IDH.L Regulatory News (IDH)

20 November 2020

Immunodiagnostic Systems Holdings PLC

Unaudited Interim Results for the six-month period ended 30 September 2020 (H1 FY21)

Key Business Developments in H1 FY21

The COVID-19 pandemic has had an extraordinary impact on global economic performance, and to healthcare systems around the world. Levels of routine diagnostic testing in the market dropped significantly in April, and since then they have been on a recovery path, reaching an estimated 85% of normal levels in September. On a quarterly basis, the directors estimate the market for routine testing saw a drop of 35% during Q1, and 15% during Q2. The IDS revenues followed this market trend.

IDS has launched a number of products for COVID-19 testing in H1, but revenues from these products have so far not been able to make up for the impact of the decline in the market for routine testing.

Unaudited Group revenues for H1 FY21 were £13.7m, 27% lower than the same period last year on both a LFL (i.e. at constant FX rates) and reported basis. Revenues in Q1 were £5.7m (61% of Q1 FY20) but had increased significantly to £8.0m in Q2 (84% of Q2 FY20). This development mirrors the recovery of routine diagnostic testing as noted earlier.

We undertook several cost control efforts during the period to offset the reduced revenues, including using part time working schemes where available, and as a result reduced fixed costs by £1.6m versus H2 FY20.

Adjusted EBITDA, our core metric for measuring underlying profitability, decreased from a profit of £2.9m in H1 FY20 to a loss of £0.8m in H1 FY21. Within the period, Adjusted EBITDA has followed the same improving trend as the revenue, with a loss of £0.9m in Q1 recovering to a profit of £0.1m in Q2.

These results are summarised below:

* Like for like 'LFL' numbers have been restated to remove the impact of foreign exchange movements in the period by restating the prior period results using the exchange rates of the current period.

** Before exceptional items of £0.6m (H1 FY20: £nil) - see reconciliation in the Financial Review section.

Jaap Stuut, CEO of IDS, commented:

"The impact of the COVID-19 pandemic dominated our H1 FY21 results. However, on the positive side it was pleasing that our automated assay menu increased by seven new assays. We also continued to increase the installed base of IDS analysers and saw a swift recovery in business performance during Q2 as diagnostic testing levels recovered. This increased installed base and assay menu, which now includes a comprehensive SARS-CoV-2 antibody test offering, coupled with our strong balance sheet position, gives me confidence that as the global situation improves IDS will return to growth."

Notes:

Immunodiagnostic Systems Holdings PLC ("IDS" or "the Group") is a specialist producer of manual and automated diagnostic testing kits and instruments for the clinical and research markets.

For further information:

Chief Executive's Statement

Overview

On both a reported basis and LFL basis, Group revenue decreased by 27% from H1 FY20, mainly driven by the reduction in routine diagnostic testing levels due to the COVID-19 pandemic. However, we witnessed a much stronger performance towards the end of H1, with Q2 revenues at 84% of the same period in the prior year. The quarterly Group revenue performance is summarised as follows:

Below is a discussion of the main developments and actions taken in each business unit during the period:

1. AUTOMATED BUSINESS

1.1 Business Performance

Revenue performance in our Automated business declined versus the prior year due to lower diagnostic testing levels, as noted earlier. The revenue trajectory improved significantly as H1 progressed, with revenues of £3.3m in Q1 increasing to £4.9m in Q2.

Business performance varied depending on geography, due to the differing stages of the pandemic in each location. During Q2 FY21 sales in our direct European territories had recovered and were slightly ahead of the same period in the previous year. Conversely, sales in the US and some of our distribution territories were significantly lower.

Over the last few years, our strategy has been to develop new business streams in our Automated Business, thereby reducing our reliance on the declining Vitamin D business. Vitamin D now only accounts for 13% of our Automated business, resulting in a more diversified revenue base with better underlying growth characteristics.

It was pleasing to note, despite the macro economic factors, Speciality Autoimmune revenues continued to grow. This reflects the attractiveness in the market of our comprehensive assay menu which combines dedicated autoimmune markers with complementary endocrinology markers. There is also opportunity to accelerate our Infectious Disease assay revenues on the back of our automated SARS-CoV-2 antibody tests which were released towards the end of H1 FY21.

1.2 Instrument Placements

An analysis of instrument placements and sales is set out below:

The worldwide installed base of analysers increased by 11 during H1 FY21 (H1 FY20: 18).

The focus in most hospitals and laboratories on acute PCR testing for SARS-CoV-2 has impacted the speed in which we can install analysers for validation, and more generally to progress opportunities through our sales pipeline. Sales activity levels, in both direct and distribution markets, improved during Q2, and as a result we expect to see improved analyser placement performance during H2 FY21.

1.3 Assays per Instrument

Average assays being run on each instrument stands at 6.1, versus 5.4 at 30 September 2019, demonstrating our ability to upsell new assays onto existing placements, along with the continued uptake of our enlarged assay portfolio.

1.4 Market Share

We have assessed whether the strong decrease in revenues in H1 FY21 could be the result of a loss of market share and are confident that we have not ceded market share to competition. We take this confidence from three sources: the lower number of analysers returned, the increased ability to upsell more assays onto our installations, and the fact that many diagnostic companies routine testing businesses have suffered similar declines in revenue.

1.5 COVID-19 Products

Towards the end of H1 FY21 we launched two automated immunoassays for the detection of SARS-CoV2 IgG and IgM antibodies, which can detect past infections as well as providing critical public health information. We also provided outsourced manufacturing services to The Binding Site (UK) for their ELISA-based SARS-CoV-2 antibody test. Revenue from COVID-19 products amounted to £0.4m during Q2 FY21.

With the potential arrival of SARS-CoV-2 vaccines, public health studies into the virus should increase as there will be a need to measure the success of the vaccination programmes. There should be a growing interest in monitoring the overall antibody level in a population to measure the attainment of a protective antibody level nationwide for achieving herd immunity. This could drive increased sales of our automated SARS-CoV2 antibody tests.

The above tests are used to confirm past infections. However currently the market focus is on testing to verify an active infection. Therefore, in conjunction with one of our partners, we are working on the development of a saliva-based rapid test for SARS-CoV-2 antigens. This manual test, which has the potential for self-administered use, would allow for immediate identification of individuals with an elevated amount of SARS-CoV-2 virus and be extremely helpful for curtailing the spread of the virus. In addition, it will overcome the shortcoming of presently used rapid tests based on nasopharyngeal swabs, which rely on sampling by professional staff only. 

1.6 Assay Development and Product Registration

In Europe, in addition to the two automated SARS-Cov-2 tests we released the IDS Automated Cortisol assay, which rounds out our automated hypertension panel. We also entered the field of therapeutic drug monitoring, with a panel of four new tests co-developed with a partner. These are the first such automated tests on the market. They are used to monitor the efficacy of Infliximab (trade name Remicade) and Adalimumab (trade name Humira) which are antibody-based drugs used in the management of chronic inflammatory diseases.

In the US we achieved 510k approval for our BAP assay and expect to make the first sales of this key assay to a major US laboratory chain during H2 FY21.

In summary, the automated assay menu now available on the IDS analysers is:

2. Manual Business

The Manual business saw a decline of 37% LFL versus H1 FY20, impacted essentially by the same factors as the Automated business. Revenues started to recover with Q1 revenue being £1.6m and Q2 being £2.0m. Despite the efforts of the Manual business unit sales team, this recovery is less pronounced than our Automated business, which we believe is due to a greater portion of our Manual business being generated in geographies which have seen a slower rebound from the first virus wave and hence lower demand levels.

The speciality product range has been impacted less by the reduction in levels of routine testing than our 25-OH Vitamin D and Diametra products, as the speciality tests are often used in a research setting, where the volume impact has been less significant.

3. Technology Business

Our Technology business, comprising the sale of instruments and ancillaries to OEMs, showed a LFL decline of £172k.

In this business unit, we have widened the sales focus to include commercialisation of our assay technology and manufacturing know-how. We had success in this area through our agreements to provide contract manufacturing services for SARS-CoV-2 ELISA kits, the revenue for which has been recognised in Technology Income, along with the revenue from sales of our analyser technology to OEM partners.

4. Operations

Like most businesses IDS has faced challenges and restrictions arising from the COVID-19 crisis. These have varied in each of our operational locations, and across the territories where our customers and suppliers are based. It is a credit to our entire team that we were able to maintain full operational capabilities across the business, thus ensuring continuity of supply to all our customers, while adhering to all regulations recommended to ensure the safety of our employees. We have carefully managed costs during the period - more information related to this is provided in the Financial Review.

I would like to thank all of the IDS team for their efforts to ensure we have been able to maintain strong customer service levels and meet customer requirements during these unprecedented times.

Financial review

Group revenues were £13.7m, compared to £18.8m recorded in H1 FY20. An overview of the revenue performance has been given in the Chief Executive's Statement.

Adjusted EBITDA (before exceptional items) was a loss of £0.8m, compared to a profit of £2.9m in H1 FY20, the reduction being driven mainly by the lower revenues, offset by cost savings as explained later in this review. The adjusted EBITDA trajectory improved significantly during H1 FY21, with Q1 recording a loss, but returning to profit in Q2. Free cash to equity outflow was £2.9m (H1 FY20: inflow of £0.4m).

A. SUMMARY OF INCOME STATEMENT

*Restated - see A1 below

The profit performance for the Group followed a similar trajectory to revenue, with a significant improvement during Q2 as revenues increased, and costs reduced. Gross margin was 34% in Q1 FY21, improving to 41% in Q2 FY21. Adjusted EBITDA in Q1 FY21 was a loss of £0.9m, recovering to a profit of £0.1m in Q2 FY21.

A1 Change in Accounting Policy

To ensure that the Group's financial performance can be more easily benchmarked with its peer group, and our policies are aligned to market practice in the diagnostics sector, the amortisation costs related to capitalised development spend previously shown within cost of goods sold, have been reclassified to Research and Development expenses within Operating Costs. This change does not impact the profit or net assets of the Group. Prior period comparatives have been updated to reflect this change in accounting policy. A table detailing the impact of this reclassification is set out in Note 1.

A2 Foreign Exchange

The average exchange rates used to translate Euros and US Dollars to Pounds Sterling are as follows:

The movement in FX rates has not significantly impacted the reported results of the Group and the comparisons versus H1 FY20. In the period, 73% (H1 FY20: 68%) of the Group's revenues were denominated in Euros, and 13% (H1 FY20: 20%) were denominated in US Dollars.

A3 Gross Profit

Gross profit was £5.3m (H1 FY20: £9.4m) implying a gross margin of 38.4% (H1 FY20: 50.1%).

It is important to note that this drop in margin is almost entirely volume related; we have not seen a significant change in product selling prices to customers. As a result, once sales volumes recover, we expect gross margins to swiftly return to the circa 50% level as seen in FY20. Indeed, as the continuous improvement projects implemented in the operations function have continued during H1 FY21, margins should continue the upward trend seen between FY19 and FY20 moving forward.

A4 Operating Costs

The Group's total operating costs (before exceptional items) comprise:

*Restated H1 FY20 information as described in Section A1 of Financial Review

Total spend on operating costs has declined by £0.6m to £8.2m (H1 FY20: 8.8m) with the details set out in the table above.

A5 Cost Control Efforts

During H1 FY21 we implemented two restructuring exercises, as set out in the exceptional items note below, and took advantage of part time working schemes throughout Europe and the Paycheck Protection Program scheme in the US.

As a result, our spend on fixed costs across COGS and Operating costs reduced by £1.6m (or 13%) versus H2 FY20, and £2.2m versus our H1 plan for FY21. We will continue these cost control efforts into H2 FY21 as required, taking account of both how the business recovers as the pandemic evolves as well as the success of our new product lines.

A6 Exceptional Items

Exceptional items during the current and previous financial periods comprise:

In H1 FY21 the exceptional costs relate to redundancy costs arising from two strategic reorganisation projects. Firstly, the assay research and development function was consolidated into the two sites in Boldon and Spello, and secondly, we streamlined the IDS Executive Team. We believe both of these changes, which were independent of the impact of the COVID-19 pandemic, will lead to quicker and more efficient decision making within the business, increased output, and a significant reduction in our fixed cost base.

A7 Finance Expense

Net finance expense was £0.1m (H1 FY20: £0.9m). The prior period cost relates mainly to foreign exchange losses on intercompany loans. In the intervening period the intercompany balances have been reorganised to reduce the exposure to intercompany related FX movements.

A8 Taxation

The Group's effective tax rate for the current period is based on an estimate of the rate for the full financial year and is 19% (H1 FY20: 107%) giving a tax credit of £0.7m (H1 FY20: £0.2m). Before exceptional items, prior year adjustments and the effect of rate changes on deferred tax balances, the effective rate is 12% (H1 FY20: 60%).

A9 Earnings Per Share

Basic loss per share was 10.3p (H1 FY20: earnings per share 0.1p).

B. HEADCOUNT

A summary of IDS headcount by function is given below:

Annualised revenue per employee for H1 FY21 decreased to £96,000 per FTE (H1 FY20: £138,000). The increase in headcount versus 30 Sep 2019 is mainly driven by the creation of a team tasked with ensuring our assays will comply with the future IVD regulations, which will come into effect in May 2022. This team is split across the Operations and Research and Development categories.

C. SUMMARY OF BALANCE SHEET

C1 Equity

The Group's net assets at 30 September 2020 are £54.0m, compared to £57.1m at 31 March 2020 (30 September 2019: £56.7m).

C2 Working Capital

The Group net working capital decreased to £13.2m from £14.1m at 31 March 2020 (£11.3m at 30 September 2019). This equates to 48% of annualised revenue.

Inventory levels have increased, driven by a decision to build up stock levels of analysers and related raw materials worth £2.1m, which we expect will be sold or placed during the second half of the year. This was offset by a net reduction in trade debtors and trade payables, reflecting the lower activity levels experienced towards the end of H1 FY21.

D. SUMMARY OF CASH FLOW STATEMENT

A summary of the Group's cash flow is set out below:

The net decrease in cash was £3.4m, compared to an increase of £0.2m in H1 FY20. The decrease was driven by the lower revenues recorded, which led to cash of £0.7m being used in operating activities. In H1 FY20, £2.6m of cash was generated from operating activities.

Cash used in investing activities reduced, mainly as a result of the lower instrument placements during H1 FY21. The increase in cash used in financing activities was due to the increased dividend of £0.5m related to the prior year (H1 FY20: £0.2m).

As a result of the above, free cash outflow to equity was £2.9m (H1 FY20: inflow of £0.4m).

As at 30 September 2020, the Group's cash and cash equivalents are £24.2m (30 September 2019: £28.1m; 31 March 2020: £27.6m).

E. BREXIT

With a hard Brexit looking more probable, I believe IDS is well positioned to mitigate any disruption. Most of our production capacity and customer base is located outside the UK, and thus will not be impacted by Brexit.

In the run up to 31 December we will position our finished goods inventory to mitigate the impact of any delays arising at the UK:EU border, and do not anticipate any impact to our customers. Furthermore, we have plans to ensure sufficient stock of raw materials are held, particularly where we know a transfer across this border is required, to ensure production in our Boldon facility can continue uninterrupted. Finally, we have taken the steps necessary to ensure our products retain the relevant regulatory approval to enable sale in the EU post Brexit.

Should the Pound Sterling be adversely impacted by a hard Brexit, this will be favourable to IDS, as the majority of our income stream is in Euros or US Dollars, yet we have significant costs in Pounds Sterling.

F. OUTLOOK

While I am pleased with the recovery shown during the second quarter, there remains uncertainty as to how this recovery might evolve, as it is highly contingent on the future development of the pandemic. Given the current onset of a second wave of COVID-19 infections across Europe and the US we will keep a tight control on costs and aim to be ahead of the curve when matching costs to revenues.

Unaudited consolidated interim income statement

For the six-month period to 30 September 2020

Unaudited interim statement of other comprehensive income

For the six-month period to 30 September 2020

Unaudited consolidated interim balance sheet

As at 30 September 2020

Unaudited consolidated interim cash flow statement

For the six-month period to 30 September 2020

Unaudited consolidated statement of changes in equity

In the prior year Interim Financial Statements, the opening equity was restated due to a change in accounting policy relating to IFRS16 Leases. This was subsequently noted as incorrect and was reversed at the year end. The impact is not material and therefore there is no restatement of prior year Interim opening reserves.Notes to the Interim Financial Statements

For the six-month period to 30 September 2020

1 Basis of preparation

The unaudited condensed financial statements for the six months ended 30 September 2020 have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union. They do not include all 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 March 2020. The unaudited condensed financial information has been prepared using the same accounting policies and methods of computation used to prepare the Group's Annual Report & Accounts for the year ended 31 March 2020 that are described on pages 62 to 72 of that report which can be found on the Group's website at www.idsplc.com. The annual financial statements of the Group are prepared in accordance with IFRS as adopted by the European Union.

New standards or interpretations not yet effective for the financial year ending 31 March 2021 are as follows: -

· IAS 1 - Presentation of Financial Instruments - amendments to the definition of material;

· IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors - amendments to the definition of material;

· IFRS 3 - Business Combinations - amendments to clarify the definition of a business;

· IFRS 9, IAS 39 and IFRS 7 Financial Instruments - amendments to interest rate benchmark reform providing certain reliefs for hedge accounting.

The financial information for the six months ended 30 September 2020 is not reviewed by PricewaterhouseCoopers LLP and accordingly no opinion has been given. The comparative financial information for the year ended 31 March 2020 has been extracted from the Annual Report & Accounts 2020. The financial information contained in this interim report does not constitute statutory accounts as defined in section 435 of the Companies Act 2006 and does not reflect all of the information contained in the Group's Annual Report & Accounts 2020. The annual financial statements for the year ended 31 March 2020, which were approved by the Board of Directors on 16 June 2020, received an unqualified audit report, did not contain a statement under section 498 (2) or (3) of the Companies Act 2006 and have been filed with the Registrar of Companies.

To ensure that the Group's financial performance can be more easily benchmarked with its peer group, and our policies are aligned to market practise in the diagnostics sector, the amortisation costs related to capitalised development spend previously shown within cost of goods sold, have been reclassified to research and development expenses. This change does not impact the profit or net assets of the Group. The changes made are highlighted in the tables below: 

The change in accounting policy would have similarly impacted prior periods, with a decrease in Cost of Sales and an increase in Research and Development costs. The impact on FY19, FY18, and FY17 would have been £2,246,000, £2,020,000, and £1,865,000 respectively.

2 Revenue

An analysis of the Group's revenue split by the key product types is as follows:

Operating lease rental relates to contracts implicit in agreements for the placing of IDS analyser instruments with customers and the related sale of reagents and is estimated based on averages.

Contract assets

Contract liabilities

3 Segmental information

The Group applies IFRS 8 Operating Segments. IFRS 8 requires provision of 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 team as well as by product type. IDS reports profit from operations for the three segments 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.