 million (2010: £1.72 million, after excluding a non-recurring element of £0.35 million). This included £1.24 million from Avacta Analytical (2010: £0.50 million) assisted by the contribution of the fourteen Optim installations and associated consumables revenue and £1.21 million (2010: £1.22 million) from Avacta Animal Health. The additional revenue contributed positively to the continued investment in product development and the adjusted operating loss reduced as a result to £0.92 million (2010: £1.53 million). Reported operating loss was reduced to £1.13 million (2010: £2.03 million) with non-recurring administrative expenses, amortisation of intangible assets and share based payment charges reducing to £0.20 million (2010: £0.50 million).

Development expenditure capitalised during the year was £0.88 million (2010: £1.04 million) and net intangible assets increased to £9.30 million (2010: £8.55 million) after amortisation of £0.13 million (2010: £0.11 million).

The Group recognised £0.52 million of R&D tax credits during the year which reduced the loss retained to only £0.59 million (2010: £1.88 million). Accordingly, loss per share reduced to 0.04 pence (2010: 0.15 pence).

The Group reported cash balances of £1.77 million (2010: £1.43 million) following its fund raise during January 2011 when it raised £1.95 million at a price of 1.05 pence per share.

Outlook

The Board is very pleased to report on the substantial commercial and financial progress made by Avacta during the last financial year. Avacta Analytical has now established a global network of high quality distributors to accelerate the penetration of Optim into its target markets and this is working well and starting to reap substantial rewards. We have taken a further eight orders already this year, ahead of target, and the pipeline for the longer term continues to strengthen markedly. The extension of our Optim distribution agreement with Pall into South East Asia is further validation of the product and its potential and we are delighted also to be extending our collaboration with Pall into joint analytical services. There is scope to improve the margins of both the Optim units and consumables and these development programmes are underway and on schedule to deliver benefits during 2012.

Avacta Animal Health has now resolved the technical problems related to the injection moulding of the AX-1 consumable cartridge and the Group will be showcasing the product at the London Vet Show during November 2011. We can now push forwards and get AX-1 into the hands of vets after what has been a frustrating delay.

The Group has clear visibility on its short and long term commercial, technical and financial objectives and has a solid platform from which to achieve them. We are focused on commercialising our first two innovative products and on growing the recurring revenue streams by expanding our Optim applications and AX-1 test menu. By continuing to grow our range of proprietary reagents for diagnostic and analytical tests that go through our products we will add value to the Group in the long term and will drive margin growth in the near term; this is therefore an important aspect of our growth strategy. As our first two products transfer into commercialisation we will also be able to consider the next phase of product development and we look forward to updating the market on these opportunities to accelerate growth in the future.

Consolidated Income Statement

for the year ended 31 July 2011

Consolidated Balance Sheet

as at 31 July 2011

Consolidated Statement of Changes in Equity

for the year ended 31 July 2011

Consolidated Statement of Cash Flows for the year ended 31 July 2011

Notes

1. These preliminary results have been prepared on the basis of the accounting policies which are to be set out in Avacta Group plc's annual report and financial statements for the year ended 31 July 2011.

The consolidated financial statements of the Group for the year ended 31 July 2011 were prepared in accordance with International Financial Reporting Standards ("IFRSs") as adopted for use in the EU ("adopted IFRSs") and applicable law.

The financial information set out above does not constitute the company's statutory financial statements for the years ended 31 July 2011 or 2010 but is derived from those financial statements. Statutory financial statements for 2010 have been delivered to the Registrar of Companies and distributed to shareholders, and those for 2011 will be respectively delivered and distributed on or before 31 December 2011. The auditors have reported on those financial statements and their reports were:

(i) unqualified;

(ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and

(iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006 in respect of the financial statements for 2010 or 2011.

2. Basis of preparation

The Group financial statements have been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS).

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these 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 Group's activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's and Chief Executive Officer's Report. The financial position of the Group, its financial performance and its cash flows and liquidity position are described there also and within the financial statements presented.

The financial statements have been prepared on a going concern basis. The current economic conditions create uncertainty particularly over the level of demand for the Group's products and over the availability of finance which the directors are mindful of. In addition, the Group has incurred significant losses over the last 18-24 months of which a substantial element is in cash.

The Financial Reporting Council issued "Going Concern and Liquidity Risk: Guidance for Directors of UK Companies" in 2009, and the Directors have considered this when preparing these financial statements. This has been prepared on a going concern basis, notwithstanding the loss for the period ended 31 July 2011. The Directors have taken steps to ensure that they believe the going concern basis of preparation remains appropriate, and that the carrying value of intangibles remains supported by future cash flows. The key conclusions are summarised below:

- The Group is at a critical point in its development as it seeks to ramp up sales of its Optim product and launch the AX-1 product. These are expected to generate significant revenue for the Group over the coming years, aiding both profitability and cash flows.

- The Group has taken a significant amount of annualised costs out of the business and will continue to take all appropriate steps to manage its cost base in light of any deviations from the forecast sales levels.

- The Directors have prepared sensitised cash flow forecasts extending to the end of the financial year ended 31 July 2013. These show that the Group has sufficient funds available to meet its obligations as they fall due over that period.

- The Group's year-to-date financial performance is materially in line with this budget cumulatively.

- The Directors are not aware of any evidence to suggest that the budgeted improvement in the level of performance over the short term future will not be realised although the Directors recognise that it is possible that a worsening of performance could become evident, at which point they would act accordingly to mitigate the impact of such a worsening. The action may include further cost reduction strategies, curtailed capital expenditure programs or equity issues.

- The Group does not have external borrowings or any covenants based on financial performance.

- The Directors have considered the position of the individual trading companies in the group to ensure that these companies are also in a position to continue to meet their obligations as they fall due.

- The markets in which the business operates are not considered to be at significant risk due to the ongoing global economic recession.

- There are not believed to be any contingent liabilities which could result in a significant impact on the business if they were to crystallise.

Following this assessment, the Directors have reasonable expectation that the Group has adequate resources to continue for the foreseeable future and that carrying values of intangible assets are supported. Thus, they continue to adopt the going concern basis of accounting in preparing these financial statements.

3. Segmental reporting

Operating segment analysis 2011

Operating segment analysis 2010

4. Basic and diluted loss per ordinary share

The calculation of earnings per ordinary share is based on the profit or loss for the period and the weighted average number of equity voting shares in issue. The earnings per ordinary share is the same as the diluted earnings per ordinary share because the earnings per share is negative.

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