IDH.L Regulatory News (IDH)

17 June 2020

Immunodiagnostic Systems Holdings PLC

Final Results for year ended 31 March 2020

highlights 2020

The table above presents a number of alternative performance measures which the Directors believe reflect the underlying performance of the business.

* Like for like ('LFL') numbers have been adjusted to remove the impact of foreign exchange movements in the year by restating the prior years' performance using the exchange rates during FY2020.

** Before exceptional operating income of £nil (2019: exceptional operating income of £0.1m) - see reconciliation in Financial and Operations Review.

*** Before exceptional finance income of £1.2m (2019: before exceptional operating income of £0.1m).

**** See reconciliation in Financial and Operations Review.

***** Adjusted to exclude the impact of IFRS16 of £0.6m in 2020 and before exceptional operating income of £nil (2019: £0.1m). See reconciliation in Financial and Operations Review

Operational summary

· Our target of maintaining LFL revenue growth was met. Group revenue increased by 2% LFL to £39.3m, our second consecutive year of revenue growth.

· Automated business revenue increased by 4% LFL, driven by higher sales of speciality assays. Revenue for autoimmune and infectious disease assays grew 74% LFL. Revenue from our automated distribution channels grew 30% LFL.

· The Manual business declined by 8% LFL due to lower sales in direct European markets.

· The Technology business generated £4.6m of revenue, a LFL increase of 30%.

· Total gross instrument sales/placements across our Automated and Technology business units reached 150 (2019: 127), the strongest performance since 2012.

- Placements in our direct markets were 43 (2019: 37) with returns of 25 (2019: 24). As a result, net placements in our direct markets increased to 18 (2019: 13).

- Instrument sales to distributors increased to 50 (2019: 47).

- Instrument sales to OEM customers in our Technology business unit increased to 57 (2019: 43).

· Gross margin improved to 44% (2019: 43%) due to cost efficiency efforts, which were partially offset by an adverse sales mix. Adjusted EBITDA increased to £6.1m (2019: £4.8m).

· At the end of FY2020, we have a total of 141 (2019: 135) CE-marked assays available for sale on IDS analysers,22 (2019: 22) of which are in-house developments.

Jaap Stuut, CEO of IDS, commented:

 "During FY2020 we delivered a second consecutive year of like for like revenue growth, with revenue increasing by 2% to £39.3m. We also increased the number of analysers sold or placed to 150, compared to 127 in FY2020. Adjusted EBITDA improved to £6.1m from £4.8m in the prior year. Our results in Q1 of FY2021 will be significantly impacted by reduced laboratory testing volumes, however once the pandemic subsides, we believe we are in a strong position to continue our revenue growth. Additionally, we have an opportunity to commercialise our range of automated and manual SARS-CoV-2 antibody testing kits, which we plan to launch during June 2020".

 Annual report

The annual report will be sent to shareholders shortly and will also be available at the registered office of Immunodiagnostic Systems Holdings PLC at: 10 Didcot Way, Boldon Business Park, Boldon, Tyne and Wear NE35 9PD. It will be made available on the Company's website at: www.idsplc.com.

Notes:

Immunodiagnostic Systems Holdings plc ("IDS", "the Group" or "the Company"), is a specialist in-vitro diagnostic solution provider to the clinical laboratory market and producer of manual and automated diagnostic testing kits and instruments for the clinical and research markets.

For further information:

Chairman's Statement

1. Introduction

For IDS, FY2020 was the second consecutive year of revenue growth with an increase of 2% (2019: 1%) on a like for like ('LFL') basis. Thus, the Group met its stated target of LFL revenue growth. Our Automated business returned to growth, with revenues improving 4% LFL (2019: 1% LFL decline). This was further supported by the continued strong performance of our Technology business unit, with revenues growing 30% LFL (2019: 32% LFL growth).

In FY2020, management focused on re-igniting growth. I would like to highlight the following aspects:

a) The opportunity in Autoimmune ('AI') diseases became a focal point of our sales efforts in areas where we can sell with a CE-mark, i.e. Europe and a large part of the distributor universe. In the previous year, the sales organisation had collected information on users of these tests, generating information to improve the lead identification and lead qualification in our CRM system. In the current year, we focused on delivering these sales opportunities and were able to place 42 instruments in laboratories with an AI focus, via our direct and distribution sales channels.

Our generic advantage is that the IDS analyser is one of very few random-access instruments used in this field. In addition, we learned that many users like to run AI tests in conjunction with tests for endocrinology markers. To our knowledge we are the only supplier with a menu covering both areas, giving us a unique market proposition.

b) A second thrust for accelerating growth has been the geographical expansion of the IDS business. We have successfully expanded our automated distribution footprint through a network of new distributors, and expanded business with our historical distribution partners. In particular, during FY2020, we have been successful growing this business in South America. Revenue through this channel has almost doubled since 2017.

Beyond these initiatives for the acceleration of growth, the Executive Management Team continued to work on the internal projects as set out in the Annual Report and Accounts 2019, in particular a culture change with more value put on personal responsibility, accountability and upgrading our talent pool.

Further detail on these activities is set out in the CEO's report.

2. Key performance indicators ('KPIs')

Jaap will give you an update on the performance of the business in the CEO's report. Below I have just summarised the key points:

Key Achievements:

a) Placements: We achieved 150 instrument sales or placements (2019: 127) in all channels, i.e. direct sales territories, sales to distributors and to OEM partners;

b) Menu: Our total menu increased to 141 assays (2019: 135), driven by additional partner assays; and

c) Regulatory approvals: We registered one more product in the US and submitted a second for approval. We also created a new team who have made good progress to ensure our assays are IVDR compliant by May 2022, when these new regulations are scheduled to be implemented.

We missed on the following goals:

a) Product development: While we released improved versions of two of our key automated assays, we did not release any new endocrinology assays. This was mainly due to slippage in the development timelines. We believe the new development process, implemented part way through the year, will improve the speed of our development. We have reviewed our capabilities in this area, and made some changes, and this will be a core focus in FY2021.

b) Corporate development: Despite investigating a number of acquisition opportunities, we were not able to close any deals. Undertaking an appropriate acquisition remains central to IDS's growth strategy. We will continue discussions with one of the targets we approached during FY2020, and will also seek new acquisition opportunities. We feel the double challenges the industry faces in terms of COVID-19 and IVDR implementation may impact valuations in FY2021 and provide opportunity for IDS in this area.

3. Financials

Paul will give you an in-depth review of the financials for FY2020 in the Financial and Operations Review. I would like to highlight the following points:

Key achievements

a) Revenue LFL growth: We were able to accelerate Group LFL revenue growth slightly from 1% in FY2019 to 2% in FY2020. This was mainly due to a strong growth in the second half of the year, where the business grew 7% LFL versus the second half of FY2019;

b) Gross margin: Gross margin improved by 1%, from 43% in FY2019 to 44% in FY2020; and

c) Opex: Operating costs declined by 2%, leading to an adjusted EBITDA improvement from 12% in FY2019 to 15% in FY2020.

What we did not achieve?

a) Productivity/benchmarking: While we improved some cost metrics in the last financial year there is still a significant gap to the best-in-class competitors.

b) Free cash flow: We were not able to grow our cash balance, due to an increase in working capital requirements, mainly driven by the phasing of revenue towards the end of the year, meaning the related debtors balances had not been collected by year end.

4. Board matters

4.1 Board composition

There were no changes in our Executive Board: Jaap continues as Chief Executive Officer, delivering on the strategy of putting the Group back on a path of growth.

Jaap could not have achieved this goal without the support of Paul Martin, our Group Finance Director. In FY2020 Paul was still significantly involved in operational projects. During H2 FY2020, we recruited a Group Operations Director so Paul should be able to re-focus on the core financial themes as well as Corporate Development.

There is no change in the Non-executive Director team, and I believe the Board continues to work efficiently.

4.2 Board process in FY2020

During FY2020 the Board had five meetings, four of which took place in person while the meeting scheduled for March 2020 was held by conference call.

4.3 Ownership of IDS shares by Board Members

A number of Board members continued to invest in the IDS business during the year, a summary of their holdings is set out below. I like the notion of having 'skin in the game', so I take this as a sign of confidence in the business by the people who are close to it:

5. Dividend and share buybacks

Our stated dividend policy is to pay out 25-30% of adjusted basic EPS as dividends. Adjusted basic EPS in FY2020 was 7.4p (2019: 2.4p). Thus, the Board proposes a dividend of 1.9p (2019: 0.7p) - implying a pay-out ratio of 26% (2019: 29%) Based on our closing share price on 31 March 2020 this implies a dividend yield of circa 0.9%. The total amount payable to our shareholders is circa £0.5m.

There were no share buy backs performed during the year.

6. Employees

I would like to thank all of our staff for their effort and commitment in the last year. We will continue to need you and your commitment to make IDS a company which will be a stronger and a more successful competitor going forward. Reaching a second year of LFL revenue growth is a significant success for a company which faced significant headwinds for a four-year period before this. I hope you have the same feeling of pride that I do when looking back to over the achievements of the last 12 months.

7. Outlook

FY2020 was the second consecutive year of LFL revenue growth. We also improved several operational KPIs which suggest positive momentum, e.g. placements which will become fully effective next financial year.

The COVID-19 pandemic will impact our ability to continue on this trajectory. Whilst we saw a significant decline in demand for in-vitro testing during April and May as healthcare providers focused on treating COVID-19 patients, recent trading is improving. The Impact of the pandemic will be temporary, and once the pandemic becomes under control we should be able to harvest the benefits of the actions taken in FY2020 in order to accelerate our growth.

We are working to manufacture and commercialise CLIA and ELISA tests to detect SARS-CoV-2 antibodies, combining our resources and capabilities with partners who complement our skill set with their virology know-how. A summary of the opportunities we are working on is set out in Jaap's CEO report, and we will update the market via RNS if there is any significant news in this area.

What has not changed, though, is my conviction that IDS continues to be a good business: the automated part of the IDS business is a razor/razorblade-type business with recurring revenues at a very predictable rate.

Dr Burkhard Wittek

Chairman

CEO's Report

1. Overview

During FY2020, total Group revenues increased by 2% on a LFL basis to £39.3m, as well as delivering the strongest instrument placement performance since 2014.

I was pleased to see that everyone in the IDS team put in significant effort to deliver a second consecutive year of LFL revenue growth. I would like to thank all the employees at IDS for their efforts and going the extra mile in achieving this result, despite the challenges caused by COVID-19 towards the end of the year.

Our Automated business recorded LFL revenue growth of 4%. This was established using our offering of a full random-access system with a combined menu of endocrinology, autoimmunity and infectious disease assays. Within our Automated business unit, autoimmunity and infectious disease sales have grown 74% on a LFL basis. Performance of our Automated business in our distribution markets was particularly strong, with these territories delivering 30% LFL growth.

We also achieved strong growth within our Technology business, which exhibited 30% LFL revenue growth.

Instrument sales/placement performance resulted in a total of 150 instruments being placed or sold across both the Automated and Technology business units, an increase of 18% year on year.

Disappointingly, our Manual business revenue declined by 8% LFL, due to lower sales of ELISA's in our direct markets, which was not offset by the growth in our distribution markets.

On the people side, a strong focus on the IDS culture and values was combined with improving our efforts to set clear targets for all team members. A continual review of the performance and talents of all customer-facing team members was an area of focus in the year, and where needed improvements were made. This approach will be adopted across all teams in FY2021.

Changes we made in our regulatory approval process have delivered progress in obtaining regulatory approvals both in the US and China. We have also made considerable progress in our preparation for the implementation of the new IVDR regulatory framework that will be imposed in May 2022.

Unfortunately, we did not see improvements within our internal assay research and development function, with no new assays released during the year. However, we did progress a number of assays along the research and development stage gate process, and released improved versions of two of our key assays.

Looking forward, FY2021 will be affected by the COVID-19 pandemic. We have put our employee's safety and wellbeing first whilst we take care to ensure continuous product supply and service for our customers. We will continue to intensify our efforts to generate new business and reduce our costs. Furthermore, we will continue to pursue our successful growth strategy via clear target setting and customer focus in all departments and adapt to the COVID-19 circumstances as required.

2. Automated business unit

2.1 Business segment revenue

In FY2020, Automated business revenues increased by 4% LFL. This business unit accounts for 59% (2019: 59%) of Group revenues.

25-OH Vitamin D assay revenues continued to decline driven by the general reduction in demand and lower reimbursement levels for 25-OH Vitamin D assays, along with the consolidation of this test onto workhorse analysers. Additionally, in the US there has been a significant drop in the reimbursement ratefor this test, with it falling by 27% over the last three years. Revenue reduced by 14% versus the prior year on a LFL basis, mainly driven by a decline in the US, which we expect to continue.

Speciality - IDS revenues (i.e. from assays developed by IDS) increased by 3%. Strong growth in our distribution channels, coupled with modest growth in our main European direct sales markets, was offset by revenue declines in the US and Brazil. Brazil faced the impact of the loss of one high volume customer at the start of the year, but subsequently enlarged their installed base during the remainder of the year by signing several new customers which will show an increased assay demand during FY2021.

Speciality - Partners revenue encompasses the sales of IDS branded assays developed and manufactured by IDS's partners, and mainly comprises revenue from our autoimmune product portfolio. Our combined endocrinology/autoimmune panel continues to be well received in the market, generating LFL revenue growth of 74% in this segment. We will focus on leveraging our increased installed base and intensify our efforts both from our sales team and our autoimmune clinical application specialists (CAS) to find new business.

Income from instrument sales has grown 9% year-on-year on a LFL basis. This is driven through an increase in analysers sold during the year into distribution channels, coupled with increased instrument spare parts orders arising from the larger installed base in distribution markets.

2.2 Key success factors

2.2.1 Completion of endocrinology reagent portfolio

The endocrinology assay menu of IDS remains specialised but lacks some critical assays to offer a complete testing suite for certain indication areas. Thus, we remain focused on the completion of our hypertension and fertility/steroids panels.

While assays progressed through the stage-gate based development process, we did not meet our expectations for new assay releases during the year. However, we successfully released two improved versions of key assays, and our new automated cortisol assay is due to be released imminently.

During the year we obtained FDA approval for an additional assay, bringing the total number of assays available for sale in the US to 11. Our US endocrinology menu, however, remains sub-critical in size. In the mid-term we will be looking to expand this panel through approval of additional IDS assays, as well as working with our partners to obtain FDA approval for their assays. One further assay was submitted for approval in FY2020, and we target this to be available for sale in the US during FY2021.

In China we have four assays registered. The Chinese regulators (NMPA) require medical devices to be re-registered on a periodic basis, and we substantially completed this re-registration process for our on-market assays and instruments during the year. We have appointed specialist registration agents in China, a role previously fulfilled by our local distributor. As a result, we have seen an acceleration in registration progress, and are now well advanced with the registration of our 25-OH Vitamin D assay which was submitted to the Chinese regulators for approval in FY2020. We target this assay being available for sale during FY2021, followed rapidly by further endocrinology panel assays which will give us additional growth potential in China.

As a result, the number of automated endocrinology assays produced internally by IDS is:

2.2.2 Other assay fields

One of the highlights of the year has been the growth we have achieved in sales of assays outside our historical key market of endocrinology. This revenue is shown under the 'Speciality Partners' caption.

We work with partners, who are experts in their respective fields, to develop and commercialise assays which can be run on the IDS instrument. The partner typically develops and manufactures the assays, while IDS applies for regulatory approval and provides the commercial route to market for the products.

These relationships take several years to generate commercial benefit because individual assays typically take a couple of years for our partners to develop, then a sufficiently large assay panel needs to be developed to provide hospitals and laboratories with a compelling commercial proposition. We are now starting to see the fruits of these efforts, with revenues in these fields growing 74% LFL to £2.3m.

During the year we have continued to enhance our levels of co-operation with our partners, and we would like to thank them for their continued support and commitment to the IDS platform. A summary of progress in each of these fields is set out below:

Autoimmune and infectious disease

Most of the revenue growth was generated from our autoimmune assay panel. During the year IDS has strengthened our internal competencies in this field, and the combined IDS endocrinology and autoimmune panel is gaining increasing credibility and traction in the market. We look forward to working with our partner, Technogenetics, to continue this success into FY2021, and in particular to our collaboration on our new SARS-CoV-2 assay.

Allergy

We have seen the first sales of these products in FY2020, which are manufactured and developed by our partner Omega Diagnostics. As noted in last year´s CEO report we need a suitable panel of screening assays, before we can gain significant commercial traction in this field. While we will continue to work with Omega Diagnostics, during FY2021 we will explore additional avenues to accelerate development of the screening assays we require.

Monitoring of biotherapy treatment

In March 2020, our partner Theradiag, successfully CE-marked the first four products in their automated biotherapy monitoring range. These products run on the iTrack10 analyser, manufactured by IDS. During FY2021, we will work closely with Theradiag to support their roll out of this new and exciting product range, and IDS will distribute these products in various territories not serviced by Theradiag. Our sales and clinical application specialists have been trained in these products, and customer roadshows have been performed to facilitate market uptake.

In summary the total number of assays available on the IDS instrument platform is:

2.2.3 Instrument placements

The number of machines installed is a critical KPI, as each machine will generate future recurring assay revenue. The total number of machines placed or sold increased to 93 (FY2019: 84), representing the highest level of placements/sales since FY2012. This performance is summarised in the table below:

Instrument returns in the year were adversely impacted by the loss of one major customer who ran a single assay across four instruments. The net result of an increase of 18 instruments in the installed base in our direct markets is the strongest result since FY2014.

The number of sales to distributors would have been significantly higher had the COVID-19 pandemic not interrupted the sale of a significant number of machines to one of our distributors. This shipment has been rescheduled by our distributor for H1 of FY2021.

The average number of assays being run on an instrument has continued to increase - moving from 5.1 to 5.9 over the year. This trend is driven by the upsell of additional assays onto existing installed machines, coupled with the fact that newly installed instruments typically run a combination of endocrinology and autoimmunity assays. This means newly installed machines typically run many more assays than legacy machines, albeit in lower volumes.

Average revenue per direct instrument ('ARPI') was £48,000 (2019: £52,000) per annum, calculated on a rolling 12-month basis. The decrease in ARPI was mainly due to the loss of a few high-volume single assay systems in the Americas, coupled with the fact that machines running combined endocrinology/ autoimmune assays are typically placed in laboratories where volume demands are lower.

2.2.4 Sales team

During FY2020 we achieved a level of stability within our direct sales team, while continuing to focus resources, both sales and technical support, on our growing distribution business. We have completed the recruitment of a number of autoimmune application specialists, with specific product knowledge in this field, to help support our sales team grow this business. The improving instrument placement and sales trends in both the direct and distribution markets are evidence that we are starting to see initial success with this relatively new structure.

Our main challenge continues to be in the US, due to the limited size of the IDS panel available for sale. As noted earlier there is no short-term solution to this, though we target expanding this assay panel in the mid-term by obtaining FDA clearance for both IDS and partner speciality assays. During the year we commenced projects with our partners with the goal of obtaining the validation data required to register their speciality assays in the US.

Our automated distribution sales team had a successful year, growing sales by 30% LFL, and opening up new distribution markets in South America and the Middle East.

2.2.5 - IVD Regulations

The new IVD regulations are scheduled to come into effect from 26 May 2022. This means, rather than self-certifying assays as organisations currently do under the CE-mark certification, our assays will require third party CE certification and audit by a notified body. To comply with the new IVD regulations the analytical performance, scientific validity and clinical performance of our assays will require significant supporting evidence. This will apply to all IDS assays, existing or new, automated and manual. We have created a team of 11 people to ensure we are prepared for this transition and believe that while a huge amount of effort will be required, this change in regulations will not pose a material risk for IDS. Indeed, IVDR may be an opportunity for IDS due to industry consolidation, as many smaller IVD organisations that lack the regulatory resources could struggle to meet the more stringent requirements.

3. Manual business unit

In FY2020, our Manual business unit ('MBU') revenue declined 8% on a LFL basis which was below our expectations of flat revenues in this business. The business unit now accounts for 29% (2019: 32%) of Group revenues.

Distribution sales, which make up just under half of the volumes in this business unit, showed slight growth, and were in line with our target. The shortfall to prior year occurred in our direct sales markets. The focus of the MBU team has been on halting the historical decline in our distribution markets, where they have been successful. However, it is clear that during FY2021 more attention needs to be focused on our direct markets where gross margins are significantly higher. Therefore, we are in the process or redeploying resources to achieve this and will likely make some targeted hires to increase our technical sales capabilities and enhance our abilities to make direct sales of ELISA assays to research institutions and laboratories. We believe these measures will enable us to achieve our target of returning this business to annualised revenue levels in excess of £12m once the COVID-19 pandemic passes.

4. Technology business unit

In FY2020 Technology business unit sales exhibited a LFL increase of 30%, to reach £4.6m. This represents record levels of non-royalty derived technology income.

During the year we successfully diversified this business, and now generate significant revenues from three different partners who purchase our analysers and related ancillary products. We sold 57 instruments, mainly IDS i10 derivatives, to OEM customers in the year.

We aim to expand the number of partners who utilise our technology, to enable continued revenue growth and reduce our reliance on a handful of partners. The long-term future of this business is dependent on the development by our partners of their respective assay panels for the IDS analysers, and the success of these new panels in the market.

5. Culture and values

The growth of our revenue and placements for a second consecutive year has shown evidence that IDS has progressed in our chosen journey from a scientifically focused organisation towards a commercial, customer-focused organisation which produces high quality IVD products underpinned by excellent science and services.

Also, I was pleased to see the improvement in results obtained from our annual employee engagement survey. The IDS results for FY2020 were not materially impacted by COVID-19, due to the hard work and extra efforts of the entire IDS team. The fact that we were able to keep all our sites operational, and overcome the obstacles thrown up by the pandemic during March, is testament to the engagement of our team, and the passion they have to ensure IDS is successful. I am very proud of the results we delivered during FY2020 despite the challenges and believe the entire IDS team should feel the same. I would like to thank them sincerely for their efforts during FY2020.

6. COVID-19 update

Thanks to the dedication of the IDS team, our manufacturing locations in Italy, France, Belgium and the UK have continuously remained operational during the COVID-19 crisis. We were able to overcome any disruption in the final quarter of FY2020 caused by the virus. One exception was that we were required to delay the planned sale of a significant number of analysers to one distributor from FY2020 into FY2021.

When lockdown measures start to be slowly lifted, we are increasingly confident we will be able to maintain continuity in our business. The safety of our people has been, and will continue to be, our top priority. Thus, we are following all relevant government regulations, including those related to social distancing and good hygiene practices. During the peak of the crisis, all employees not directly involved in the manufacture of our products were asked to work from home. We are now implementing a phased return to work for those employees who need access to IDS facilities to perform their role effectively, though all other staff are being encouraged to remain working from home. This approach will enable IDS to adhere to the social distancing guidance issued by each government in the territories where we operate.

Opportunities

We are currently in negotiations with a number of partners to manufacture and commercialise COVID-19 antibody test kits in both ELISA and CLIA formats.

We are currently working to manufacture and commercialise COVID-19 antibody test kits in both ELISA and CLIA formats, combining our resources and capabilities with partners who have knowledge in virology and infectious diseases. Our development partner, Technogenetics, has developed a COVID-19 IgG assay to detect SARS-CoV-2 antibodies. This quantitative automated assay which runs on the IDS-iSYS analyser, should be available for sale by IDS before the end of June, in Europe and distribution regions whose regulatory regime is based on the CE-mark.

In addition, we have agreed commercial terms with a UK based specialist medical diagnostics company to produce components of their COVID-19 ELISA manual assay. Finally, we are working with a number of partners with expertise in virology and immunology to provide a route to market for ELISA-based COVID-19 assays, utilising our direct sales organisation as well as our extensive distribution network.

7. Outlook

We have seen a significant reduction in revenue during the first quarter of FY2021 versus the same period last year, driven by a reduction in routine medical testing in hospitals and laboratories across the world, whose focus has been on COVID-19 treatment and testing. Large laboratories have stated that in April testing volumes dropped to around 50-60% of normal levels. We have taken appropriate action to minimise our costs during this period of uncertainty. From a liquidity perspective, IDS is in a very strong position with cash holdings of almost £28m at year end.

During FY2021 we will continue our drive to ensure all IDS team members have specific objectives which are aligned to the Group goals of improving revenue, analyser placements and profit. We will enhance focus, especially under the current difficult circumstances caused by the pandemic, on our teams´ ability to hit agreed objectives. It is through this result-oriented approach we will support our customers best, and achieve success.

We have significantly increased our installed analyser base as well as the panel of assays available on our analysers. We have successfully diversified away from being a `Vitamin D and Bone marker' focused organisation, to a more rounded specialised customer-driven organisation, underpinned by strong scientific ability. Our balance sheet continues to remain strong, with IDS holding almost £28m cash at year end. Thus, we believe IDS is well positioned to weather the storm of the COVID-19 pandemic.

Over the last two years we have made good progress in addressing some of the fundamental challenges facing IDS, we have improved our main processes and addressed several areas where we had deficiencies in talents and skills. During FY2020 we were able to focus more efforts on accelerating our business growth, and once the challenges of COVID-19 subside, we should be able to harvest the fruits of these efforts and see a further acceleration of growth. In the short term we will also focus on commercialising opportunities arising from Increased levels of SARS-CoV2 antibody testing using a range of automated and manual test kits which we expect to launch during Q1 FY2021.

We will provide an update on trading in Q1 FY2021 at our AGM on 23 July 2020. However, we are confident once the global situation improves, we are well positioned to continue our trajectory of growth, leveraging our increasing installed instrument base and assay menu.

Jaap Stuut

Chief Executive

Financial and Operations Review

1. Overview

IDS has achieved a second consecutive year of revenue growth, with revenue increasing by 2% on a LFL basis to £39.3m. It is encouraging to see that the growth we are now generating arises in the areas of business where we have invested most, namely automated speciality assays and sales of our analyser technology. Growth in these areas is now offsetting declines in the other areas of the business.

As set out in more detail later in this report, our efforts to improve our process and operational efficiency have started to be reflected in our financial performance. This is particularly evident in our gross margin, which increased by 1%, despite a greater proportion of the Group's sales being generated through lower margin distribution sales channels. Operating costs remained under tight control, decreasing 1% on a LFL basis.

As a result, adjusted EBITDA, our core metric for measuring underlying profitability, increased from £4.8m to £6.1m. Adjusted EBITDA in FY2020, excluding the impact of IFRS 16 was £5.4m (2019: £4.8m). I will comment on the impact of IFRS 16, a new accounting standard which impacts EBITDA, below.

Cash and cash equivalents decreased by £0.1m to £27.6m (2019: £27.7m).

2. Revenue analysis

Group revenue of £39.3m (2019: £38.5m) increased by £0.8m, or 2% on both a reported and LFL basis.

2.1 Revenue by geography

Our US business suffered a revenue decline of 11% on a LFL basis, which was driven by declines in both automated and manual revenues. The decline in automated revenues is due to the sub-scale automated assay menu, which makes it difficult to win new business. This also means it is relatively easy for laboratories to consolidate the limited number of tests being run on the IDS analyser onto other platforms, making retention of contracts coming up for renewal more challenging. The decline in the Manual business was due to a lower level of ELISA sales related to research projects.

Revenue in the European business grew 2% versus the prior year on a LFL basis. Growth in the Technology business unit, where revenues are predominantly generated in Europe, offset declines in the Manual business in our direct European sales territories. The Automated business performed in line with the prior year.

As with FY2019, our best regional performance was in the Rest of world region, where revenue is mainly delivered through our distribution network. The growth was generated through our Automated business unit, where we saw strong growth in sales of our autoimmune products, were able to gain a foothold in South America, as well as growing our Middle Eastern business. The performance of our Manual business distribution network was consistent with the previous year.

3. Profit and loss performance and comparison with best-in-class

3.1 Summary income statement and peer comparison

During FY2020, IDS delivered improving revenue performance, and translated this into EBITDA growth, with EBITDA increasing to 15% of revenue (2019: 12% of revenue). However, it should be noted that this comparison is slightly flattered by the implementation of IFRS 16 as set out below. If this change is stripped out, EBITDA would have equated to 14% of revenue in FY2020.

3.2 Change in accounting policy

The introduction of IFRS 16 `Leases' means that leases held by IDS, which were previously defined as operating leases, are now deemed to be finance leases. This means that costs previously classified as rental expenditure are now included within depreciation and interest, and as a result EBITDA is favourably impacted by £604,000 during FY2020, with depreciation increasing by a similar amount. The introduction of IFRS 16 did not materially impact reported gross profit or operating profit. This is summarised in the table below which restates the FY2020 results as if IFRS 16 had not been implemented:

Additionally, the implementation of this new standard led to an increase in fixed assets of £1,524,000, with a corresponding increase in finance lease liabilities of £1,524,000.

The FY2019 results have not been restated to reflect the impact of adopting IFRS 16 as IDS transitioned using the modified retrospective approach

3.3 Comparison with best-in-class performance

The improvements in financial performance are a step in the right direction. However, our ultimate goal is to be in-line with the best-in-class industry performance, and for that we undertake regular benchmarking against selected peers. This ensures we focus on our goal of closing the gap to best in class financial performance and embed the ambition in our team members to 'play in the top league' of our industry.

As in previous years, we have compared the IDS financial performance with DiaSorin and Qiagen. DiaSorin is the most successful competitor we face in the field of automated endocrinology, and Qiagen are a world class molecular diagnostics organisation.

The following table shows the cost structures of these best-in-class companies, as a percentage of revenues, compared to IDS:

As I noted in the Annual Report and Accounts 2019, the key area where IDS lags behind these organisations is in terms of our level of cost of goods sold ('COGS'). The deficiency in other cost categories is less pronounced. Therefore, improving our COGS metric was a key area of focus in FY2020. During the year we were successful in reducing our COGS from 57% to 56% despite a high proportion of low margin distribution sales. However we still have a long way to go to reach best-in-class performance. A summary of the key initiatives undertaken is set out in the next section.

Additionally, we have strengthened the leadership within our operations organisation, with the new team members being tasked to continue to improve our levels of operating efficiency and to help bridge the gap to best-in-class performance.

4. Gross profit and operational performance

Gross profit in the year was £17.4m (2019: £16.7m), an increase of £0.7m, from the prior year. Gross margin increased to 44% (2019: 43%), despite a continuing revenue mix swing from higher margin direct business, to lower margin distribution business. Distribution business accounted for 27% of Group revenue (2019: 23%).

Initiatives to reduce our COGS, and hence improve our gross profit, were focused on our Automated business, which from an operational perspective comprises the instrument manufacturing site in Pouilly and the assay manufacturing site in Liége.

Pouilly

The site in Pouilly benefited from the leverage effect of producing more instruments, with 168 instruments being produced versus 134 in the previous year. This was achieved with minimal increase in the operating cost base. During the year we invested in expanding the size of this factory, thus ensuring we are well placed to deal with the expected increase in instrument demand in future years.

Liége

A formal project management framework has been implemented in Liége, with many of the projects focused on generating cost efficiencies through improved processes and controls.

Significant savings have been made by reducing scrap costs, reducing the internal consumption of manufactured products, scaling up the size of our production batches, and increasing assay shelf lives where possible. These projects remain ongoing. During FY2020, we focused on the 'low hanging fruit' but there is still much opportunity to generate further efficiencies moving forward.

Savings scorecard and moving forward

Overall the Group met the cost savings targets we set for ourselves at the start of the year, thanks to the efforts of many individuals within the IDS team. However, as demonstrated earlier, we have a long way still to go to reach best in class performance. Therefore, looking into FY2021, improving operational efficiency will remain a key priority of the Group.

We also expect to see cost improvement benefits from two further Group-wide initiatives. Firstly, towards the end of FY2020 we created a Group purchasing function, which consolidated the disparate purchasing functions located in each site. We envisage this will enable us to take a more coordinated approach to supplier management, as well as pooling the experience of our team and making sharing of best practise easier. Secondly, we are implementing a continuous improvement programme, where technicians will be rewarded for suggesting and implementing process changes which lead to efficiency gains in our production processes. This is a process, which in previous organisations I was involved in, generated many small gains which quickly added up to a material cost saving.

5. Operating costs

Once all the recognition criteria of IAS 38 Intangible Assets related to the capitalisation of product development costs are met, the relevant expenditure related to instrument and new assay developments is capitalised. The total amount of costs capitalised decreased from £2.4m in FY2019 to £1.9m in FY2020, reflecting the slower than anticipated progress with various internal development projects. We review projects on which costs have been capitalised on a periodic basis throughout the financial year and the costs are impaired if a project no longer meets the required capitalisation criteria.

As can be seen in the table in section 3.1, operating costs before exceptional items were £16.0m (FY2019: £16.4m), a decrease of 1% on a LFL basis.

6. Foreign exchange

Movements in foreign exchange rates have not materially impacted the Group operating results year on year, withthe weakening of the GBP against the USD offsetting its strengthening against the Euro. The table below shows the average exchange rates during the year:

In the year 69% (2019: 67%) of the Group's revenues were billed in Euros and 20% (2019: 20%) were billed in US Dollars.

7. Segmental reporting

Adjusted EBITDA margin in our Automated business increased to 14.5% (12.6% EBITDA margin excluding the impact of IFRS 16) from 8.4% in the prior year. Adjusted EBITDA was favourably impacted by the leverage effect of higher revenues, and the cost savings generated by the initiatives set out in section 4 of this report. These improvements were partially offset by the impact of higher levels of sales generated through distribution channels, which attract a lower margin than direct sales.

In our Manual business the adjusted EBITDA margin reduced to 17.4% (16.1% excluding the Impact of IFRS 16) (2019: 22.4%) due to the decline in sales revenue year on year. While in our Technology business, adjusted EBITDA grew to 14.9% (2019: 4.0%) due to the leverage effect of higher revenues.

8. Headcount and productivity

8.1 Headcount

An analysis of the Group's headcount, on a FTE basis, is set out below:

The increase in headcount is mainly due to IDS creating a team tasked with ensuring that our assays will comply with the future IVD Regulations, which will come into effect in May 2022. These FTE are split across the operations and research and development categories.

8.2 Labour productivity

The most appropriate way to measure the overall productivity of IDS is the revenue per employee. During the year, IDS revenue per employee rose to £140,000 (2019: £137,000) - the best performance in five years.

NB: DiaSorin and Qiagen results are for year ended 31 December 2019. IDS are for year ended 31 March 2020.

9. Exceptional operating items

In FY2020, there were no exceptional operating items. In FY2019, there was an exceptional credit of £0.1m due to the reversal of restructuring provisions related to our France and Italy operations which were not utilised.

10. Profit from operations

Profit from operations ('EBIT') was £1.3m (2019: £0.4m), the rise being mainly due to the improved revenue and cost performance of the business as set out in this report.

11. Net finance income

Net finance income was £1.9m (2019: income of £0.4m). Included within net finance income is a foreign exchange gain of £0.7m (2019: gain of £0.3m), which arises from the translation of non-Pound Sterling denominated intercompany balances and a foreign exchange gain from the liquidation of a subsidiary of £1.2m (2019: nil). The gain from the liquidation of the subsidiary has been treated as exceptional finance income as it is non-recurring in nature.

12. Taxation

The tax credit of £0.1m (2019: charge of £0.05m) gives a full-year effective rate of -2.9% (2019: 5.5%). It comprises a current tax credit of £0.1m and a deferred tax charge of £nil. The current tax credit arises mainly due to research and development tax claims in UK and France, and a prior year over provision reversal in France, partially offset by profits chargeable in overseas territories taxable at a higher rate than UK corporation tax.

Total gross tax losses carried forward amount to £22.3m (2019: £20.3m) of which £nil (2019: £3.2m) has been recognised as an asset in the balance sheet.

13. Earnings per share

Adjusted earnings per share is calculated using profit after tax adjusted to exclude the after-tax effect of both exceptional operational and finance income. Adjusted basic earnings per share are 7.4p (2019: 2.4p). Basic earnings per share are 11.6p (2019: 2.7p).

14. Balance sheet and cashflow

14.1 Equity

The Group's shareholders' funds at 31 March 2020 were £57.1m (2019: £55.3m).

14.2 Working capital

The Group net working capital was £14.1m at 31 March 2020 (£12.6m at 31 March 2019). This represents 36% of revenue (2019: 33%). A summary of the working capital movements is as follows:

· Inventory increased mainly due to the number of completed analysers held in stock. At the end of FY2019 we had no completed analysers on hand. A large proportion of these relate to a postponed order by one of our distributors, and we expect these will be sold during H1 of FY2021.

· Trade debtors increased; however, this was due to strong trading in Q4, rather than a significant increase in debtor days, which equated to 58 days of sales (2019: 53 days).

· These were offset by an increase in trade creditors, mainly due to the timing of receipt of invoices from our assay partners, coupled with amounts owed related to our Pouilly building expansion.

14.3 Cash flow summary

A summary of the Group's cash flow statement for the year is shown below:

Cash generated from operating activities decreased to £5.5m (2019: £5.8m). The increased profit in the year was offset by the higher working capital requirements. Free cash flow to equity was an inflow of £0.1m (2019: inflow of £1.2m), the reduction being driven by higher capital investment and finance lease repayments.

15. Dividend and share buy back

There was no share buyback activity during the year (2019: 612,297 shares were bought back at an average £2.20 per share). Dividend payments, which related to the final dividend for 2019, reduced to £0.2m (2019: £0.5m related to the final dividend for 2018).

The Group has a policy to pay out between 25% to 30% of its adjusted earnings per share as a dividend. In FY2020 adjusted earnings per share was 7.4p (2019: 2.4p) thus the Board is proposing a dividend for the year of 1.9p (2019: 0.7p) subject to the approval of shareholders at the Annual General Meeting on 23 July 2020. If approved, the dividend will be paid on 14 August 2020 to shareholders on the register at the close of business on 17 July 2020.

16. Key risks

COVID-19

As set out in the CEO's Report, the business was able to successfully mitigate the impact of the COVID-19 pandemic during FY2020. During the first half of FY2021, we expect that we will see a significant impact on revenues due to the lower levels of routine testing being undertaken by laboratories and hospitals around the world. At the time of writing, it is very difficult to determine when testing levels will return to normal. However, our expectation is that once patients feel comfortable to visit hospitals, the bounce back in testing volumes, and hence IDS revenues, will be relatively swift.

IDS is well positioned to ride out the challenges of the pandemic, with almost £28m of cash on hand at year end. Nevertheless, we are monitoring the situation closely, taking the relevant cost control steps across all areas of the organisation, minimising the costs of running the business during this period of uncertainty, to alleviate the impact of the reduced revenue on the bottom line.

Brexit

While Brexit has taken a backseat due to the COVID-19 pandemic, the transition period is currently scheduled to end on 31 December 2020. There is a risk that a deal is not reached by then, and the UK reverts to WTO trade terms with the EU. We have now had two 'practice runs' at preparing for a no deal Brexit, firstly at the end of March 2019 and then at the end of October 2019. Thus, we believe that we have the appropriate processes in place to ensure that a 'no deal' scenario at the end of the transition period will not materially impact the performance of IDS.

Paul Martin

Group Finance Director

17 June 2020

Consolidated Income Statement for the year ended 31 March 2020

All results relate to continuing operations.

Consolidated Statement of Comprehensive Income for the year ended 31 March 2020

Consolidated balance sheet at 31 March 2020

Consolidated statement of cash flows for the year ended 31 March 2020

Consolidated statement of changes in equity for the year ended 31 March 2020

Notes to the consolidated financial statements for the year ended 31 March 2020

1. Segmental information

The Group applies IFRS 8 Operating Segments. IFRS 8 provides segmental information for the Group on the basis of information reported internally to the chief operating decision-maker for decision-making purposes. The Group considers that the role of chief operating decision-maker is performed by the Board of Directors.

Analysis of revenue is prepared and monitored on a geographical basis due to the organisation of the sales teams as well as by product type. However, earnings on a geographical basis are not considered the most appropriate measure of performance given the differing nature of operations across the different territories.

IDS reports profit from operations for the three segments shown below. This is monitored by the chief operating decision-maker quarterly.

All balance sheet and cash flow information received and reviewed by the Board of Directors is prepared at a Group level.

2. Profit from operations

Profit from operations is stated after charging/(crediting):

Amounts payable to PricewaterhouseCoopers LLP (2019: PricewaterhouseCoopers LLP, £143,000 & Ernst & Young LLP £35,000) and their associates in respect of both audit and non-audit services:

In FY2020, there were no exceptional operating items. Exceptional finance income relates to foreign exchange gains from the liquidation of immunodiagnostic Systems Nordic A/S.

In FY2019, the exceptional credit was due to a £0.1m reversal of restructuring provisions relating to our French and Italian operations which were no longer required.

3. Taxation on ordinary activities

a) Analysis of credit in the year

In addition, total current and deferred tax of £5,000 (2019: £nil) was debited to equity.

'Other' in the current and prior year relates to the reversal of short-term timing differences.

b) Factors affecting tax charge

The tax assessed for the period is lower (2019: lower) than the standard rate of corporation tax in the UK, 19% (2019: 19%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

The standard rate of UK corporation tax will no longer reduce to 17% from 1 April 2020. These proposed changes, which were substantively enacted when the Finance Bill 2016 received Royal Assent on 15 September 2016, were changed on 17 March 2020 when the Government utilised the Provisional Collection of Taxes Act 1968 to maintain the main UK corporation tax rate at 19%. UK deferred tax liabilities which were recognised at 17% at the prior year balance sheet date have been recognised at 19% at 31 March 2020.

There were no significant tax reforms impacting the Group in the current year.

The (credit)/charge for the year can be reconciled to the profit per the income statement as follows:

4. Earnings per Ordinary share

Basic earnings per share is calculated by dividing the earnings attributable to holders of Ordinary shares by the weighted average number of Ordinary shares outstanding during the year.

For diluted earnings per share, the weighted average number of Ordinary shares in issue is adjusted to assume conversion of all dilutive potential Ordinary shares. The Group has dilutive potential Ordinary shares relating to contingently issuable shares under the Group's share option scheme. At 31 March 2020, the performance criteria for the vesting of certain awards under the option scheme had been met and consequently the shares in question are included in the diluted EPS calculation.

The calculations of earnings per share are based on the following profits and numbers of shares.

Extract from Annual Report and Financial Statements

The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 March 2020 or 2019 but is derived from those financial statements. Statutory financial statements for FY2019 have been delivered to the registrar of companies, and those for FY2020 will be delivered in due course. The auditors have reported on those financial statements; 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. The annual report and financial statements for the year ended 31 March 2020 will be posted to shareholders on 24 June 2020. This final results announcement and results for the year ended 31 March 2020 were approved by the Board of Directors on 16 June 2020 and are audited.

Basis of preparation

The final results announcement has been prepared under historical cost convention on a going concern basis and in accordance with the recognition and measurement principles of International Reporting Standards and IFRIC interpretations as adopted by the EU ("IFRS").

The final results announcement has been prepared on the basis of the same accounting policies as published in the audited financial statements of the Group for the year ended 31 March 2019, with the exception of the accounting policies adopted in the audited financial statements of the Group for the year ended 31 March 2020.

Adoption of the new lease standard, IFRS 16 has been applied using the modified retrospective approach, meaning comparatives for FY2019 have not been restated.

Annual report

The annual report will be sent to shareholders shortly and will also be available at the registered office of Immunodiagnostic Systems Holdings PLC at: 10 Didcot Way, Boldon Business Park, Boldon, Tyne and Wear NE35 9PD. It will be made available on the Company's website at: www.idsplc.com.