Bioquell Regulatory News (BQE)

29 August, 2012

Bioquell PLC - 2012 interim results

Investment in a new range of bio-decontaminationproducts & services substantially complete; good performance from TRaC

Bioquell PLC (LSE: BQE) - provider of patented, low temperature, environmentally-friendly, high efficacy bio-decontamination technologies to the Healthcare, Life Sciences and Defence sectors, and specialist testing and compliance services, predominately in the UK, via its TRaC division - announces its interim results for the six month period ended 30 June, 2012.

Highlights:

§ A new product development programme for the Bio-decontamination ("Bio-decon") division substantially complete; as expected related costs of new products and reduced defence revenues have held back profitability in the first half

§ Group revenues of £19.3 million (2011: £20.0 million)

§ Group revenues excluding "lumpy" contract-based defence revenues up 9% to £18.9 million (2011: £17.3 million)

§ TRaC revenues up 12% to £7.4 million (2011: £6.6 million)

§ EBITDA of £3.7 million (2011: £3.9 million)

§ Basic earnings per share 2.7p (2011: 3.5p)

§ Strong balance sheet: net cash £2.3 million (£4.6 million) with net assets of £27.6 million (2011: £25.3 million)

§ More than doubling of the Group's manufacturing facilities in preparation for the roll-out of new products

§ Six new Bio-decon products with attractive recurring revenue profiles to be launched in 2012

§ Good performance from TRaC

Commenting on the 2012 interim results, Nigel Keen, Chairman of Bioquell PLC, said:

"The progress made in the first half on completing new products designed to transform the Group's business model has been impressive."

"The encouraging results from our Life Sciences, Healthcare and TRaC businesses were offset by costs relating to the expanded facilities needed to underpin our range of new products, and reduced revenues from our defence orderbook."

"We will start to see revenues from our transformational range of new products - with attractive levels of recurring revenues - starting to flow this year."

Enquiries:

Nigel Keen Chairman Bioquell PLC 01264 835900

Nick Adams Group Chief Executive

Mark Bodeker Chief Operating Officer and Finance Director

***********************************************

Notes to editors:

§ Bioquell is a UK-headquartered, international technology company with two divisions:

o Bio-decon which sells specialist bio-decontamination products and services into the Healthcare, Life Sciences and Defence sectors, with most of its revenues generated from overseas customers; and

o TRaC which provides specialist Testing, Regulatory and Compliance services principally to UK corporates.

§ Bioquell's bio-decontamination technology is principally based around hydrogen peroxide vapour ("HPV") - which is highly efficacious at eradicating micro-organisms such as bacteria and viruses at room temperature - and is subsequently broken down using specialist catalysts to water vapour and oxygen (hence an extremely 'green' technology) at the end of the bio-decontamination process.

§ For the last two years Bioquell has invested substantial sums in developing a new product range which has been designed to increase the proportion of recurring revenues from its HPV technology - and hence increase its quality of earnings; this range of new products is being rolled out in 2012.

§ Bioquell's bio-decontamination technology:

o is used by bio-pharmaceutical, biotechnology and research institutions to provide sterile equipment and/or sterile working environments;

o is used to eradicate "superbugs" from hospitals; independent scientific research has demonstrated that 'bioquelling' hospital equipment and facilities reduces significantly the rates of hospital acquired infection;

o has been incorporated in a wound-care product - BioxyQuell - which has received regulatory approval for use on chronic wounds in the European Union; and

o was selected by the United States Department of Defense for the JMDS/JSSED programme to decontaminate sensitive equipment against biological and chemical warfare agents.

§ Bioquell currently has overseas operations in the USA, France, Ireland, Singapore, China and Brazil.

§ TRaC sells its specialist services to the product development departments of a broad range of companies, principally based in the UK, with a particular focus on aerospace, military and telecoms clients.

INTRODUCTION

Bioquell is organised in two divisions, the Bio-decontamination ("Bio-decon") Division and TRaC. The Bio-decon division uses its proprietary peroxide technology to develop, manufacture and market innovative new products and services used to eradicate micro-organisms at room temperature. These are used by the Life Sciences, Healthcare and Defence industries throughout the world. TRaC is a largely domestic UK service business offering electromagnetic interference and environmental testing services to customers from modern, well invested locations which cover the UK.

Over the past five years the Group has invested in upgrading the quality of the TRaC business by creating a number of state-of-the-art service centres available to TRaC's customers. More importantly, over the same time period, in the Bio-decon division the Group has invested in a wide range of new products and services which either have just been launched to the market or will be introduced very shortly. In order to deliver excellent customer experience with these new products, Bioquell has invested in new manufacturing facilities and techniques which are aimed at delivering products and services at the highest quality and the lowest cost. In addition, over the same time period the Group has invested in regional overseas sales and service operations which provide a worldwide platform through which the existing and new products of the Bio-decon division can be sold.

As part of these new initiatives the Group's business model is being changed by focussing on creating in these new products and services characteristics which have been designed to:

(i) increase the proportion of the Group's recurring revenues derived from consumables, service and/or rental products thereby improving the Group's quality of earnings; and

(ii) reduce the effect on the Group's profitability of the fluctuating revenues associated with the delivery profile of the Group's defence order book.

GROUP FINANCIAL RESULTS

The first half of 2012 has been a period of substantial progress both in the investments which have been made which are described above and in the current trading in challenging global macro-economic conditions. This strong performance is masked by the effect of the Bio-decon division's defence business. Bioquell's defence business is characterised by large contracts which are won in support of a larger defence contractor's business with the end-user governmental customer. Once such a contract has been awarded deliveries of product are typically made over a period of several years. It is often difficult for Bioquell to predict the timing of such defence orders and as they tend to be sizable in a good year they can have a significant effect on Group results. There is little fixed overhead associated with the Group's defence activities and as such although the business is lumpy it makes a strong contribution to the profitability of the Group.

The table below shows the effect on the results for the first half from the defence business which was at a lower level than in the same period in the previous year when a significant Malaysian order was won and a CBRN contract for a Middle Eastern customer was being delivered.

Orders

Order intake in the first six months of the year was satisfactory. Total Group orders in the period were £20.9 million (2011 £23.9 million), some £3.0 million (13%) down in the period; however, Group orders excluding defence activities increased to £20.5 million (2011: £19.0 million), up 8% in the period.

At the divisional level without defence the Bio-decon orders were flat at £11.8 million (2011: £11.8 million). (Our defence order book remains satisfactory and was broadly unchanged at 30 June, 2012 at £5.3 million (2011: £ 5.5 million).) The TRaC division saw orders up a robust £1.5 million (21%) to £8.7 million (2011: £7.2 million).

Revenues

Excluding the effect of defence revenues, Group revenues were £18.9 million (2011: £17.3 million), up 9% in the period. Total Group revenues were slightly down (4%) at £19.3 million (2011: £20.0 million). These consolidated revenues included a relatively low level of defence revenues of £0.4 million (2011: £2.7 million), reflecting the profile of the delivery dates of our defence order book.

Revenues in the Bio-decon division after adjusting for our defence activities were £11.5 million (2011: £10.7 million) up some 7%. TRaC also saw revenues increase by 12% to £7.4 million (2011: £6.6 million). Revenue generation varied in the different territories: Bioquell AsiaPacific's revenues more than doubled in the period, although Bioquell France experienced a significant reduction in revenues, reflecting challenging trading conditions in France. 

Profitability

The Group's gross margin was unchanged at 45% (2011: 45%) despite higher costs associated with the expansion of our UK manufacturing facilities required for our range of new products in the Bio-decon division.

Consolidated overheads increased slightly to £7.3 million (2011: £6.9 million), reflecting our ongoing investment in expanding our sales & marketing resources internationally.

Earnings before interest, tax, depreciation and amortisation ("EBITDA") for the Group was £3.7 million (2011: £3.9 million), a decline of 5%. At the divisional level, EBITDA for Bio-decon was £2.2 million (2011: £2.9 million) and for TRaC was £2.2 million (2011: £1.8 million). Profit from operations declined to £1.5 million (2011: £2.1 million) reflecting a lower contribution from our defence activities in the period as well as costs relating to a programme of new product launches.

Capital expenditure

In the first half we invested substantially in new production and testing facilities for our Bio-decon and TRaC divisions as well as product development, totalling £3.6 million (2011: £2.8 million). Much of this investment was linked to the substantial expansion of the Group's Bio-decon manufacturing facilities at Andover. We would consider this level of investment to be higher than our usual steady-state investment rate.

Balance sheet

The Group's balance sheet remains strong and ungeared. Net cash at the period end was £2.3 million (2011: £4.6 million), the utilisation of cash reflecting the substantial investments that were made in the business in the first half, including new product launches described elsewhere in this document. Net assets were £27.6 million (2011: £25.3 million).

BIO-DECONTAMINATION DIVISION

New product launches

This year the following new products or services have been, or will be, launched. Further details on those new products which have already been launched are available on our website: www.bioquell.com:

·; IG-1: a new integrated HPV generator which enables third party original equipment manufacturers ("OEMs"), for example, chamber manufacturers, which require HPV-based bio-decontamination to integrate the Bioquell HPV technology conveniently and efficiently in their equipment. The sale of our technology by OEMs is advantageous to the Group as it helps us gain additional, incremental revenues as a result of sales by third parties of our products (and consumables). The Bioquell IG-1 system includes a captive hydrogen peroxide consumable cartridge which is protected by RFID electronic technology;

·; QUBE: a novel, modular bio-decontamination chamber which incorporates BQ's HPV technology and which exploits novel, low-cost manufacturing techniques. The QUBE was well received at product launches in Frankfurt and Tokyo in June, and notwithstanding the summer holiday period and the lack of wide-spread availability of demonstration units, we have issued an encouraging number of QUBE quotations since June. The QUBE also incorporates the use of captive hydrogen peroxide consumable cartridges protected by RFID technology;   

·; ICE-range: Open, multi-bed units (so-called "Nightingale wards") are common in many hospitals in the UK and in the emerging markets - and represent a particular challenge for standard infection control measures as well as the easy use of Bioquell's HPV technology. The Bioquell Infection Control Enclosure (ICE) range - the ICE-cube and the ICE-pod - enables hospitals with such open, multi-bed units to: (i) 'bioquell' the near-patient bed space rapidly and conveniently; (ii) improve significantly compliance with standard infection control measures; and (iii) improve patient dignity and privacy. We are in the process of beta testing the deployment of our first ICE-cube at a London hospital - and a number of other NHS hospitals have requested to trial ICE-cubes or ICE-pods later this year;

·; HPV-AQ: Bioquell's proprietary range of aqueous hydrogen peroxide solution consumables contain hydrogen peroxide which has been formulated for optimised bio-decontamination performance in our HPV equipment. This new range of hydrogen peroxide consumables includes convenient safe-change consumable cartridges as well as electronically tagged cartridges, using RFID technology, which can conveniently provide customers with key data to satisfy regulatory requirements;

·; HPV-BIs: many international regulators require Bioquell's HPV bio-decontamination technology to be validated using biological indicators ("BIs"). A number of our clients have encountered significant issues, including regulatory-related issues, linked to the use of sub-optimal BIs manufactured by third parties. Later this year Bioquell will be launching a range of Bioquell-branded BIs which have been optimised for use with its HPV technology; and

·; HPV-CIs: Later this year Bioquell will also be launching a range of chemical indicators ("CIs") which have been engineered to mimic the response characteristics of BIs but which are lower cost and which respond in real-time. These CIs will allow, among other things, much faster HPV cycle development work. We have recently licensed a patent from a large US group to allow us to develop and market these CIs.

In order to maximise the revenue potential from this substantial investment in new products in the Bio-decon division, we have deliberately focussed on developing new products and technologies which, in the main, have applications in both the Life Sciences and Healthcare sectors. For example, the new Bioquell QUBE can be used to provide a secure, sterile environment for a bio-pharmaceutical company to carry out sterility testing on products to satisfy regulatory requirements for batch release but, equally, the QUBE can also be used to enable hospital pharmacies to prepare sensitive intravenous drugs in a secure, sterile and safe environment within the hospital setting.

The costs of these development programmes have been substantial. Some of these costs are directly related to research and development, whilst other costs are more indirect, such as the costs relating to the expansion of the Group's manufacturing facilities and the establishment of an international hydrogen peroxide consumable supply-chain, including the appropriate, regulatory approvals.

In order to ensure that we can manufacture cost-effectively, efficiently and rapidly our new products, during the first half of the year we more than doubled the footprint of the Bio-decon division's manufacturing facilities at our headquarters in Andover, Hampshire. There are significant strategic benefits to developing specialist, low-cost manufacturing techniques and processes which should help the Group achieve additional revenues, higher margins, reduced lead times, improved quality and make it harder for third parties, particularly in Asia, to copy our range of novel new products.  

In the first half we also invested in establishing an international supply-chain for our hydrogen peroxide consumable cartridges which will help drive our recurring revenues. Putting in place this supply-chain has been difficult, in part due to the regulatory-related requirements; however, we believe that now it has been established it will help us generate attractive, recurring revenues and cash flows from these consumable sales.

Life Sciences

The Life Sciences sector continues to be the largest contributor to revenues and profits for the Bio-decon division. In the first half we continued to see good overall demand for Bioquell's products and services in most territories and sub-sectors, although equipment revenues were slightly behind in some markets. We expect demand for equipment to increase in the second half, in part due to the recent launches of the IG-1 and the QUBE which address two important gaps in our portfolio of HPV-based bio-decontamination products.

Across the Life Sciences industry worldwide there appears to be, in general terms, robust levels of investment in research & development, production and regulatory compliance, and as a result the prospects for our products and services within this sector remain attractive. We also believe that there are a number of new applications for our HPV technology which have yet to be sold into parts of the key bio-pharmaceutical industry and we are looking at ways of extending our market penetration and further exploiting applications of our novel technology.

Healthcare

Eradication of pathogens which cause hospital acquired infection ("HAI")

This year norovirus (the so-called 'sickness and vomiting bug') caused a number of NHS hospitals, particularly in the South of England, significant financial costs. In addition Clostridium difficile infection remains a clinical and financial concern for many NHS hospitals, in part as it appears that NHS hospitals are now being fined for experiencing levels of HAI in excess of targets set by the Department of Health. In addition, internationally the increasing antibiotic resistance of Gram-negative bacteria continues to cause concern with, for example, recent reports in the scientific literature of hospital-associated transmission to patients in an American hospital of the New Delhi metallo-beta-lactamase 1 strain.

Our new ICE range, designed to reinforce standard infection control measures and facilitate the rapid "bioquelling" of the near-patient environment in open, multi-bed wards, should help reduce significantly HAI rates and hence enable us to develop our healthcare business significantly in the UK and in the emerging markets where such multi-bed wards are prevalent.

Wound-care

We have made good progress in determining the next stages in the commercialisation of our BioxyQuell ("BxQ") wound-care product.

In the UK we have agreed to collaborate with a local GP practice in setting up a private specialist wound-care clinic which will adopt the BxQ technology and will initially focus on the treatment of venous leg ulcers. This clinic should allow us to develop a better "real world" understanding of how best to deploy the BxQ technology clinically and commercially, as well as enable us to generate further scientific data to strengthen the evidence-base supporting the use of the BxQ technology in the treatment of chronic wounds. Once we have proved the success of this specialist wound-care clinic model we intend to roll out the use of BxQ in the UK and internationally.  

Defence

CBRN filtration and environmental control systems

As we mentioned in the May Interim Management Statement, our relatively low defence revenues in the first half of £0.4 million (2011: £2.7 million) reflected the delivery schedules of our current defence order-book. Based on these delivery schedules, our defence-related revenues will be greater in the second half, although substantial deliveries against our existing defence order book do not occur until 2014.

Generally we continue to see tight defence budgets internationally although there are some interesting overseas opportunities for our niche area of expertise comprising Chemical, Biological, Radiological and Nuclear (CBRN) filtration and Environmental Control Systems (ECS). In the current constrained funding climate we do not anticipate the award of more HPV technology-related United States Department of Defense research contracts in the short term.

TRaC DIVISION

Testing, Regulatory and Compliance

TRaC's business continues to expand on a number of fronts and is performing well. We believe that we are still taking market share whilst at the same time are expanding the number of services we are offering our clients. Many of the new services relate to consultancy or advisory services within TRaC's ESQ consultancy business. Strategically we are keen to build TRaC's consultancy business as such services help us capture and retain clients; moreover, typically the consultancy business does not require substantial additional capital investment. We also believe that there are a number of interesting opportunities for further expansion of related consultancy-type services which are complementary to TRaC's core specialist testing services. In parallel, TRaC continues to invest in its sales and marketing activities and is focussing on the closer integration of its sales team with its expanding digital marketing capabilities.

We continue to take small but strategically important steps in building TRaC's business internationally. TRaC China is beginning to generate modest fee income and we intend to build our Chinese practice slowly ensuring that we have a good understanding of the dynamics and requirements of this market; however, there does appear to be demand in China for European regulatory approvals for products manufactured in China but which are ultimately sold in Europe. We believe that there are opportunities to extend this international certification work to other countries, particularly in Asia, via the international IECEE CB scheme run by the International Electrotechnical Commission.

Although most of TRaC's clients are UK-based, many of them are substantial blue-chip engineering-based exporters, primarily involved in military, aerospace or telecoms. TRaC's aerospace practise continues to be strong.

At the beginning of the year the final payments were made in respect of the completion of the new TRaC South site at Three Legged Cross in Dorset. We believe that the TRaC division requires a final one-off property-related investment of some £1 million before the level of ongoing capital expenditure will more closely match its depreciation and amortisation charge, which was £0.7 million (2011: £0.6 million) in the first half.

OUTLOOK AND PROSPECTS

We are coming to the end of a substantial strategic investment programme in the Bio-decon and TRaC divisions, which will be completed by the end of this year and which will result in a more robust business model positioning the Group for its next stage of growth. Some revenues associated with this investment programme will be seen in the second half of this year, although we anticipate that substantial increases in revenues will not be generated until next year (2013).

Our Life Sciences, Healthcare and TRaC businesses provide products and services to well-funded, growing international markets and are well positioned for growth. Currently our defence business remains lumpy and accordingly can affect disproportionately the Group's overall profitability; however, in the second half the defence revenues derived from our existing order book should be significantly higher than in the first half of the year. In the future we anticipate that the revenues and margins generated from our new products will result in our defence revenues declining as a proportion of overall Group revenues (and the associated impact on Group profitability should therefore also be lessened).

Most of the hard-work needed to change the Group's business model and increase the proportion of recurring revenues has been completed, and we are now looking to reap the benefit of this hard work with a period of strong growth creating sustainable and increasing value for our shareholders.

Nigel Keen

Chairman

Bioquell PLC

29 August, 2012

Consolidated income statement

unaudited results for the six months ended 30 June 2012

All amounts are derived from continuing operations.

Notes

1. The financial information for the six months ended 30 June 2012 and the comparative figures for the six months ended 30 June 2011 have not been reviewed or audited by the Group's auditors and have been prepared on the basis of the accounting policies adopted by the Group under IFRS. The same accounting policies and methods of computation are followed in the interim financial report as published by the Company on 20 March 2012 in its annual financial statements, which are available on the Company's website on www.bioquellplc.com.

2. The comparative figures for the twelve months to 31 December 2011 have been prepared under IFRS. They do not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The unqualified audited accounts for the twelve months ended 31 December 2011 have been filed with the Registrar of Companies and they did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

3. The tax charge shown on the income statement represents a combined Corporation tax charge and deferred tax liability. The charge is based on the Group's anticipated effective tax rate for the full year.

4. Earnings per share for the half year have been calculated on the profit on ordinary activities after taxation divided by the weighted average number of ordinary shares in issue during the period. The Group's diluted earnings per share are calculated by including dilutive share options in the denominator.

5. There have been no related party transactions that have occurred during the first six months of the financial year that have materially affected the financial position or performance of the Group during that period and there have been no changes in the related party transactions described in the last annual report that could do so.

6. Copies of this statement will be available to members of the public at the Company's registered office: 52 Royce Close, West Portway, Andover, Hampshire SP10 3TS and on the Group's website at www.bioquellplc.com.

Principal risks and uncertainties

The Board believes that the principal risks and uncertainties facing the Group have not changed materially from those described in the 2011 Annual Report, including the summary of risks and uncertainties set out on pages 13 to 15. The Group provides complex equipment and specialist services to a large number of clients in the UK and internationally. Accordingly the Group is subject to a broad range of strategic, operational and financial risks and uncertainties, including but not limited to: competition, technological, regulatory, reliance on suppliers, loss of key personnel, currency and credit risks.

Going concern

The Group has sufficient financial resources to cover budgeted future cash flows, together with contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook. The Directors confirm that they have a reasonable expectation that the Group has adequate finance resources to continue to trade for the foreseeable future. Thus, they continue to adopt the going concern basis in preparing the financial statements.

Responsibility statement

We confirm that to the best of our knowledge: (i) the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting; (ii) the financial statements give a true and fair view of the assets, liabilities, financial position and profit of the undertakings, included in the consolidation as a whole as required by DTR 4.2.4R; (iii) the Interim Management Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and a description of principal risks and uncertainties for the remaining six months of the year); and (iv) the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

NicK Adams Mark Bodeker

Group Chief Executive Chief Operating Officer and Finance Director

29 August 2012

Consolidated statement of comprehensive income

unaudited results for the six months ended 30 June 2012

Consolidated statement of changes in equity

unaudited results for the six months ended 30 June 2012

Consolidated balance sheet

unaudited results at 30 June 2012

*restated to reclassify deferred tax to non-current in accordance with IAS1

Consolidated cash flow statement

unaudited results for the six months ended 30 June 2012

Notes to the cash flow statement

unaudited results for the six months ended 30 June 2012

Business segments

For management purposes the Group is currently organised into two operating divisions: Bio-decon and TRaC ("Testing, Regulatory and Compliance"). These divisions are consistent with the internal reporting as reviewed by the Chief Executive. These reportable divisions remain unchanged from the 31 December 2011 consolidated accounts.

Segment information about these businesses is presented below:

Dividends

The final dividend for the year ended 31 December 2011 was approved by shareholders at the Annual General Meeting held on 14 May 2012 and is therefore included in current liabilities in the balance sheet.

Analysis of net cash