TSL.L Regulatory News (TSL)

28 Sep 2006 07:03

Tissue Science Laboratories PLC28 September 2006 28 September 2006 Interim Results for the six months ended 30 June 2006 Tissue Science Laboratories plc (LSE: TSL), the medical technology companyspecialising in biologic tissue replacement and repair products, today announcesits Interim Results for the six months ended 30 June 2006. Operational Highlights • Successful expansion of direct sales team leading to strong growth in US general surgery sales. Further sales team expansion underway• Excellent progress made in vascular, ligament and bone development projects• Further value potential in core technology• Partner channels delivered lower than forecast sales in urology and orthopaedics Financial Highlights • Turnover up 8% to £5.4m (H1 2005: £5.0m)• Improved margins at 68% (H1 2005: 51%) as a result of increased manufacturing efficiency and improved sales mix• Loss before tax £1.8m (H1 2005: Loss £0.8m) in line with management expectations• Solid cash position - £4.8m (31 Dec 2005: £6.8m) due to continued careful cash management Commenting on the results, Martin Hunt, CEO of TSL, said: "Our performance in the first half of the year has been characterised by thegood progress made in our direct sales and marketing efforts and the positivedevelopment of our clinical programme and technology pipeline. This gives usmuch confidence for the future of the Company. We have invested in theprogrammes set out in our fund raising in 2005 and are now beginning to see thebenefits of that strategy. These positives have, however, been offset by thedisappointing performance of our US distributors and marketing partners in thefirst half of the year. Assuming partner sales do not recover materially in thesecond half, our results for the year will be some way below current marketexpectations. Despite this near term sales volatility, the Board remainsconfident in both our technology and chosen markets and that there remains asignificant opportunity for future growth and value creation." -Ends- There will be a meeting for analysts this morning at 09.30am at HogarthPartnership's offices - 2nd Floor Upstream, No 1 London Bridge, London SE1 9BG.For registration and/or enquiries, please contact Julie Cordice, Hogarth PR ontel: 020 7357 9477 or jcordice@hogarthpr.co.uk. Enquiries: TSL plc Tel: 01252 369 603Martin Hunt, Chief ExecutiveDavid Jennings, Finance Director Hogarth Partnership Limited Tel: 020 7357 9477James Longfield / Sarah Richardson www.tissuescience.com. Chief Executive's Statement Strategy Overview Our mission is to establish TSL as a leading player in the rapidly developingfield of biologic surgical repair materials. Our core Permacol(R) technologyplatform already offers surgeons differentiated and innovative products derivedfrom porcine dermis across a broad range of surgical applications. We are alsomaking good progress in applying our technology across other tissues to developour new product pipeline. In March 2005 we raised funds to develop our business in three principal areas.Investment in building a direct sales and marketing infrastructure in the US,supplementing our previous model of dependence on marketing and distributionpartners to one where we are increasingly able to control the sales marketing ofour products in selected market sectors. Investment in clinical studies tosupport our marketing platform, and investment in new product development toprovide the next generation of products from our core technology from newtissues such as porcine bone, ligaments and blood vessels. Business Review H1 2006 We have been very encouraged by the progress made in each of these areas in thefirst half. Our US sales team has achieved significant success with Permacol in the firsthalf and this has led to the decision to further expand the sales team in thesecond half of the year. It is important to note that the progress of our directUS sales operation has been masked by lower than expected sales through ourpartner channels in the first half of the year. This lack of visibility orcontrol of partner sales has been a driver in the Board's decision to evolve ourUS business model. In urology/gynaecology, CR Bard has faced an increasingly competitive marketenvironment leading to lower in-market sales in the pelvic-floor reconstructionand incontinence procedures addressed by our range of products. In orthopaedicsZimmer continues to support our product in Rotator Cuff repair in a verypositive way, however, the priority given to biologic materials and the rate ofadoption by the Zimmer sales organisation has been lower than we hadanticipated. Investment in clinical trials which demonstrate the benefits of our corePermacol(R) technology is vital for the future success of the business. Werecently announced positive results from pilot studies in the prophylactictreatment of parastomal hernias and the treatment of anal fistulae. Recruitmentinto our extended studies for therapeutic and prophylactic repair of parastomalhernias is underway. We have made very exciting progress in our new product development programmes.We are developing products using porcine bone and ligaments to addressattractive orthopaedic applications and using porcine blood vessels to developgrafts for use in vascular surgery. Process development and clinical work hasprogressed well in the first half and we have completed pilot scale animalstudies to assess the further potential of all three products. Financial Review Turnover in the first half of the year was £5.4m (H1 2005: £5.0m) an increase of8%. On a constant currency basis (translating H1 2006 revenues at the same $/£exchange rate as that used in H1 2005) turnover increased by 4%. Althoughturnover has shown only modest growth in total during the period, this hasmasked strong growth in general surgery sales in both the US and Europe whichhas been offset by a decline in sales in urology/gynaecology through CR Bard. Sales in general surgery in the US increased by 63% in the first half to $4.4m(H1 2005 $2.7m). Sales growth was driven principally by our direct US sales teamand we are planning further recruitment in the second half as we move from acombined direct/distributor sales model to direct sales only model in certainmarkets. Although the sales team is still new, we have achieved some notablesuccesses in the period and have built a strong base to support further growthgoing forward. We are satisfied that investment in the direct sales model in theUS will yield significant returns in terms of future growth and profitability.In Europe our UK direct team and our distributors also performed strongly with50% growth to £0.9m (H1 2005: £0.6m). Sales in urology/gynaecology through CR Bard declined in the period by 42% to$2.9m (H1 2005: $5.0m) and this is obviously a significant disappointment. Inour core target market of vaginal repair and incontinence procedures thecompetitive environment has moved rapidly and whilst our product continues toperform well clinically, recent improvement in certain surgical techniques andinnovations in the product offerings of competitors has resulted in lower thananticipated demand for our products. Consequently, Bard has had to re-positionits inventory levels to reflect these new market conditions and this hasresulted in lower stocking orders for the 'Pelvi' range of products so far thisyear. We expect this inventory adjustment to persist into the second half of theyear and thereafter we expect forward sales to recover in line with in-marketdemand. In orthopaedic surgery sales to Zimmer were unchanged at £0.1m (H1 2005: £0.1m).In the first half Zimmer has continued to develop its marketing platform and toroll-out our product through its sales organisation. 'Ortho-biologics' remains anew field for Zimmer and the adoption of our technology by the Zimmer salesteams has been slower than anticipated. We are encouraged by Zimmer's continuedcommitment to the application of our technology in rotator cuff repair andcontinue to be confident for the future prospects for our product in this field. Gross Margins improved strongly in the first half to 68% (H1 2005: 51%). Thiswas a result of increased manufacturing efficiency in the first half resultingin lower unit manufacturing costs being achieved. In addition the increase indirect sales in general surgery relative to partner sales in urology/gynaecologyand orthopaedics contributed to greater profitability at the gross margin level. In line with our investment strategy, the first half saw an increase in costs.Our direct sales team in the US increased the selling and distribution expensesto £1.8m in the first half (H1 2005: £0.7m). Marketing expenses remainedunchanged at £0.9m (H1 2005: £0.9m). Expenditure on new product development andclinical studies increased as planned to £1.4m (H1 2005: £0.6m). Administrationexpenses increased to £1.4m (H1 2005: £1.2m), reflecting our additional USinfrastructure and administration resource versus the same period last year. The US dollar weakened further during the period, trading at an average rate of£1 = $1.79. The Company had in place hedging contracts which enabled a compositerate of £1 = $1.74 to be used in translation of its US dollar denominatedtransactions. The increase in loss before tax to £1.8m (H1 2005 loss: £0.9m) was in line withour expectations for the period and is a result of the planned investments inselling and distribution and product development programme. As at 30 June 2006the company had cash at bank and in hand of £4.8m and net funds of £3.0m,slightly ahead of expectations.The Company continues to manage its resources carefully and will continue todirect resources into areas of our business where we see maximum growthpotential. Sales & Marketing General Surgery - US We started the year with 20 general surgery sales representatives in the US andtheir performance in the first half confirmed our belief in the evolution of ourUS business model. We took the decision at the end of the first half to expandthis team further and by September we have recruited and deployed a further 19reps. We are well on course to achieve our target of having 43 reps in place bythe year-end. This will give us direct sales coverage of the key US metropolitanareas for the first time and we will enter 2007 in a very strong position fromwhich to achieve our growth objectives for next year. We will, as a consequenceof this initiative, terminate our existing non-partner regional distributorarrangements by the end of 2006 and this process is already underway. The decision to invest further in our direct sales team is underpinned by thesignificant growth opportunity that already exists for biologic materials ingeneral and colorectal surgery. The attractiveness of this rapidly growingmarket segment and the product features and benefits offered by porcinematerials has attracted new entrants into the market. Davol, a division of CRBard Inc, has recently introduced 'Collamend' a cross-linked porcine dermalcollagen into complex hernia repair. Lifecell Inc has also indicated that theywill be introducing a porcine derived collagen repair patch into the generalsurgery market next year. We believe both of these developments are a validationof our approach to the general surgery market and that TSL will retainconsiderable 'first mover' advantage in terms of clinical data and productcharacteristics to enable us to meet this competitive threat. In addition we will seek to capitalise on our investment in a direct sales teamby bringing new products through our development pipeline into this field. Wehave identified the therapeutic and prophylactic treatment of herniated stomasas a major market opportunity going forward and are currently conductingclinical studies to support future product launches. We have also made promisingprogress in developing Permacol(R) for the treatment of anal fistulae wherethere is a very large unmet surgical need. Clinical work to support a futureproduct launch in this area is ongoing. Urology/Gynaecology This area of our business has presented a considerable challenge in the firsthalf of the year. I have commented above on the competitive issues faced by ourmarketing partner, CR Bard, and this remains an ongoing concern. We believe thatbio-materials offer surgeons demonstrable clinical advantages over syntheticalternatives, and our challenge is to continue to develop innovative productofferings to meet surgeons' evolving needs. We will work both with our marketingpartner and directly with the market to identify the next opportunities for ourmaterials in what is still new and developing surgical field. Orthopaedics The use of bio-materials in orthopaedic applications is a rapidly developingarea where the characteristics of such materials potentially offer surgeonsadvantages versus traditional techniques. Our dermal sheet product is alreadybeing marketed for rotator cuff repair in the shoulder by Zimmer Inc. and webelieve there is further scope to apply our sheet material in other orthopaedicprocedures such as knee and ankle ligament and tendon repair. Within our productpipeline we have also made excellent progress during the period in thedevelopment of both our bone and ligament tissues which offers us much potentialto offer a much broader orthopaedic product range in the attractive and growingfield of orthobiologics. R&D Excellent progress has been achieved in the development of porcine derived bone,ligament and vascular grafts. Initial milestones of adapting the manufactureprocess to produce the new tissues and assess initial graft biocompatibilityhave been completed. The bone and ligament grafts have each completed initialanimal performance models with encouraging results, and the bone grafts havefurther proceeded to a definitive preclinical animal performance model (startedJune 2006, with results expected in March 2007). The ligament grafts areexpected to proceed to a definitive in-vivo performance study by Q1 2007. We have also started (August 2006) our initial in-vivo functional study withPermacol(R) processed vascular grafts. Pig coronary arteries were removed andreplaced with Permacol(R) processed vascular grafts and to date all grafts arefunctioning satisfactorily. The initial study will be complete in Q4 2006, butinitial interim results are encouraging. Clinical Studies Prophylactic parastomal reinforcement study (PROPHECI) Further data presented from the pilot study investigating the use of Permacol(R)for the reinforcement of new stoma has confirmed that Permacol(R) may havesignificant benefits in this indication. A follow-up multicentre, randomised,controlled clinical study to demonstrate the effectiveness of Permacol(R) forthis indication is in the final stages of initiation. Full COREC (Central Officefor Research Ethics Committees) approval has been granted and individual studysites are undergoing local approvals. Patient recruitment is expected to beginimminently. Parastomal hernia repair study Study sites continue to be enrolled and approved to this multicentre,randomised, controlled study. Patient recruitment is active and ongoing. Urethral Bulking Discussions with potential marketing partners are ongoing. We will not progresswith the US regulatory clinical study until we have secured a commercialagreement for marketing the product. Recent analysis of European clinical studyresults has indicated that Permacol Injection has greater longevity of actionthan previously established - patients may benefit from treatment with thisproduct for up to three years which is significantly longer than other urethralbulking agents. Anal FistulaeWe have received encouraging results from in-vivo studies assessing theperformance of our injectable collagen formulations for the treatment of analfistula, and work is now progressing to develop this formulation for humanclinical study in 2007. Cosmetic InjectionClinical data demonstrates equivalence with market leading products (Perlane(R)& Zyplast(R)) and the company is reviewing its options for the futurecommercialisation of this product. Product approvals/clearances Clearance was received in the US and EU to extend the use of Zimmer CRP(R)(Collagen repair Patch) to include all tendons of the rotator cuff. In additionclearances were obtained for the CR Bard products Pelvisoft(R) and Pelvicol(R)in Australia and Russia respectively. Operations Manufacturing operations performed strongly in the period achieving improvedproduct yields and efficiencies resulting in lower unit manufacturing costs.Stock and work in progress increased in the period as a result of the plannedbuilding of inventory to support our US sales operations and as a result oflower than anticipated demand for some partner products. During the period ourmanufacturing facility successfully completed routine regulatory audits from ourEuropean notified body and distribution partners. Summary and Outlook Our performance in the first half of the year has been characterised by the goodprogress made in our direct sales and marketing efforts and the positivedevelopment of our clinical programme and technology pipeline. This gives usmuch confidence for the future of the Company. We have invested in theprogrammes set out in our fund raising in 2005 and are now beginning to see thebenefits of that strategy. These positives have, however, been offset by thedisappointing performance of our US distributors and marketing partners in thefirst half of the year. Assuming partner sales do not recover materially in thesecond half, our results for the year will be some way below current marketexpectations. Despite this near term sales volatility, the Board remainsconfident in both our technology and chosen markets and that there remains asignificant opportunity for future growth and value creation. Martin HuntChief Executive Officer Tissue Science Laboratories plcConsolidated Profit & Loss Account for the Six Months Ended 30 June 2006 Note Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited)(Unaudited)* (Restated)* £000s £000s £000s TURNOVER: 2 5,367 5,001 10,171Cost of Sales (1,711) (2,432) (5,071) Gross Profit 3,656 2,569 5,100Selling & Distribution costs (1,753) (737) (1,882) Administrative ExpensesResearch and development costs (1,379) (637) (1,297)Other administrative costs (2,380) (2,103) (4,628) --------- ---------- ---------- (3,759) (2,740) (5,925) Operating Loss (1,856) (908) (2,707) Interest Receivable 103 135 293 Interest Payable & similar chargesBank & finance lease interest (75) (27) (94) --------- ---------- ---------- LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (1,828) (800) (2,508)Taxation 0 (22) 140 --------- ---------- ---------- RETAINED LOSS ON ORDINARYACTIVITIES AFTER TAXATION (1,828) (822) (2,368) ========= ========== ==========Basic loss per ordinary share 3 6.2p 3.0p 8.4p ========= ========== ========== All amounts relate to continuing operations. There is no difference between the retained loss on ordinary activities beforeand after taxation for the period stated above and their historical costequivalents. * The profit and loss accounts and cash flow statements for the periods ended 30June 2005 and 31 December 2005, and the balance sheet at 30 June 2005 and 31December 2005, have been restated for the adoption of FRS 20 "Share basedpayment". Tissue Science Laboratories plcConsolidated Statement of total recognised gains and losses for the Six MonthsEnded 30 June 2006 Six months Six months Year ended ended ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited)* (Restated)* £000s £000s £000s Loss attributable toshareholders of the company (1,828) (822) (2,368)Foreign exchange translationdifferences on foreign currencysubsidiary (87) 0 0 --------- ---------- ----------Total recognised losses for theperiod (1,915) (822) (2,368) Prior period adjustment (72) =========Total losses recognised sincelast annual report and financialstatements (1,987) * The profit and loss accounts and cash flow statements for the periods ended 30June 2005 and 31 December 2005, and the balance sheet at 30 June 2005 and 31December 2005, have been restated for the adoption of FRS 20 "Share basedpayment". Tissue Science Laboratories plcConsolidated Balance Sheet as at 30 June 2006 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited)* (Restated)* £000s £000s £000s Fixed Assets Tangible assets 3,190 1,613 3,340 Current Assets Stocks 3,319 2,387 2,301Debtors 2,232 2,110 2,713Cash at bank and in hand 4,839 9,163 6,842 --------- ---------- ---------- 10,390 13,660 11,856 Creditors: amounts falling duewithin one year (2,663) (2,600) (2,482) --------- ---------- ---------- NET CURRENT ASSETS 7,727 11,060 9,374 Total assets less currentliabilities 10,917 12,673 12,714 Creditors: amounts falling dueafter more than one year (1,578) (162) (1,554) --------- ---------- ---------- NET ASSETS 9,339 12,511 11,160 ========= ========== ========== CAPITAL & RESERVES Called up share capital 2,951 2,932 2,946 Share premium account 22,112 21,947 22,075 Shares to be issued 291 195 239 Merger reserve 545 545 545 Profit & loss account (16,560) (13,108) (14,645) ---------- ---------- ---------- EQUITY SHAREHOLDERS' FUNDS 9,339 12,511 11,160 ========== ========== ========== * The profit and loss accounts and cash flow statements for the periods ended 30June 2005 and 31 December 2005, and the balance sheet at 30 June 2005 and 31December 2005, have been restated for the adoption of FRS 20 "Share basedpayment". Tissue Science Laboratories plcConsolidated Cash Flow for the Six Months Ended 30 June 2006 Note Six months Six months ended ended Year ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited)* (Restated)* £000s £000s £000s Net cash outflow fromoperating 4 (1,857) (1,504) (3,301)activities Returns on investment andservicing of Finance 30 72 196 Taxation 172 (22) (32) Capital expenditure &financial (209) (226) (2,144)investment Cash outflow before use ofliquid resources & financing (1,864) (1,680) (5,281) Financing Net cash (outflow)/inflow fromfinancing (139) 7,391 8,651 -------- --------- --------- (Decrease)/increase in cash inthe period (2,003) 5,711 3,370 ======== ========= ========= RECONCILIATION OF NET CASHFLOWTO MOVEMENT IN NET FUNDS (Decrease)/increase in cash inthe period (2,003) 5,711 3,370 Cash outflow from movement indebt & lease financing 182 161 343 Change in net funds resultingfrom cash flows (1,821) 5,872 3,713 New finance leases (180) (95) (393) Bank loan (1,300) Currency translation difference (2) (2) 18 -------- --------- --------- Movement in net funds in theperiod (2,003) 5,775 2,038 Net funds brought forward 4,966 582 2,928 -------- --------- --------- Net funds carried forward 2,963 6,357 4,966 ======== ========= ========= * The profit and loss accounts and cash flow statements for the periods ended 30June 2005 and 31 December 2005, and the balance sheet at 30 June 2005 and 31December 2005, have been restated for the adoption of FRS 20 "Share basedpayment". Tissue Science Laboratories plc Notes 1. ACCOUNTING POLICIES AND BASIS OF PREPARATION The financial information set out in this announcement does not constitute theCompany's statutory accounts for the six months ended 30 June 2006. Informationfor the year ended 31 December 2005 has been derived from the statutory accountsfor that period which have been delivered to the Registrar of Companies. The audit report for the year ended 31 December 2005 was unqualified. The profit and loss accounts and cashflow statements for the periods ended 30June 2005 and 31 December 2005, and the balance sheets at 30 June 2005 and 31December 2005, have been restated for the adoption of FRS20 "share basedpayment". On the 1st January 2006 a wholly owned subsidiary, Tissue Science LaboratoriesInc., was incorporated in the USA. These interim results therefore consolidatethe results of Tissue Science Laboratories Inc. for the first time. The accounting policies adopted are consistent with those adopted in theprevious period, except for the adoption of FRS20 in the period and theconsolidation of Tissue Science Laboratories Inc.. 2. TURNOVER A geographical analysis of turnover by destination is as follows: Six months Six months Year ended ended Ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited) (Audited) £000s £000s £000s United Kingdom 741 557 1,201Europe 279 757 1,465USA 4,250 3,615 7,413Rest of World 97 72 92 ----------- ----------- ---------- 5,367 5,001 10,171 =========== =========== ========== 3. LOSS PER SHARELoss per ordinary share has been calculated based on the weighted-average ofordinary Shares in issue during the period. Six months Six months Year ended ended Ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited) (Restated) £000s £000s Loss for the period (1,828) (822) (2,368)Weighted average number ofordinary shares 29,496,848 27,218,571 28,296,310Loss per share 6.2p 3.0p 8.4p =========== =========== ========== 4. RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING ACTIVITIES Six months Six months Year ended ended Ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited) (Audited) £000s £000s Operating loss (1,856) (908) (2,707)Depreciation of tangiblefixed assets 539 433 922Decrease/(Increase) in debtors 305 (187) (633)Increase in stocks (1,018) (837) (751)Increase/(Decrease) in creditors 206 (19) (178)Foreign exchange (gain)/loss (85) 2 (18)Share based payments 52 12 64 ----------- ----------- ---------- (1,857) (1,504) (3,301) =========== =========== ========== 5. RESTATEMENT OF COMPARATIVES The adoption of FRS 20 "Share based payment" from 1 January 2006 has requiredthe expense of share options to be fair valued. As a result of these changes inaccounting policy, the comparatives have been restated as follows: (a) Profit and loss account Six months Year ended Ended 30 June 31 December 2005 2005 (Unaudited) (Restated)Retained loss for the period £000s £000s As previously stated (810) (2,304) Adoption of FRS 20 "Share based payment" (i) (12) (64) ----------- -----------As restated (822) (2,368) =========== =========== (i) Under FRS 20 the fair values of share options issued have been recognisedand expensed. (b) Balance sheet Shares to be Profit and Issued Loss accountAs at 30 June 2005 £000s £000s As previously stated (175) (13,088) Adoption of FRS 20 "Share based payment" (i) (20) (20) ----------- -----------As restated (195) (13,108) =========== =========== Shares to be Profit and Issued Loss accountAs at 31 December 2005 £000s £000s As previously stated (167) (14,573) Adoption of FRS 20 "Share based payment" (i) (72) (72) ----------- -----------As restated (239) (14,645) =========== =========== (i) Under FRS 20 the cumulative fair value of the shares to be issued has beentaken to the shares to be issued account and the expense taken to the profit andloss reserve. 6. RECONCILIATION OF MOVEMENTS ON GROUP SHAREHOLDERS' FUNDS Six months Six months Year ended ended Ended 30 June 30 June 31 December 2006 2005 2005 (Unaudited) (Unaudited) (Restated) £000s £000s Loss for financial period(as previously stated) (1,828) (810) (2,304)Adoption of FRS 20 "Sharebased payment) 0 (12) (64) ----------- ----------- ----------Loss for the financialperiod (as restated) (1,828) (822) (2,368)Other recognised gains andlosses relating to theperiod (87) 0 0Share options based expense 52 11 64Shares issued during theperiod 5 469 483Share premium on sharesissued during the period 37 7,083 7,211 ----------- ----------- ----------Net (reduction)/addition toshareholders' funds (asrestated) (1,821) 6,741 5,390Opening shareholders' funds(as previously stated) 11,160 5,770 5,770 ----------- ----------- ----------Closing shareholders' funds(as previously stated) 9,339 12,511 11,160 =========== =========== ========== This information is provided by RNS The company news service from the London Stock Exchange