Nanoco Regulatory News (NANO)

27 Feb 2007 07:02

Evolutec Group PLC27 February 2007 For immediate releaseTuesday 27 February 2007 Evolutec Group plc ("Evolutec" or "the Company") Preliminary Results for the year ended 31 December 2006 Exploring all strategic options to realise value for shareholders Evolutec Group plc (AIM: EVC), the biopharmaceutical company developing novelproducts for the treatment of allergic, inflammatory, and autoimmune diseases,announces Preliminary Results for the year ended 31 December 2006. Highlights • Two Phase II trials completed for lead development candidate rEV131 o Primary endpoints not met in allergic rhinitis and inflammation following cataract surgery o No further work with rEV131 planned in these indications • Positive rEV576 preclinical results in life threatening autoimmune conditions myasthenia gravis and Guillain-Barre Syndrome o Potential orphan drug status • Research and development activity is currently on hold• Cash and held-to-maturity investments of £8.7m (2005: £17.6m) o Redundancies and other cost cutting measures implemented post year-end Mark Carnegie Brown, Chief Executive of Evolutec, said: "Inevitably the disappointing clinical results with rEV131 have overshadowedprogress made in research and the preclinical development of rEV576. Theimmediate priority for the business is to explore all strategic options andrealise value for shareholders." Enquiries: Evolutec 0118 922 4480Mark Carnegie Brown, Chief Executive OfficerNicholas Badman, Chief Financial Officerwww.evolutec.co.uk Financial Dynamics 020 7831 3113David YatesBen Brewerton Notes for Editors: About Evolutec Evolutec, which is based in Reading, UK, is a clinical stage biopharmaceuticalcompany with a focus on asthma and auto-immune diseases. The Company's lead candidate, which is in preclinical development, is rEV576, acomplement inhibitor. rEV576 has demonstrated preclinical activity against theautoimmune diseases myasthenia gravis and Guillain-Barre Syndrome, asthma andacute myocardial infarction ("AMI") (heart attack). Evolutec has established aresearch collaboration with Case Western Reserve University, Cleveland, Ohio, toundertake further preclinical work with rEV576 in myasthenia gravis. The rights to Evolutec's vaccine technology for animals are partnered withMerial. Evolutec is listed on the AIM market of the London Stock Exchange and developstherapeutics originally isolated from the saliva of ticks. The tick remainsundetected by its hosts, including humans, by injecting an array of moleculesinto the skin that suppresses host immunity. These stealth molecules haveundergone millions of years of natural evolution to select a promising efficacy,potency and safety profile. Evolutec employs the tick's evolutionary stealthtechnology to offer the potential of treating human diseases. Safe Harbour statement: this news release may contain forward-looking statementsthat reflect the current expectations of the Company regarding future events.Forward-looking statements involve risks and uncertainties. Actual events coulddiffer materially from those projected herein and depend on a number of factorsincluding the success of the Company's research strategies, the applicability ofthe discoveries made therein, the successful and timely completion of clinicalstudies, the uncertainties related to the regulatory process, the successfulintegration of completed mergers and acquisitions and achievement of expectedsynergies from such tractions, and the ability of the Company to identify andconsummate suitable strategic and business combination transactions. Chairman's Review The financial year ended with the disappointing news that rEV131, the Company'slead clinical development candidate, did not show clinical efficacy in eitherthe allergic rhinitis or post-operative cataract surgery Phase II clinicaltrials. The Company took immediate steps to put all significant external expenditure onhold while it undertook a review of the best route to protect shareholder value.The year-end cash position of £8.7 million provides adequate working capital.The Board is exploring all strategic options for the Group. There are a numberof positive value-driving ways forward for the Company and these are beingpursued actively. It is expected that at least one of these will be brought tofruition by the middle of the current financial year. The failure of clinical trials is an occupational hazard of all biotechnologyand pharmaceutical companies. Phase II clinical studies are conducted togenerate information about the clinical efficacy, safety and tolerance of drugcandidates at a limited number of doses. There still remains potential value inrEV131 given its good clinical safety and tolerance profile and because of itsnovel mechanism of pharmacological action. It is clear, however, that Evolutecon its own does not have sufficient resources to explore these options further. Evolutec continued to diversify its asset base during the course of the yearwith particularly exciting progress on its novel inhibitor of the complementpathway, rEV576. This product candidate opens a new route to the treatment of anumber of autoimmune diseases, including myasthenia gravis and Guillain-BarreSyndrome, where there is currently no curative therapy available. Both theseindications potentially qualify for Orphan Drug status in the US which, ifgranted, would reduce cash outflow associated with further development. The lowcost and short timeline to clinical proof of concept in critical care marketswhere there is high unmet need are expected to make rEV576 an attractive asset.The Company is focussed on realising value from rEV576 for shareholders viapartnering or a corporate solution. The Company also began to invest in exploratory research to evaluate thepotential of the tick saliva to yield further molecules that could be oftherapeutic interest. Initial results are encouraging, and, given Evolutec'spatent protection for the discovery of new proteins by this route, thisrepresents a further asset to exploit. I would like to take this opportunity to thank our staff for the timely deliveryof the key objectives for the Company and for their ability to generate theresults within budget. The Company is also indebted to our investors for theircontinued support and we particularly acknowledge the additional investmentreceived in October 2006. Clearly this year has been a disappointing experience both for investors andstaff alike. It is our intention to do everything in our power to enhance thevalue of Evolutec and realise value to investors as soon as possible. We intendto continue active dialogue with our shareholder base to keep them aware of ourplans. David P BloxhamChairman26 February 2007 Chief Executive's Review of Operations 2006 was set to be a transformational year for Evolutec with key clinicalresults with the lead development candidate rEV131 and the development of thepreclinical pipeline through rEV576. It was anticipated that a positive allergicrhinitis result with rEV131 would have led to a major licensing deal. The yearended and 2007 started with disappointing clinical results, first, from thePhase IIb rhinitis trial and then the Phase II post-cataract inflammation trial- both of which failed to meet their end points. At the year end the rEV576preclinical programmes were ahead of schedule and development plans were inplace for the progression of this asset to the clinic. The disappointingclinical results with rEV131 left the Group with net cash of £8.7 million, apromising preclinical asset and a much reduced market capitalisation. In the first six months of 2006 the focus of activities in Evolutec was on thepreparatory work for the two rEV131 clinical trials. These trials, in allergicrhinitis and post-cataract eye inflammation, commenced in June 2006. The 300patient rhinitis trial was undertaken in the Environmental Exposure Chamber atAllied Research International ("Allied") in Toronto under the leadership of Dr.Piyush Patel. The study evaluated the efficacy of rEV131 under a constant highlevel pollen challenge for up to 12 hours. Duration and onset of action wereevaluated and the end point was sum of symptom scores after 7 days twice daily("b.i.d.") dosing. This Phase IIb trial followed a positive 112 patient rhinitistrial where patients received a single dose of rEV131 and then a nasal allergenchallenge. Prospective partners and a clinical research panel were consultedabout the design of the Phase IIb study. The Environmental Exposure Chamber atAllied has been used in the development programme for fluticasone, cyclesonide,and glutaraldehyde modified vaccines. These products had performed well in thechamber. rEV131 did not demonstrate any significant efficacy or meet itsendpoint in the Phase IIb trial. The Phase II rEV131 post-cataract eye inflammation trial was undertaken at 15separate clinical sites across the United States. This 150 patient trial wascoordinated by Ophthalmic Research Associates, Inc ("ORA") led by Dr. MarkAbelson. This dose ranging trial evaluated the efficacy of rEV131 inpre-selected patients and compared the anti-inflammatory potential of rEV131with the steroid standard, prednisolone. The study design was similar to thatused in the approval of other anti-inflammatories. The primary endpoint in thetrial was inflammation 14 days following surgery. This clinical trial followedpositive preclinical data in a well recognized surrogate model of post-cataractinflammation. rEV131 showed no appreciable efficacy and the level ofinflammation was no different to the placebo. The prednisolone standardperformed as anticipated and efficacy was significantly superior to the placebo. The disappointing results of rEV131 in Evolutec's clinical trials demonstratethe high level of risk associated with drug development. Both trials weremonitored by our Clinical Research Manager Lisa Wilson-Campbell and supervisedby our Medical Director Dr. Wynne Weston-Davies. Retrospective analysis of thetrials has confirmed drug product conformity and protocol implementation was inline with intention. It is possible that the pharmacokinetic properties ofrEV131 may not be ideal for these indications. This means that eitherinsufficient drug reached the target or alternatively remained within the targetarea. A second potential contribution to the rhinitis result was that the drugwas simply overwhelmed by the amount of histamine generated by patients in thechamber. It was by design, that the recent Phase IIb rhinitis trial representeda higher hurdle, with patients being exposed to greater levels of ragweed pollenthan in the previous Phase IIa trial. Other rhinitis products have been throughsimilar clinical trial programmes and it was felt that another single nasalallergen study would not have provided sufficient commercial validation. Asexpected, patients showed twice the allergic symptom score compared to theprevious trial. Thus the lack of efficacy observed may have been because theamount of histamine released exceeded the availability and binding capacity ofrEV131. The amount of histamine released and involved in allergic andinflammatory conditions is not known. Evolutec has effectively demonstrated themechanism of action of rEV131 and shown preclinical and clinical efficacy.However, during the course of the rEV131 development programme the Company hasfound itself at the centre of an evolving knowledge base concerning theimportance of histamine in inflammation. The recent clinical trial resultsdemonstrate the challenge of validating a novel mechanism of action for apotential first in class therapy. The Company has no plans to make furtherinvestment in rEV131 in allergic rhinitis or post-cataract inflammation. Topical rEV131 administration to both the eye and the nose did not meet thenecessary efficacy goals. The Company has confirmed the excellent patient safetyprofile of rEV131 and the lack of immunogenic response from a recombinantprotein isolated from tick saliva. Evolutec has reviewed its strategy for rEV131and believes that two areas warrant further consideration. rEV131 has shownefficacy in preclinical models of Acute Respiratory Distress Syndrome and thismay offer a long term investment opportunity. Furthermore intravenous deliverywould negate any weakness in the pharmacokinetic profile of rEV131. Secondly thedemonstration that, rather unexpectedly, rEV131 penetrates the skin might offera lower risk strategy to explore dermatological indications where histamine isimplicated in pruritus and dermatitis. The clinical programmes in dry eye andasthma have been cancelled. rEV576 The preclinical programme with rEV576, a novel complement inhibitor, has madegood progress in 2006. This development candidate binds C5a in the complementcascade. Unlike histamine, C5a levels can be predicted and monitored inpreclinical and clinical situations. This means that intravenous delivery ofrEV576 can be adjusted to bind varying levels of C5a in the body. Furthermorethis mechanism of action has been validated by Alexion Pharmaceuticals Inc whowill launch eculizumab in the orphan indication paroxysmal nocturnalhaemoglobinuria in 2007. The Company has generated positive results in preclinical models of myastheniagravis, Guillain-Barre Syndrome ("GBS"), acute myocardial infarction and asthma.Myasthenia gravis and GBS are autoimmune conditions in which disease impacts theperipheral nervous system. These two areas are commercially attractive as theyare not only areas of high unmet clinical need, but also small patient numbers,potentially allowing direct sales rather than marketing via a partner. These arealso potential orphan drug indications which would allow the Company reduceddevelopment expenditure and a period of marketing exclusivity. The myasthenia gravis research collaboration at Case Western is led by ProfessorKaminski who is funded by the National Institutes of Health ("NIH"). This workhas shown that rEV576 impacts both mild and severe disease in the preclinicalmodels. The models reflect the chronic disease closely because antibodies aredeveloped in vivo. These results are important as they suggest that rEV576 couldbe used as a rescue therapy during myasthenic crises. Evolutec has focused itscommercial activities in developing a solid understanding of the commercialopportunity in myasthenia gravis. The Company believes that the US market forsuch an acute therapy is approximately $100 million. In the GBS model, rEV576had a significant effect in reducing moderate levels of disease. The Company has applied for orphan indication in myasthenia gravis and the FDAhave indicated that they would need to see further progress on the manufactureof current Good Manufacturing Practice ("cGMP") material before granting orphanstatus. Work leading to the production of cGMP material is underway with WackerBiotech GmbH ("Wacker"). In a preclinical asthma model, inhaled rEV576 significantly reduced airwayhyper-responsiveness with good effect at low doses. Effects were comparable tothe commercial standard budesonide. In addition, rEV576 reduced the number ofeosinophils in the bronchoalveolar lavage fluid suggesting a reduction inunderlying inflammation. Recent evidence suggests that activation of thecomplement system is associated with the more severe forms of asthma. It ispossible that rEV576 could be suited to severe asthma patients and furtherexamination of the economics of this market are required. The rEV576 process development work with Wacker has progressed well and was ontrack to deliver the clinical grade material required for clinical studies in2007. Evolutec had intended to progress rEV576 to the clinic in 2007. However,in exploring strategic options for the business it has been decided that theseplans will be delayed until 2008. Evolutec is now seeking to partner rEV576prior to entering the clinic with this development candidate. Discussions have continued with Merial regarding Evolutec's animal vaccines andwe are awaiting their response to the proposed continuation of this work. rEV598 was found to have limited activity when evaluated in a preclinical modelof chemotherapy induced nausea and vomiting. No further work will be undertakenwith rEV598 at this stage. A research feasibility programme commenced in October 2006 with AtherisLaboratories in Switzerland. The programme examines the feasibility of isolatingfurther proteins and peptides from the saliva of the deer tick and will use bothgenomics and proteomics approaches to evaluate potential activities. The projecthas enjoyed excellent momentum and is ahead of schedule with a goal of producingpreclinical molecules at the end of 2007. In 2006, Malcolm Darvell joined the board as a Non-Executive Director. Malcolmis Chief Executive Officer of Rontech a software supplier to the financialservice industry. During 2006, the Company employed Lisa Wilson-Campbell asClinical Research Manager; Lisa is the Company's first US employee. AndrewMoberly also joined the business in the role of part-time Company Secretary.These recruitments increased the total number of Evolutec full-time employees totwelve. Following the disappointing clinical results the company has made fourredundancies. In the last three years Evolutec has undertaken three clinical trials withrEV131, managed two manufacturing programmes and developed rEV576 to a positionthat it can progress to the clinic in the next 12 months. Prior to the latestclinical trials the Company made good progress with partnering rEV131. TheCompany's animal vaccines have been partnered with Merial. Despite the strongscience behind Evolutec's technology the most recent clinical trial resultsfailed to realise value for the Company's shareholders. The immediate focus forthe business is to consider all strategic options to realise value for itsshareholders. In January 2007 the Company appointed Numis Securities Limited toadvise on strategic options; Numis will also act as broker and adviser toEvolutec. It leaves me to thank the staff within the business for their substantialefforts in delivering the preclinical and clinical programmes in a timely andhighly professional manner. Mark Carnegie BrownChief Executive Officer26 February 2007 Financial review Evolutec had cash and cash equivalents of £8.7 million as at 31 December 2006. Evolutec reports 2006 operating loss of £(12.9) million, which is within marketexpectations. the principal expenditure items in 2006 were the Phase ii trialsin rhinitis and post-cataract inflammation. International Financial Reporting Standards ("IFRS") The financial results for the year ended 31 December 2006 are the first annualresults prepared in accordance with IFRS. In accordance with IFRS 1, the resultsfor the year ended 31 December 2005 have been restated to comply with IFRS. Balance sheet Share capital The Company issued 2.4 million shares via a placing in November 2006 bringingthe number of 10p ordinary shares in issue at the year-end up to 26.0 million. Liquidity The Group had cash and held-to-maturity investments of £8.7 million as at 31December 2006 compared with £17.6 million as at 31 December 2005. The decreasein cash and held-to-maturity investments reflects the expenditure during 2006,principally on the Company's lead drug development candidate, rEV131. The netcash outflow from operating activities was £12.0 million (2005: £5.6 million)reflecting the Group's expenditure for the period. The Group had no borrowings during the year (2005: £nil). Treasury As at 31 December 2006 the Group had £8.2 million on treasury deposit. TheGroup's policy is to split its deposits between at least two banks each with aminimum credit rating of F1/A. The objective is to derive the maximum interestconsistent with flexibility to undertake ongoing activity and safeguarding theasset. A material portion of Evolutec's expenditure is US Dollar denominated and asmaller portion is Euro denominated. This means that Evolutec is exposed toexchange rate movements in these currencies. The Group's policy is not to engagein speculative transactions or derivatives trading in respect of cash balancesheld. The objective is to monitor closely the movement in these exchange ratesand to buy foreign currencies as and when appropriate. The weakening US Dollar has led to an unrealised foreign exchange loss of £0.2million for 2006 (2005: gain of £0.4 million). Cash flow Net cash outflow from operating activities in the year was £12.0 million (2005:£5.6 million). The principal cash inflow items were net interest receipts of£0.6 million (2005: £0.4 million) and receipt of the research and developmenttax credit for the prior period of £0.5 million (2005: £0.2 million). Other than the operating expenditure, the principal cash outflow was capitalexpenditure of £0.1 million (2005: £0.2 million). This capital expenditure wasmainly in relation to refurbishment of additional office space and officeequipment. Income statement Revenue Evolutec is a clinical stage biopharmaceutical company and as such has no sourceof direct revenue. The revenue for the period was £14,000 (2005: £14,000)relating to payments for materials supplied to Merial in connection with itswork in relation to animal vaccines. Selling and marketing The selling and marketing costs of £0.2 million (2005: £nil) reflect costs ofmarket research in the respiratory and ophthalmology markets. Research and development Higher research and development expenditure of £10.5 million (2005: £5.3million) reflects increased development activity with the lead molecule rEV131.In particular, it includes the cost of the 300 patient Phase IIb allergicrhinitis clinical trial and the 150 patient post-cataract inflammation trial. Italso includes costs associated with the development of a cGMP manufacturingprocess for rEV576 carried out by Wacker Biotech GmbH. Administrative expenses The increase in administrative expenses to £2.2 million (2005: £1.7 million)reflects the full-year cost associated with the additional staff recruitedduring the second half of 2005 as well as the additional employee recruited in2006. At the end of 2006, Evolutec had 12 full-time employees compared to 11full-time employees the beginning of the year. Since the year-end, 4 employeeshave been made redundant leaving Evolutec with 8 full-time employees. Interest receivable and interest payable Foreign exchange gains and losses are shown under finance income and financecosts respectively. Interest receivable increased to £0.6 million (2005: £0.4million) reflecting the higher average cash balance during 2006. In 2006, therewas a foreign exchange loss of £0.2 million (2005: foreign exchange gain: £0.4million). Taxation The Group's research and development tax credit of £0.6 million (2005: £0.5million) reflects the Group's qualifying research and development expenditure. Nicholas BadmanChief Financial Officer26 February 2007 Consolidated income statementFor the year ended 31 December 2006 Year ended Year ended 31 December 31 December 2006 2005 Restated Note £000 £000Revenue 2 14 14Cost of sales (1) (6) _________ _________Gross Profit 13 8 (189) - Selling and marketing costsResearch and development expenditure (10,509) (5,346)Administrative expenses (2,172) (1,665) _________ _________Operating loss (12,857) (7,003) 749 1,017Finance incomeFinance costs (364) (147) _________ _________Loss before tax (12,472) (6,133)Taxation 645 528 _________ _________ Loss for the period (11,827) (5,605) _________ _________Basic and diluted loss per ordinary share 3 (49.3)p (34.8)p The results for the period are derived from continuing activities. Balance sheetsAs at 31 December 2006 Group Group Company Company 31 December 31 December 31 December 31 December 2006 2005 2006 2005 Restated RestatedASSETS Note £000 £000 £000 £000Non-current assetsProperty, plant and equipment 140 161 - -Investments - - 3,853 29,186 _________ _________ _________ _________ 140 161 3,853 29,186 _________ _________ _________ _________Current assetsResearch and development tax credits 645 502 - -Trade and other receivables 4 203 819 - -Held-to-maturity investments - 15,877 - -Cash and cash equivalents 8,682 1,739 3,147 - _________ _________ _________ _________ 9,530 18,937 3,147 - _________ _________ _________ _________Total assets 9,670 19,098 7,000 29,186 _________ _________ _________ _________ EQUITYShare capital 27,037 24,402 27,037 24,402Other reserves 5 9,083 8,793 5,349 4,784Retained deficit (27,839) (16,012) (25,386) - _________ _________ _________ _________Equity shareholders' funds 8,281 17,183 7,000 29,186 _________ _________ _________ _________LIABILITIESNon current liabilities 6 34 - - - _________ _________ _________ _________ 34 - - -Current liabilitiesTrade and other payables 6 1,355 1,915 - - _________ _________ _________ _________Total liabilities 1,389 1,915 - - _________ _________ _________ _________Total equity and liabilities 9,670 19,098 7,000 29,186 _________ _________ _________ _________ Statements of changes in shareholders' equity Share Share Other Retained capital Premium reserves deficit TotalGroup £000 £000 £000 £000 £000Balance at 1 January 2005 5,824 4,622 3,734 (10,407) 3,773 _________ _________ _________ _________ _________ Net income recognised directly in equityLoss for the year - - - (5,605) (5,605)Share-based payments charge - - 275 - 275 _________ _________ _________ _________ _________Total recognised income and expense for the period - - 275 (5,605) (5,330) Issue of ordinary shares 1,339 17,421 - - 18,760Cancellation of deferred shares (4,804) - 4,804 - -Purchase of own shares - - (20) - (20) _________ _________ _________ _________ _________Balance at 31 December 2005 2,359 22,043 8,793 (16,012) 17,183 _________ _________ _________ _________ _________Net income recognised directly in equityLoss for the year - - - (11,827) (11,827)Share-based payments charge - - 290 - 290 _________ _________ _________ _________ _________Total recognised income and expense for the period - - 290 (11,827) (11,537) Issue of ordinary shares 236 2,399 - - 2,635 _________ _________ _________ _________ _________Balance at 31 December 2006 2,595 24,442 9,083 (27,839) 8,281 _________ _________ _________ _________ _________CompanyBalance at 1 January 2005 5,824 4,622 - - 10,446 _________ _________ _________ _________ _________Net income recognised directly in equityCancellation of deferred shares (4,804) - 4,804 - -Purchase of own shares - - (20) - (20) _________ _________ _________ _________ _________Total recognised income and expense for the period (4,804) - 4,784 - (20) Issues of ordinary shares 1,339 17,421 - - 18,760 _________ _________ _________ _________ _________Balance at 31 December 2005 2,359 22,043 4,784 - 29,186 _________ _________ _________ _________ _________ Net income recognised directly in equityImpairment charge - - - (25,386) (25,386)Share-based payments charge - - 565 - 565 _________ _________ _________ _________ _________Total recognised income and expense for the period - - 565 (25,386) (24,821) Issue of ordinary shares 236 2,399 - - 2,635 _________ _________ _________ _________ _________Balance at 31 December 2006 2,595 24,442 5,349 (25,386) 7,000 _________ _________ _________ _________ _________ Cash flow statementsfor the year ended 31 December 2006 Group Year Group Year Company Company ended ended Year Year 31 December 31 December Ended Ended 2006 2005 31 December 31 December Restated 2006 2005 Restated £000 £000 £000 £000 Cash flows from operating activitiesLoss for the period (11,827) (5,605) (25,386) -Taxation (645) (528) - -Depreciation 87 29 - -Interest received (595) (429) - -Fair value adjustment on investment in subsidiary - - 25,386 -Unrealised foreign exchange losses/(gains) 81 (311) - -Share options - value of employee services 290 275 - -Decrease/(increase) in trade and other receivables 616 (741) - -(Decrease)/Increase in trade and other payables (526) 1,548 - - _________ _________ _________ _________Cash used by operations (12,519) (5,762) - -Taxation received 502 203 - - _________ _________ _________ _________Net cash outflow from operating activities (12,017) (5,559) - - _________ _________ _________ _________ Cash flows from investing activitiesPurchase of property, plant and equipment (66) (179) - -Decrease/(increase) in investment in subsidiary - - 512 (18,740)Interest received 595 429 - -Decrease/(increase) in held-to-maturity investments 15,877 (13,167) - - _________ _________ _________ _________Net cash generated from investing activities 16,406 (12,917) 512 (18,740) _________ _________ _________ _________Cash flows from financing activitiesProceeds from issuance of shares 2,635 18,760 2,635 18,760Purchase of treasury shares - (20) - (20) _________ _________ _________ _________Net cash generated from financing activities 2,635 18,740 2,635 18,740 _________ _________ _________ _________ Net increase/(decrease) in cash and cash equivalents 7,024 264 3,147 -Cash and cash equivalents at the start of the period 1,739 1,374 - -Exchange gains/(losses) on cash and bank overdrafts (81) 101 - - _________ _________ _________ _________Cash and cash equivalents at the end of the period 8,682 1,739 3,147 - _________ _________ _________ _________ Preliminary results for the year ended 31 December 2006 1. Accounting policies and basis of preparation Prior to 2006, the Group prepared its audited financial statements under UKGAAP. For the year ended 31 December 2006, the Group has decided to prepare itsannual consolidated financial statements in accordance with accounting standardsas adopted in the European Union ("EU"). As such, these financial statementswill take account of the requirements and options in IFRS 1 "First-time Adoptionof International Financial Reporting Standards" as they relate to the 2005comparatives included therein. Evolutec is a research and development-based pharmaceutical business whichexpects to incur further losses until revenues from product sales, royaltyincome and milestone receipts exceed expenditure on the product portfolio aswell as overheads and administrative costs. Following the negative trial resultswith rEV131, all strategic options for the Group are being explored. Whilst theBoard is exploring strategic options for the Group, the Directors consider thatit is reasonable for the financial information to be prepared on a going concernbasis. However, if Evolutec were unable to continue in operational existence forthe foreseeable future, adjustments would have to be made to reduce the balancesheet value of assets to their recoverable amounts, and to provide for furtherliabilities that might arise, and to reclassify fixed assets and long-termliabilities as current assets and liabilities. Basis of preparation These financial statements have been prepared in accordancewith International Financial Reporting Standards and IFRIC interpretationsendorsed by the EU and with those parts of the Companies Act, 1985 applicable tocompanies reporting under IFRS. The financial statements have been preparedunder the historical cost convention. Certain of the requirements and options in IFRS 1 relating to comparativefinancial information presented on first-time adoption may result in a differentapplication of accounting policies in the 2005 restated financial information tothat which would apply if the 2005 financial statements were the first financialstatements of the Group prepared in accordance with IFRS. An explanation of howthe transition from UK GAAP to IFRS has affected the Group's financial position,income statement and cash flow is set out in Note 7. Company income statement In accordance with the provisions of Section 230 of theCompanies Act 1985, no separate income statement has been presented for EvolutecGroup plc. The results for the Company are also presented under IFRS. Accounting policies The principal accounting policies adopted in the preparationof these financial statements are set out below. These policies have beenconsistently applied to all periods presented, unless otherwise stated. Basis of consolidation The consolidated financial statements of the Groupinclude the accounts of Evolutec Group plc and all its subsidiary undertakings(together, the "Group"), made up to 31 December 2006. Inter-company transactionsare eliminated on consolidation. The identifiable assets and liabilities of subsidiary undertakings accounted forunder acquisition accounting principles are included in the consolidated balancesheet at their fair values at the date of acquisition. The results and cashflows of such subsidiaries are brought into the Group accounts only from thedate of acquisition. The combination of Evolutec Group plc and Evolutec Limited in 2004 was accountedfor under merger accounting principles. Revenue The Group generates revenue by licensing its technologies. Therecognition of such revenue, including up front and milestone payments, isdependent on the terms of the related arrangement, having regard to the ongoingrisks and rewards of the arrangement, and the existence of any performance orrepayment obligations with any third party. Non-refundable access fees, options fees and milestone payments receivable forparticipation by a third party in development and commercialisation of a productdevelopment candidate are recognised when they become contractually binding,provided there are no related commitments of the Group. Where there are relatedcommitments, revenue is recognised on a percentage-of-completion basis in linewith the actual levels of expenditure incurred in fulfilling these commitments.All other licence income and contract research fees are recognised over theaccounting period to which the relevant services relate. Revenues derived fromgrants received are recognised in line with the related expenditure. Royaltyincome is recognised in relation to sales to which the royalty relates. Operating leases Costs in respect of operating leases are charged to the profitand loss account on a straight-line basis over the terms of the leases. Share-based payments The Group makes equity-settled share-based payments to itsemployees and Directors. Equity-settled share-based payments are measured atfair value at the date of grant and expensed on a straight-line basis over thevesting period of the award. At each balance sheet date, Evolutec revises itsestimate of the number of options that are expected to become exercisable. The value of any shares or options granted is charged to the profit and lossaccount over the period the shares vest, with a corresponding credit toreserves. When share options are exercised, the proceeds received, net of anytransaction costs, are credited to share capital (nominal value) and sharepremium. The principal assumptions used to calculate the value of options issued are: Share price volatility 45%Risk free rate of return 4.5%Date of exercise Normally assumed to be the first possible exercise date Employee benefits All employee benefit costs, notably holiday pay andcontributions to personal defined contribution pension plans, are charged to theincome statement on an accruals basis. The Group does not offer any otherpost-retirement benefits. Taxation Current tax, including UK corporation tax and research and developmenttax credits, is provided (or shown) at amounts expected to be paid (orrecovered) using the tax rates or laws that have been enacted, or substantiallyenacted, by the balance sheet date. Credit is taken in the accounting period for research and development taxcredits, which will be claimed from HM Revenue and Customs in respect ofqualifying research and development costs incurred in the same accountingperiod. Deferred tax is recognised in respect of all temporary differences identified atthe balance sheet date. Temporary differences are differences between thecarrying amount of the Group's assets and liabilities and their tax base. A deferred tax asset is recognised only when, on the basis of all the availableevidence, it can be regarded as probable that there will be suitable taxableprofits, within the same jurisdiction, in the foreseeable future against whichthe deductible temporary difference can be utilised. Deferred tax is provided on temporary differences arising in subsidiaries,except where the timing of reversal of the temporary difference can becontrolled and it is probable that the temporary difference will not reverse inthe foreseeable future. Deferred tax is measured at the average tax rates that are expected to apply inthe periods in which the asset is realised or liability settled, based on taxrates and laws that have been enacted or substantially enacted by the balancesheet date. Measurement of deferred tax liabilities and assets reflects the taxconsequence expected to follow from the manner in which the asset or liabilityis recovered or settled. Property, plant and equipment Property, plant and equipment are stated athistoric cost less depreciation and any provision for impairment. Historic costcomprises the purchase price together with any incidental costs of acquisition.Depreciation is calculated to write off the cost, less residual value, oftangible fixed assets in equal annual instalments over their estimated usefullives as follows: Plant and machinery 3-5 yearsOffice equipment 3-5 yearsFixtures and fittings 3 years The carrying values of plant and equipment are reviewed for impairment whenevents or changes in circumstances indicate that carrying value may not berecoverable. The assets' residual values and useful lives are reviewed andadjusted, if appropriate, at each financial year-end. Internally-generated intangible assets - product research and developmentDevelopment expenditure on new or substantially improved products is capitalisedas an intangible asset and amortised through cost of sales over the expecteduseful life of the product concerned. Capitalisation commences from the pointat which the technical feasibility and commercial viability of the product canbe demonstrated and the Group is satisfied that it is probable that futureeconomic benefit will result from the product once completed. This is usuallyat the point of regulatory filing in a major market and approval is highlyprobable. Capitalisation ceases when the product is ready for launch. Whereassets are acquired or constructed in order to provide facilities for researchand development over a number of years, they are capitalised and depreciatedover their useful lives. Expenditure relating to clinical trials is accrued ona percentage-of-completion basis with reference to fee estimates with thirdparties. Expenditure on research and development activities which do not meet the abovecriteria is charged to the income statement as incurred. Financial instruments The Group's financial instruments comprise cash and cashequivalents, held-to-maturity financial assets and various receivables andpayables, such as trade receivables and trade and other payables, which arisedirectly from its operations. The Group does not enter into derivativetransactions or other forms of hedging arrangements. Held-to-maturity investments Held-to-maturity investments are non-derivativefinancial assets with fixed or determinable payments and fixed maturities thatthe Group's management has the positive intention and ability to hold tomaturity. Assets in this category are held at amortised cost. Held-to-maturityinvestments include short-term investments with original maturities of more than3 months. Cash and cash equivalents Cash and cash equivalents include cash in hand, bankdeposits repayable on demand and other short-term highly liquid investments withoriginal maturities of 3 months or less. Foreign currencies Transactions in foreign currencies are translated intosterling at the rate of exchange ruling at the transaction date. Monetary assetsand liabilities in foreign currencies are retranslated into sterling at therates of exchange ruling at the balance sheet date. Differences arising due toexchange rate fluctuations are taken to the income statement in the period inwhich they arise. 2. Segmental information Primary reporting format - business segments At 31 December 2006, the Group operates a single business segment, which is theresearch and development of a range of pharmaceutical product candidates. Ananalysis of revenue by category within the research and development businesssegment is as follows: Analysis of revenue by category Year ended Year ended 31 December 31 December 2006 2005 £000 £000 Collaborative agreements 14 14 _____ _____Total 14 14 _____ _____ Secondary reporting format - geographical segments The Group operates in four main geographical areas, even though it is managed ona worldwide basis. The home country of the Company, and of Evolutec Limited -which is the main operating company - is the United Kingdom. The area ofoperation is primarily research and development of a range of pharmaceuticalproduct candidates. Revenue Year ended Year ended 31 December 31 December 2006 2005 £000 £000 United Kingdom - -Rest of Europe - -North America 14 14Rest of the World - - _____ _____Total 14 14 _____ _____ Total assets 31 December 31 December 2006 2005 £000 £000 United Kingdom 9,670 19,098Rest of Europe - -North America - -Rest of the World - - _____ _____Total 9,670 19,098 _____ _____ Total assets are allocated based on where the assets are located. Capital expenditure Year ended Year ended 31 December 31 December 2006 2005 £000 £000 United Kingdom (Note 8) 66 179Rest of Europe - -North America - -Rest of the World - - _____ _____Total 66 179 _____ _____ Capital expenditure is allocated based on where the assets are located. 3. Loss per share Basic loss per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year. For diluted loss per share, the weighted average number of ordinary shares inissue is adjusted to assume conversion of all dilutive potential ordinaryshares. Since the group is loss-making there is no such dilutive impact. Year ended Year ended 31 December 31 December 2006 2005 Attributable loss (£000) (11,827) (5,605)Weighted average number of shares in issue (000) 24,011 16,096Loss per share (basic and diluted) (49.3)p (34.8)p All potential ordinary shares including options and conditional shares areanti-dilutive. 4. Trade and other receivables Group Group Company Company 31 December 31 December 31 December 31 December 2006 2005 2006 2005 £000 £000 £000 £000 Non-current trade and other receivables - - - - _____ _____ _____ _____ Trade receivables - 17 - -Other receivables 24 21 - -Prepayments and accrued income 179 781 - - _____ _____ _____ _____Current trade and other receivables 203 819 - - _____ _____ _____ _____ 5. Other reserves Share-based Capital Merger Own shares held Total payments Redemption reserve by Employee £000 reserve reserve Benefit Trust £000 £000 £000 £000GroupBalance at 1 January 2005 - - 3,734 - 3,734Fair value of share-based payments 275 - - - 275Cancellation of deferred shares - 4,804 - - 4,804Purchase of own shares - - - (20) (20) _____ _____ _____ _____ _____Balance at 31 December 2005 275 4,804 3,734 (20) 8,793Share-based payments charge 290 - - - 290 _____ _____ _____ _____ _____Balance at 31 December 2006 565 4,804 3,734 (20) 9,083 _____ _____ _____ _____ _____ CompanyBalance at 1 January 2005 - - - - -Cancellation of deferred shares - 4,804 - - 4,804Purchase of own shares - - - (20) (20) _____ _____ _____ _____ _____Balance at 31 December 2005 - 4,804 - (20) 4,784Share-based payments charge 565 - - - 565 _____ _____ _____ _____ _____Balance at 31 December 2006 565 4,804 - (20) 5,349 _____ _____ _____ _____ _____ The share-based payments reserve arises from the value of share-based paymentsto employees which are recognised over the vesting period. The merger reserve arises as a difference on consolidation under mergeraccounting principles and is solely in respect of the merger of Evolutec Groupplc and Evolutec Limited in a prior period. The reserve represents thedifference between the nominal value of shares issued by Evolutec Group plc inconsideration for Evolutec Limited shares and the nominal value and sharepremium and other capital reserves of Evolutec Limited shares at the date of themerger. The capital redemption reserve arises from the off-market purchase of deferredshares on 4 May 2005 and their subsequent cancellation. 6. Trade and other payables Group Group Company Company 31 December 31 December 31 December 31 December 2006 2005 2006 2005 £000 £000 £000 £000 Provision for NI on share options 34 - - - _____ _____ _____ _____Non Current trade and other liabilities 34 - - - Trade payables 165 599 - -Taxation and social security payable 136 109 - -Accruals 1,054 1,207 - - _____ _____ _____ _____Current trade and other liabilities 1,355 1,915 - - _____ _____ _____ _____ Total trade and other liabilities 1,389 1,915 - - _____ _____ _____ _____ 7. Explanation of transition to IFRS These financial statements have been prepared in accordance with the recognitionand measurement principles of IFRS. The following disclosures are required inthe period of transition. For the purpose of this financial information the lastinterim statements were for the six month period ended 30 June 2006, the lastannual financial statements were for the year ended 31 December 2005, and thedate of transition to IFRS was 1 January 2005. IFRS 1 "First-time Adoption of International Financial Reporting Standards" setsout the transition rules which must be applied when IFRS is adopted for thefirst time. As a result, certain of the requirements and options in IFRS 1 mayresult in a different application of accounting policies in the 2005 restatedfinancial information from that which would apply if the 2005 financialstatements were the first financial statements. The standard sets out certainmandatory exemptions to retrospective application and certain optionalexemptions. The most significant optional exemption available taken by the Group is inrespect of business combinations. The Group has elected not to apply IFRS 3 "Business Combinations" retrospectively to business combinations that took placeprior to the transition date. Consequently, goodwill arising on businesscombinations before the transition date remains at its previous UK GAAP carryingvalue of £nil at the date of transition from the UK GAAP financial statements. Reconciliation of equity and loss There were no adjustments required to eithernet assets or loss under UK GAAP in order to arrive at net assets or loss underIFRS. As shown in the following tables, there have been adjustments withincurrent assets to reclassify short-term investments with original maturities of3 months or less as cash and cash equivalents; within equity to reclassify ownshares purchased as other reserves; and within the income statement toreclassify exchange gains and losses as finance income and similar financecosts, respectively. Reconciliation of the consolidated income statement There were no adjustmentsrequired to the consolidated income statement under UK GAAP in order to arriveat the consolidated income statement under IFRS. Reconciliation of Company primary statements There were no adjustments requiredto the Company's primary statements as a result of the transition to IFRS. Reconciliation of balance sheet presentation at 1 January 2005(date of transition to IFRS) UK IFRS GAAP effect IFRS £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 11 - 11 _____ _____ _____ 11 - 11 _____ _____ _____Current assetsResearch and development tax credits 177 - 177Trade and other receivables 78 - 78Held-to-maturity investments a 3,761 (1,261) 2,500Cash and cash equivalents a 113 1,261 1,374 _____ _____ _____ 4,129 - 4,129 _____ _____ _____Total assets 4,140 - 4,140 _____ _____ _____ EQUITYCapital and reserves attributable to the equity holders of the CompanyShare capital 10,446 - 10,446Other reserves 3,734 - 3,734Retained deficit (10,407) - (10,407) _____ _____ _____Total equity 3,773 - 3,773 _____ _____ _____ LIABILITIESCurrent liabilitiesTrade and other payables 367 - 367 _____ _____ _____Total liabilities 367 - 367 _____ _____ _____Total equity and liabilities 4,140 - 4,140 _____ _____ _____ Reconciliation of balance sheet presentation at 31 December 2005 UK IFRS GAAP effect IFRS £000 £000 £000ASSETSNon-current assetsProperty, plant and equipment 161 - 161 _____ _____ _____ 161 - 161 _____ _____ _____Current assetsResearch and development tax credits 502 - 502Trade and other receivables 819 - 819Held-to-maturity investments a 17,013 (1,136) 15,877Cash and cash equivalents a 603 1,136 1,739 _____ _____ _____ 18,937 - 18,937 _____ _____ _____Total assets 19,098 - 19,098 _____ _____ _____ EQUITYCapital and reserves attributable to the equity holders of the CompanyShare capital 24,402 - 24,402Capital redemption reserve 4,804 - 4,804Other reserves 3,989 - 3,989Retained deficit (16,012) - (16,012) _____ _____ _____Total equity 17,183 - 17,183 _____ _____ _____ LIABILITIESCurrent liabilitiesTrade and other payables 1,915 - 1,915 _____ _____ _____Total liabilities 1,915 - 1,915 _____ _____ _____Total equity and liabilities 19,098 - 19,098 _____ _____ _____ Reconciliation of income statement presentation for the year ended 31 December2005 UK IFRS GAAP effect IFRS £000 £000 £000 Revenue 14 - 14Cost of sales (6) - (6) _____ _____ _____Gross profit 8 - 8Research and development expenditure (5,346) - (5,346)Administrative expenses b (1,224) (441) (1,665) _____ _____ _____Operating loss (6,562) (441) (7,003) b 429 441 870Interest receivable and similar income _____ _____ _____Loss before tax (6,133) - (6,133) 528 - 528Tax credit on loss on ordinary activities _____ _____ _____Loss for the period (5,605) - (5,605) _____ _____ _____ Notes to the reconciliation of presentation of balance sheets and incomestatements a. Under IFRS, short-term investments with a maturity of three months or less at the date of acquisition are included in cash and cash equivalents. b. Under IFRS, Evolutec has chosen to reclassify foreign exchange gains and losses within finance income and finance costs, respectively. Explanation of the principal differences between the cash flow statementspresented under UK GAAP and the cash flow statements presented under IFRS The cash flow statement has been prepared in conformity with IAS 7 "Cash FlowStatements". The principal differences between the 2005 cash flow statementspresented in accordance with UK GAAP and the cash flow statements presented inaccordance with IFRS for the same periods are as follows: Under UK GAAP, net cash flow from operating activities was determined beforeconsidering cash out flows from (a) returns on investments and servicing offinance, (b) taxes paid. Under IFRS, net cash flow from operating activities isdetermined after these items. Under UK GAAP, capital expenditure, financial investments and acquisitions wereclassified separately, while under IFRS they are classified as investingactivities. Under UK GAAP, movements in short-term investments were not included in cash butclassified as management of liquid resources. Under IFRS, short-term investmentswith maturity of three months or less at the date of acquisition are included incash and cash equivalents. 8. Publication of non-statutory accounts The financial information set out in this preliminary announcement does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. The balance sheets at 31 December 2006 and the consolidated income statement,statements of changes in shareholders' equity, cash flow statements andassociated notes for the year then ended have been extracted from the Group's2006 statutory financial statements upon which the auditor's opinion isunqualified and does not include any statement under section 237 of theCompanies Act 1985. The auditor has included an emphasis of matter paragraph inrespect of going concern in their audit report. Those financial statements have not yet been delivered to the Registrar ofCompanies. This information is provided by RNS The company news service from the London Stock Exchange