Deltex Medical Regulatory News (DEMG)

Deltex Medical Group plc

("Deltex Medical" or "the Company")

Interim results for the six months ended 30 June 2014

Strong progress in export markets

11 September 2014 - Deltex Medical Group plc (AIM: DEMG), the global leader in oesophageal Doppler monitoring ("ODM") today announces its results for the six-month period ended 30 June 2014.

Key performance measures (vs. H1 2013)

· US surgical probe sales up 20% before currency movements

o Growth driven by dedicated trainer accounts ("DTA")

o New accounts opened with enquiries increasing

o Two new sales territories opening in September

· International surgical probe sales up 16% before currency movements

· Export surgical probe gains offset by UK 13% fall: overall surgical probe sales down 3%

· Probe gross margin steady at 77%

· Loss before non-cash costs and US market development project £0.6m (2013: £0.6m)

· Cash of £4.2m (30 June 2013, £1.5m, 30 December 2013: £1.5m), following successful Placing and Open Offer in May 2014 to fund US expansion

Operating Highlights

· Rapid growth in enquiries and sales activity within US market

o Circa 20 new enquiries from potential large accounts

o Two new DTAs established with more in pipeline

o First successful cross-sell of DTA within a US hospital system

o First Premier collaboration paper completed and pending submission to a journal

· Evidence base growing stronger and broader

· Accelerating planned distribution of third party products in UK in response to delay in revised NHS implementation approach

Statutory results

· Revenue up £0.1m to £3.0m (2013: £2.9m)

· Combined probe and monitor gross margin 74% (2013: 72%)

· Operating loss of £1.5m (2013: operating loss of £1.4m) after non-cash costs of £0.7m (2013: £0.5m)

Nigel Keen, Deltex Medical's Chairman, commented:

"Deltex Medical has entered the second half of the year with an increased focus on export markets, particularly the USA, where we are experiencing a growth in sales enquiries ahead of our initial forecasts. We are building a strong pipeline of US accounts that we expect to contribute to more rapid growth in sales and we are on track with our plans to build a strong platform for medium term national roll-out in the USA.

Traction for our products is growing in other international markets as acceptance of the need for optimal intra-operative fluid management is broadening beyond the UK where, in response to more challenging UK market conditions, we are taking steps to maximise cash flows we generate from our UK sales operation."

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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.

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 surgical and critical care 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 3,000 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 the first half of 2014 particularly in our export markets. Our increased focus on the key US market saw a continuing upward trend in our US surgical probes sales growth rate to 23% (H1 2013: 15%; H1 2012: -1%) before the impact of exchange rate movements. We have seen acceleration in interest in our products in the USA since May when we announced the intention to raise additional capital primarily to finance expansion there. Since then we have completed successfully a small number of evaluations in leading hospitals and are opening new accounts as a consequence; we have qualified a number of new high quality enquiries and our pipeline continues to expand, ahead of our initial forecasts. We have ambitious growth plans in the USA predicated around establishing sufficient DTAs by the first half of 2016 to provide a platform for subsequent national roll-out. DTAs are those using, or on track to be using, at least 100 probes a month and we are well placed to achieve this goal. We are implementing our plans to expand our US coverage based around our pipeline development and we are recruiting staff to cover these new territories.

Surgical probe sales to our other export markets were up 16% on constant exchange rates. We are making progress towards building substantial market leading positions in a number of countries including through distributors in France, Sweden and Peru and through Deltex Medical's subsidiaries in Canada and Spain. After exchange differences, total surgical probe export sales including the USA were up 11% on a 13% increase in volume.

The UK, our home market, is currently the largest market for our products. We have a full national sales and clinical support team, a presence in the vast majority of hospitals and a clear market leading position in the surgical market. We generate substantial cash returns from our UK sales and clinical support operation (over £1.5m in 2013) and our strategy is to maximise these cash flows to support our increasing focus on export markets. We are accelerating plans to leverage our national sales presence to distribute complementary third party products in the UK in response to challenging market conditions for medical technologies in general and what we expect to be temporary headwinds affecting specifically the intra-operative fluid management ('IOFM') market. We expect to announce agreements involving a small number of products complementary to our ODM system sales between now and the end of the year. Incremental sales and margin from third party products would underpin the Company's cash generation plans.

First half surgical probe revenues in the UK were down 13% at £1,177,000 primarily due to widespread de-stocking in the first four months of the year as a result of the worsening NHS financial performance. In addition, a period of NHS inaction in its drive towards wider adoption of ODM and confusion as to the comparative effectiveness of individual intra-operative fluid management ('IOFM') technologies has held back the adoption of ODM. The Board believes that momentum in the UK market could be restored rapidly if the NHS were to publicise widely its revised financial mechanisms incentivising the adoption of IOFM, followed this by a programme to enforce these new mechanisms properly. However, if NHS implementation of IOFM continues to be delayed or weak, the Company still expects a recovery in growth built on clinical consensus: the impetus for this is coming from emerging clinical evidence that reinforces the clinical effectiveness of ODM as opposed to alternative IOFM technologies, even in otherwise optimised modern approaches to surgery. The results of important trials supporting this position are expected to be published in the next three to nine months.

Pro-forma results

For the six month period ended 30 June 2014

Trading results

Total probe sales were 4% lower than in H1 2013 at £2,538,000 with US and International increases after adverse exchange differences of £46,000 (11%: 20% before exchange) and £55,000 (11%: 16% before exchange) respectively offset by a £215,000 (12%) decrease in UK probe revenues.

Gross profit on probes was down £69,000 (3%) on flat gross margin of 77%.

Net monitor income increased by 160% to £177,000 (2013: £68,000). Monitor revenues were 85% ahead at £324,000 (2013: £175,000). Gross profit on monitors increased to 78% (2013: 69%) because of higher average selling prices.

Cash costs were 4% higher at £2,803,000 (2013: £2,700,000) reflecting targeted increases in US sales costs together with the additional administrative charges associated with our newly established Canadian subsidiary.

The loss before non-cash items and costs of the US market development project was £629,000 (2013: £588,000). During the period we raised over £4m of new equity capital aimed primarily at US expansion and operational improvements. We expect the additional investments to substantially increase long term profitability while pushing back profitability for a short period.

Non cash costs were £663,000 (2013: £502,000) with the increase driven primarily by charges for share based payments. US market development costs relate primarily to our research collaboration with Premier Inc and were £64,000 lower than in 2013 reflecting the revised approach we agreed in late 2013 in response to the potential US market developing faster than originally expected.

The operating loss increased 10% to £1,521,000 (2013: £1,383,000). Losses are traditionally significantly higher in the first half than the second due to the timing of many larger International orders and this trend has been exacerbated in 2014 by the slow-down in the UK market with the effect of actions taken in response expected to come through in the second half.

Markets

USA

We entered the year with two well established DTAs and two newer ones established in the second half of 2013. Since then we have added two further DTAs together with a small number of new accounts with the capacity to develop into DTAs and a significantly increased number of accounts evaluating or considering evaluating ODM. All the probe growth in the first half can be attributed to these dedicated trainer and new accounts. Since the end of the period we have substantially completed the recruitment of additional staff to complete our teams in our three existing sales territories and appointed staff in two new territories.

This year has seen a substantial increase in interest amongst US doctors and hospitals in IOFM, particularly amongst academic medical centres which tend to be first movers in changes in clinical practice. Our work with Premier has highlighted wide variations in fluid management and outcome after surgery across the USA as a precursor to quality improvement focus on the area: we expect the first paper arising from this collaboration to be submitted for publication by the end of September. Other drivers include the need for US hospitals to deliver better outcomes at lower costs in an increasingly competitive environment and recognition by leading anaesthetists that their profession needs to demonstrate its potential to deliver high added value as US healthcare reform gains traction.

UK

In difficult NHS market conditions, as discussed in our trading update at the time of the Placing and Open Offer, surgical probe sales were 13% lower in the first half of 2014 compared to 2013 at £1,177,000 with a further 11% decline in critical care probes to £346,000.

While we have delivered growth in a number of focus accounts and our strongest performance has continued in our DTAs, we have seen a significant slowing in established growth trends in all our UK sales territories. NHS de-stocking in the first four months of this year was driven by worsening finances in most hospitals which are focusing their efforts on short term reductions in variable non-pay costs, although this is contrary to the government and NHS leadership's desire to focus on improving quality of care to drive efficiency. A recovery in sales in May and June lost momentum in July and August and the Company now believes that it will be difficult to do better than maintain flat surgical probe sales for the year unless the NHS implements its revised approach aimed at the accelerated adoption of IOFM. As a consequence, we are accelerating our plans to distribute complementary third party products in the UK, both to maximise returns from our sales and clinical support operation and to broaden the appeal of our clinical offer. We have one of the largest clinical sales teams in the UK and believe this is a valuable asset which we can leverage to protect and grow our UK revenues. To the extent that the NHS implementation remains ineffective, we expect clinicians to drive sustainable future growth going forward. Forthcoming clinical evidence is expected to provide a significant boost to clinicians looking to spread ODM usage as best practice amongst their colleagues.

We have a substantial installed base in the UK of over 1,100 monitors which increased marginally in the period. 24% of monitors at 30 June 2014 are the CardioQ-ODM+ launched in December 2012 and 70% of the installed base is surgical.

International

International probe sales were up 11% (16% on a constant currency basis). Distributors in more developed markets including our largest export market in France are reporting increasing interest in ODM and higher rates of probe usage in hospitals.

Our new Canadian subsidiary delivered the planned modest sales contribution with prospects for growth tied to second half developments. These include a tender in our best established system and results for a major trial at the leading Canadian enhanced recovery teaching hospital.

Early indications are highly encouraging for the results from a major multi-centre government funded randomised controlled trial in Spain which are expected to be submitted for publication by the end of the year. We expect this trial to provide a strong platform for future growth in Spain.

Prospects

Deltex Medical has entered the second half of the year with an increased focus on export markets, particularly the US, where we are experiencing a growth in sales enquiries ahead of our initial forecasts. We are building a strong pipeline of US accounts that we expect to contribute to a more rapid growth in sales and we are on track with our plans to build a strong platform for medium term national roll-out in the USA.

Traction for our products is growing in other international markets as acceptance of the need for optimal intra-operative fluid management is broadening beyond the UK where, in response to more challenging UK market conditions, we are taking steps to maximise the cash flows we generate from our UK sales operation.

Consolidated Statement of Comprehensive Income

for the six month period ended 30 June

Consolidated Balance Sheet

at 30 June 2014

Consolidated Statement of Changes in Equity 

for the six month period ended 30 June 2014

Consolidated Statement of Cash Flows

for the year six month period ended 30 June 2014

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 2013. New standards, amendments to standards or interpretations which were effective in the financial year beginning 1 January 2014 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 2013 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 2013.

2 Revenue

*UK probe sales are split:

3 Results by operating segment

The principal activity of the Company is the sale of probes in all countries, with the geographical split being a secondary segment. Therefore, the primary segmental reporting for the Group is 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 2014 are as follows:

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

The segment results for the twelve months ended 31 December 2013 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 (2013: 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 2014 is based on the loss after tax attributable to owners of the parent of £1,532,000 and weighted average number of shares in issue of 175,659,290. The loss per share calculation for the six months to 30 June 2013 is based on the loss after tax for the period of £1,399,000 and weighted number of shares in issue of 162,975,872.

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.