Deltex Medical Regulatory News (DEMG)

Deltex Medical Group plc

("Deltex Medical" or "the Company")

Interim results for the six months ended 30 June 2013

10 September 2013 - Deltex Medical Group plc, the global leader in oesophageal Doppler monitoring ("ODM"), today announces its results for the six-month period ended 30 June 2013.

Key performance measures

· Surgical probe revenues up 12% to £2.3m (H1 2012: £2.0m)

o UK up 14% with 30% growth in Q2

o USA up 17%

o International up 3%

· Overall probe revenues up 9% to £2.7m (2012: £2.4m)

· Gross profit on probes up 8% to £2.0m (2012: £1.9m); gross margin broadly flat at around 77%

· Cash costs reduced 2% to £2.7m (2012: £2.8m)

· Net monitor income less costs flat at £0.1m

· Cash operating loss before Premier investment costs and non-cash charges reduced to £0.6m (2012: £0.8m)

· Cash of £1.5m

Operating Highlights

· Material market developments expected to underpin prolonged future growth:

o US physician payment and ODM specific coding established: first new anaesthetist billing item for over a decade

o new national clinical guidelines in France that favour strongly ODM;

o NHS launch in April to increase substantially the adoption of ODM in England, many hospitals still to act

· Installed UK surgical monitor base up 66 (11%) to 681; total UK installed base passed 1,000

· Largest probe growth in dedicated trainer accounts in USA and UK

o Six dedicated trainer accounts by June: four more imminent, pipeline in place

· Premier collaboration on track: burden of illness study completed; site selection underway

Statutory results

· Revenue down £0.3m to £2.9m: £0.4m timing difference on research monitor barter sales

· Combined probe and monitor gross margin 72% (2012: 75%)

· Operating loss of £1.4m (2012: operating loss of £1.2m) after Premier collaboration costs of £0.3m (2012: nil)

Nigel Keen, Chairman of Deltex Medical, said:

"Deltex Medical has entered the second half of the year with confidence. We have growing traction and strong market positions in a number of potentially very large markets for our products just as acceptance of the need for optimal intra-operative fluid management is broadening. We generate strong and increasing cash returns from our UK business and are also seeing growing cash generation from our larger International distribution businesses and our dedicated trainer accounts in the USA. We are building a strong pipeline of accounts both in the UK and USA, pursuing widescale adoption of ODM as a standard of care within our dedicated trainer programmes."

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Notes for Editors

Deltex Medical manufactures and markets CardioQ-ODMÔ Oesophageal Doppler Monitoring ('ODM') systems. ODM is the only therapy to measure blood flow in the central circulation in real time. Minimally invasive, easy to set up and quick to focus, the technology generates a low-frequency ultrasound signal, which is highly sensitive to changes in flow and measures them immediately. Randomised, controlled trials using Doppler have demonstrated that early fluid management intervention will reduce post-operative complications, reduce intensive care admissions, and reduce the length of hospital stay.

The CardioQ-ODM has two distinct established clinical applications: firstly, to guide fluid management during surgery and secondly, to monitor cardiac output in critical care settings.

Surgical market

In March 2011 the National Institute for Health & Clinical Excellence ('NICE') recommended that CardioQ-ODM be considered for use in patients undergoing major and high risk surgery and in high risk patients undergoing intermediate risk surgery. NICE estimated the applicable number of such patients in the NHS in England alone to be over 800,000 each year. CardioQ-ODM has been shown to be effective in both elective and emergency surgery and with both general and regional anaesthetics. This recommendation was specific to CardioQ-ODM and was based on the robust evidence base that supports its use.

Subsequent to the NICE guidance, the NHS in England announced its selection of ODM as a high impact innovation to be rolled out across the system fully, at pace and scale with significant financial penalties starting in the NHS 2013/14 financial year ending 31 March 2014.

The NICE evaluation and recommendation confirms that the potential global market for CardioQ-ODM in surgery includes tens of millions of patients, even if confined to developed health economies: the most conservative estimate of the potential value of the market opportunity Deltex Medical has created is in excess of £1 billion per annum. The Company's core focus is on building market leading positions in this surgical market, both geographically and by type of surgery.

Critical care market

In critical care settings, well-equipped hospitals will often have more than one cardiac output monitoring technology available. In this environment, ODM's strengths are that it is quick to set up, easy to use, safe, low cost and the ideal technology for a patient in crisis requiring rapid or frequent intervention. The potential market for cardiac output monitoring in critical care is a fraction of the size of that for intra-operative fluid management.

Through the 2012 launch of the CardioQ-ODM+, Deltex Medical has added the Pulse Pressure Waveform Analysis ('PPWA') approach to monitoring cardiac output to ODM functionality. Doing this has improved Deltex Medical's offer for monitoring applications as well as providing doctors and nurses with a choice of clinical strategies appropriate to individual patients in different clinical settings.

Company goal

Our goal is to make oesophageal Doppler monitoring (ODM) a standard of care for patients in both these markets. We believe that, in most modern health systems, it is essential to have a robust evidence base of both clinical benefit and cost effectiveness in order to achieve system-wide adoption of a new medical technology. Deltex Medical is one of the very first medical technology companies to have completed the investment necessary to build such an evidence base: as a result, use of ODM during surgery has the proven potential to deliver both clinical and economic benefits that are material at each of patient, hospital and system level.

The Company is currently in the implementation phase of achieving this goal in a number of territories worldwide and there are already over 2,800 CardioQ-ODM systems in use in hospitals worldwide. Distribution arrangements are in place in over 30 countries.

Chairman's statement

Overview

Deltex Medical made further progress in its major markets in the first half of 2013. UK surgical probe sales were up 14% across the half and 30% in the second quarter, USA probe sales were up 17% and probe sales to our French distributor up 21%. We have increased our installed base, reduced our cash costs and started a major collaboration in the USA with Premier Inc to accelerate the creation of a mass market for our products. We have made considerable progress in both the UK and USA towards establishing a critical mass of hospitals implementing our products deeply and broadly in order to deliver sustainable and accelerated growth. We have also started to reposition our distribution arrangements in France, Canada and Scandinavia as these markets become more developed.

Deltex Medical creates value each time that doctors start to use our products to treat more of their patients. We maximise that value through high gross margins and after sales support that is both efficient (high net margin) and effective (recurring sales). Our sales focus is on generating revenue from our single patient disposable probes. To enable probe consumption, we also work to build an installed base of monitors. While selling monitors to hospitals used to be a very significant source of revenue, we now focus on increasing the installed base quickly and at the minimum net cost to the business in order to facilitate growth in probe sales. We expect to own an increasing proportion of the monitor fleet going forward and that this will create an asset worth significantly more than book value.

Accordingly, we are including an additional statement of proforma results with both interim and full-year results. This presents our progress against key performance indicators: probe sales and margins, cash costs, net income from or cost of increasing the installed base, profit before and after non-cash items and profit before investment in the Premier project. In addition, we have added further analysis of our results on the face of the Statement of Comprehensive Income.

Pro-forma results

For the six month period ended 30 June 2013

Trading results

Group surgical probe revenues were up £243,000 (12%) at £2,264,000. Total probe sales were up £226,000 (9%) to £2,652,000 after a small (£17,000) decline in critical care probes.

Gross profit on probes was up £144,000 (8%) and the gross margin was flat at 77% (2012: 78%).

Net monitor income was £68,000 (2012: £123,000). Amortisation charges in respect of the Company owned monitor fleet increased by £47,000 to £102,000 (2012: £55,000) reflecting an increase in the installed base. Gross profit on monitors decreased from 76% to 64% reflecting lower average sales prices.

Cash costs were 2% lower at £2,700,000 reflecting careful cost control: we have made a number of targeted cost reductions in the first half and the benefit of these will come through in the second half.

The loss before non-cash items and our investment in the Premier collaboration was £166,000 (22%) lower at £588,000 and we are on track over the coming months to become cash positive at the operating level and move this measure into profit.

Non-cash costs net of non-cash income were £502,000, up £42,000 on 2012 (£848,000 costs less £388,000 revenues). In the first half of 2012 we incurred a one-off charge of £324,000 when we suspended a small number of research projects, but this was offset by £388,000 of clinical research income in the first half of 2012 (monitor sales for research under barter arrangements): as previously announced, any equivalent monitor barter sales in 2013 will be in the second half and are subject to FDA approval for the CardioQ-ODM+ monitor.

Premier costs of £293,000 included circa £100,000 relating to the pilot phase which was completed successfully in June with the presentation of the outcome improvements and cost savings from implementing ODM during surgery within an enhanced recovery programme at Duke University Hospital. The balance represents the initial work already completed on the collaboration where progress is satisfactory: a burden of illness study on the Premier database was completed on schedule and has been accepted for presentation at a major clinical meeting in December; recommended treatment protocols have been completed and site selection is underway. After Premier costs the total operating loss was £1,383,000, an increase of £169,000 over the first half of 2012.

Markets

UK

Surgical probe sales were up 14% to £1,350,000 (2012: £1,184,000). Probe sales in the first quarter were flat against a strong comparator in 2012 which saw growth of over 60% after a small number of bulk orders. The second quarter saw the start of the NHS implementation programme following the 2011 selection of ODM as a high impact innovation. Growth in the second quarter was 30% and we have seen continued growth in the traditionally quiet months of July and August: year-to-date UK surgical probe sales were 13% ahead of 2012 by the end of August and September has started strongly.

Levels of activity arising from the need for hospitals to comply with the NHS implementation drive launched in April, vary significantly between NHS Trusts and many have yet to complete their plans or commence implementation of them. We are focusing our efforts on those accounts most advanced in their plans to adopt widely ODM, some of whom are already comfortably ahead of the minimum target levels. We have added two major UK NHS Trusts into our dedicated trainer programme during the period, in addition to two Trusts who have been on an informal version of such a programme for some time. Both new accounts have subsequently more than doubled their probe utilisation and we have a number of proposals under discussion to extend this programme to other Trusts in H2: since the period end we have agreed to proceed with two of these Trusts.

Over the period we increased the surgical monitor installed base by 66 (11%) to 681, further consolidating our market leading position. With the ICU installed base also increasing by 10 monitors to 321, we entered the second half with a total UK installed base of over 1,000 monitors.

The 76 increase in installed base included 27 monitors purchased by hospitals with the remaining 49 placed by the Company. To enable the NHS to meet its innovation agenda most effectively, we have made proposals to the Department of Health and NHS with respect to a large bulk order of monitors: we anticipate a decision in the second half of 2013 and that the outcome of these discussions will determine our UK pricing strategy going forward.

USA

We entered the year with two dedicated trainer accounts in the USA and these contributed most of the 17% overall probe revenue growth. During the period we committed significant resources to evaluations of ODM in two strategically important hospital systems, both of which went well and may lead to opportunities for expansion in the second half. In addition, we have reached an agreement for implementations in two separate hospitals since the end of the period, both of which are expected to develop into dedicated trainer accounts in the coming months. Furthermore, we have significantly expanded both our pipeline and strengthened our sales team.

International

International probe sales were up 3%. Distributors in more developed markets have consistently reported increased interest in ODM and higher rates of probe usage in hospitals. Our largest distributed business is in France where our sales increased by 21%.

Market access

Our work to create mass markets for ODM has delivered material developments in the period which we expect to underpin prolonged future growth: reimbursement in the USA; new national clinical guidelines in France that favour strongly ODM and the NHS launch in April of a plan to increase substantially the adoption of ODM in England. Each of these represent opportunities for very substantial returns on the investments we have already made in building a robust evidence base of the clinical and economic benefits of ODM. The significant competitive advantage from our evidence base continues to grow:

· Positive pilot results from the largest randomised trial of intra-operative fluid management to date, a multi-centre Government sponsored trial in Spain

· Significantly improved outcomes and, therefore reduced costs, from a recently published randomised trial in the USA: the first trial to prove incremental benefit from ODM even within an established enhanced recovery protocol

· Results presented from a randomised trial at a major London teaching hospital show additional benefit if intra-operative ODM fluid management is continued in critical care post-operatively: the first such test of ODM and the first trial to show such additional benefit

In the USA we have been granted a national ODM specific procedure code meaning that doctors are paid over $100 per patient treated with ODM: this is the first such new source of income for American anaesthetists for over a decade and is generating considerable interest in hospitals and amongst doctors looking towards introducing intra-operative fluid management.

New products

Late in 2012, we launched the CardioQ-ODM+ which is the first haemodynamic system to combine ODM and Pulse Pressure Waveform Analysis ('PPWA') technologies. The CardioQ-ODM+ has been very well received both in critical care medicine and in surgery.

Clinical research income

In past years, the Company has initiated clinical research projects with leading hospitals whereby the hospitals undertake defined research activities in return for Deltex Medical equipment rather than cash. Under International Accounting Standards the value of equipment transferred has been recognised as a sale and the costs of the research, equivalent to the revenue on the equipment, have been carried forward and written off as the research has been completed. In the light of the Company moving towards a policy of owning a higher proportion of the monitor fleet, we are investigating the possibility of alternative arrangements to achieve the research goals. Subject to FDA approval to release the CardioQ-ODM+ monitor in the USA, we expect to install monitors with a sales value of circa £0.5m in the second half of the year for such research purposes. Clinical research income was £nil in the period (2012: £388,000 in the first half; £448,000 for the full year).

Prospects

Deltex Medical has entered the second half of the year with confidence. We have growing traction and strong market positions in a number of potentially very large markets for our products just as acceptance of the need for optimal intra-operative fluid management is broadening. We generate strong and increasing cash returns from our UK business and are also seeing growing cash generation from our larger International distribution businesses and our dedicated trainer accounts in the USA. We are building a strong pipeline of accounts in both the UK and USA pursuing widescale adoption of ODM as a standard of care within our dedicated trainer programmes.

Consolidated Statement of Comprehensive Income

for the six month period ended 30 June

Consolidated Balance Sheet

at 30 June 2013

Consolidated Statement of Changes in Equity

for the six month period ended 30 June 2013

Consolidated Statement of Cash Flows

for the year six month period ended 30 June 2013

1 Nature of the financial information

Deltex Medical Group plc (the Company) is a company incorporated in England and Wales. The condensed Group half-year financial statements consolidate those of the Company and its subsidiaries (together referred to as the Group). They have been prepared in accordance with International Financial Reporting Standard (IFRS) IAS 34 Interim Financial Reporting. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2011. New standards, amendments to standards or interpretations which were effective in the financial year beginning 1 January 2013 have not had a material effect on the Group's financial statements.

The half-year results are unaudited. The financial information in this interim report does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The summary of results for the year ended 31 December 2012 is an extract from the published consolidated financial statements of the Group for that period which have been reported on by the Group's auditors and delivered to the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statement for 2011 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The half year financial information has been prepared applying the accounting policies and presentation that were applied in the preparation of the Group's published consolidated financial statements for the year ended 31 December 2012.

2 Revenue

*UK probe sales are split:

3 Results by operating segment

In 2012, the Group reported the following as operating segments, UK, US, International and Spain. The principal activity of the Company has increasingly become the sale of probes in all countries, with the geographical split becoming a secondary segment. Therefore, the primary segmental reporting for the Group has been restated to probes and other.

Segment results include items directly attributable to a segment as well as those, which can be allocated on a reasonable basis.

The segment results for the six months ended 30 June 2013 are as follows:

The segment results for the six months ended 30 June 2012 are as follows:

The segment results for the six months ended 31 December 2012 are as follows:

Unallocated costs include those costs that cannot be split between segments, including expenditure on research and development and clinical trials.

4 Dividends

The Directors do not recommend payment of a dividend (2012: nil).

5 Notes to the Consolidated Statement of Cash Flows

6 Loss per share

Basic loss per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares issued during the year. The Group had no dilutive potential ordinary shares in either year, which would serve to increase the loss per ordinary share. Therefore, there is no difference between the loss per ordinary share and the diluted loss per ordinary share.

The loss per share calculation for six months to 30 June 2013 is based on the loss after tax of £1,399,000 and weighted average number of shares in issue of 162,975,872. The loss per share calculation for the six months to 30 June 2012 is based on the loss after tax for the period of £1,234,000 and weighted number of shares in issue of 145,974,406.

7 Distribution of the announcement

Copies of this announcement are sent to shareholders on request and will be available for collection free of charge from the Company's registered office at Terminus Road, Chichester, West Sussex PO19 8TX. This announcement is available from the Company's website free of charge at www.deltexmedical.com.