12 Apr 2018 09:28
Vectura Group plc
Report and Accounts for the year ended 31 December 2017 and Annual General Meeting 2018
Chippenham, UK - 12 April 2018: Vectura Group plc (LSE: VEC) ("Vectura", "the Group", "the Company") announces that today it has released the following documents:
· Report and Accounts for year ended 31 December 2017
· Notice of Annual General Meeting ("AGM") 2018
· Form of Proxy for the AGM
In accordance with the Listing Rule 9.6.1R, these documents have been submitted to National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm.
The AGM is scheduled to be held at 10.30 on Thursday 17 May 2018 at the offices of Clifford Chance LLP, 10 Upper Bank Street, London E14 5JJ.
In compliance with DTR 6.3.5, the following information is extracted from the Report and Accounts for the year ended 31 December 2017 and should be read in conjunction with the Company's Final Results announcement issued on 21 March 2018. The documents are available at www.vectura.com and together constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. Page and note references in the text refer to page numbers and notes contained in the Report and Accounts for the year ended 31 December 2017. This announcement is not a substitute for reading the Report and Accounts for the year ended 31 December 2017 in full.
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Enquiries
Vectura Group plc | +44 (0)1249 667700 |
Andrew Derodra - Chief Financial Officer David Ginivan - Vice President Communications Julia Wilson - Director Investor Relations | |
John Murphy - Company Secretary
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Consilium Strategic Communications | +44 (0)20 3709 5700 |
Mary-Jane Elliot / Philippa Gardner / Jessica Hodgson |
About Vectura
Vectura is an industry-leading inhaled product formulation, device design and development business offering a uniquely integrated inhaled drug delivery platform. We develop inhalation products to help patients suffering from airways diseases.
Vectura has eight key inhaled, two non-inhaled and ten oral products marketed by partners with growing global royalty streams, and a diverse partnered portfolio of drugs in clinical development. Our partners include Hikma, Novartis, Sandoz, Mundipharma, Kyorin, Baxter, GSK, UCB, Ablynx, Bayer, Chiesi, Almirall, Janssen, Dynavax and Tianjin KingYork.
Vectura's strategy is to fully leverage its differentiated technology and skills, maximising value by enhancing the delivery and performance of inhaled products and through the development of high-quality generic alternatives to branded therapies. For further information, please visit Vectura's website at www.vectura.com.
Unedited extract from the Annual report for the year ended 31 December 2017
Risk management and internal controls
We operate within a complex regulatory environment, which is subject to change, and the nature of pharmaceutical development exposes us to a number of risks and uncertainties. Our ability to meet our goals and objectives may be impacted by a number of these risks, which could impact our strategy, our business model and our operating environment.
We have developed and implemented a risk management process which is designed to ensure that existing or emerging significant risks are identified, assessed, managed and reported to relevant stakeholders in a timely manner to inform and support decision making. Our risk management process aims to mitigate the significant risks that Vectura faces in accordance with our risk appetite. The Group's risk appetite has been reduced following the refocused investment strategy announced in January 2018 and described in this report.
It is recognised, however, that no risk management process can provide absolute assurance against loss.
This section provides an overview of our risk management process, the key risks faced by the business and the actions that we have taken to mitigate them. Not all the risks identified as part of our risk management processes are detailed in this section; instead this report focuses on those risks that the Directors believe to be the most important and which could cause Vectura's results to differ materially from expected and historical results and significantly impact our strategy. Not all of these risks are within the control of the Group and other factors besides those listed may affect the Group's performance. As with all business operating in a dynamic environment, some risks may not yet be known whilst other low-level risks could become material in the future.
The Audit Committee reviews the effectiveness of Vectura's risk management and internal control at least annually, on behalf of the Board. This review has been undertaken during the year and, with direct support from the Audit Committee, the Board believes that it has taken all reasonable steps to satisfy itself that the risk management process is effective and fit for purpose. No material control weaknesses or deficiencies were identified as part of this review.
Our approach to assessing risk
Risk is assessed net of the application of current control activities using a standard matrix which considers the potential likelihood of a risk event occurring and the potential impact on the business were such an event to occur. The output of this matrix allows the business to prioritise risks and mitigating actions. Risks are considered within the timeframe of at least three years, which is the same period that has been used in the Viability statement.
How our principal risks have evolved during 2017
One of the principal risks described in the 2016 Report and Accounts "Disruption to the launch of the Group's US generic Advair® programme (VR315 (US))", was realised during 2017. Accordingly, this principal risk has been updated to "Failure to launch VR315 (US) in a competitive timeframe."
During the year, the Board undertook a review of the Group's investment strategy and as a result of this review has determined that it will seek to partner VR475 (EU) and VR647 (US). Accordingly, the prior year risk of "Failure to successfully launch and self-commercialise Vectura's wholly owned pipeline products" is no longer considered a key risk and is replaced by the risk of "Failure or delay in partnering VR647 (US) and VR475 (EU)". For further details of the Group's investment review and impact on overall pipeline risk, see pages 28 to 30.
The Brexit deadline on 29 March 2019 is now closer with only the first phase of negotiations concluded. Uncertainty from Brexit is now considered to be a principal risk in its own right whereas previously it was absorbed into the risk of "Changes to the regulatory, operating or pricing environment for the pharmaceutical industry".
All other principal risks have remained broadly unchanged in the year.
Principal risks
Risks specific to Vectura's business model
Supply chain disruption - Operational Risk |
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What is the risk? Vectura manages the supply chain for certain commercial products (flutiform®, AirFluSal®, Forspiro® and BreelibTM), and also relies on suppliers for the provision of quality compliant materials for R&D. Strategic Priorities impact: · Operational excellence · Strong financial discipline Risk movement: Stable Changes since last report: No change |
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What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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· Supply chain disruption involving single point of failure for which Vectura has high dependency and limited resilience. · Supplier loss of license or regulatory action impacting Vectura. · Termination of the manufacturing agreement with Sanofi for flutiform®. The agreement continues to 2020 and will be automatically renewed biannually unless terminated by either party within 24 months' notice. | Major disruption to, or failure of, these supply chains, particularly for flutiform®, could result in lost revenues and business opportunities, stock shortages, liabilities and significant damage to profitability and prospects for Vectura. Such disruption could be either quality or capacity related. | Vectura has strong working relationships with its suppliers; we have an established due diligence processes to ensure that our stringent quality standards are maintained and we have put in place appropriate systems that will provide an early warning of potential issues.
A dedicated Commercial Quality Director has oversight of release of commercial product and ensures appropriate management of quality for commercial products.
Monthly meetings are held to discuss customer demand forecasts and to review Vectura's ability to meet these forecasts. Vectura has established contingency arrangements to ensure that production capacities exceed forecast demand so that it would be possible to catch up on any shortfall in production or meet unexpected demand. Appropriate levels of safety stock are maintained.
Supply chain mapping has been undertaken, and is regularly reviewed, to identify potential points of failure and mitigating actions. Where economically feasible, additional sources of supply are established and contracts negotiated to include appropriate provisions for replacement of defective goods. The Group also has appropriate insurance, but it is not possible to insure against all risks and not all insurable risks can be fully insured on an economically feasible basis. |
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Failure or delay in partnering VR647 (US) and VR475 (EU) - Strategic Risk |
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What is the risk? In the absence of M&A, the Group plans to balance risk and value generation by partnering its specialist nebulised assets. The partnering of VR475 (EU) and VR647 (US) is anticipated in 2019 following the completion of the current clinical trial activity.
Vectura could be unable to find a partner with suitable commercial strength and respiratory heritage for these assets in a timely manner.
Strategic Priorities impact: · Maximising pipeline value · Strong financial discipline Risk movement: Increasing Changes since last report: Increasing risk following the decision, in absence of M&A, not to self-commercialise VR475 (EU) and VR647 (US). |
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What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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· Phase III (VR475 (EU)) or Phase II (VR647 (US)) clinical trials could be unsuccessful. · Inability to identify a suitable partner. · Inability to negotiate a deal with commercially attractive terms. | Failure to partner these assets with a suitable partner in a timely manner or at all could materially impact future revenues, profitability and prospects of Vectura.
Failure to partner the assets may lead to an increase in Vectura's future R&D investment. | Vectura has acquired, developed and progressed these two specialist pipeline assets based on its experience and knowledge of the respiratory market. As such the Group believes these products are well placed to capture value in an attractive niche market where relatively few competitors have relevant assets.
Vectura has dedicated, experienced personnel responsible for marketing assets to, and negotiating with, potential partners. In addition to its existing partner relationships, which have the potential to be extended to new projects, the Group also attends industry conferences and events where its programmes and technologies are marketed to new potential partners. |
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Failure to launch VR315 (US) in a competitive timeframe - Operational Risk |
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What is the risk? On 10 May 2017, our partner, Hikma Pharmaceuticals PLC ("Hikma") received a complete response letter (CRL) from the US FDA in relation to its abbreviated new drug application for its generic version of GSK's Advair® Diskus®. This CRL has been categorised as 'Major'. Hikma and Vectura have had constructive dialogue with the FDA to resolve the observations made in the CRL and the majority of questions raised have been addressed and clarified. Hikma, supported by Vectura, decided to progress a dispute resolution process regarding the remaining outstanding issue, namely the different interpretation of the results from the Clinical Endpoint Study (CEP). The dispute resolution process concluded in March 2018 and the FDA has upheld its original decision and included a requirement that Hikma completes an additional CEP study. Strategic Priorities impact: · Maximising pipeline value · Strong financial discipline Risk movement: Decreasing Changes since last report: Decreasing risk following receipt of the CRL during 2017 and the unfavourable outcome of the dispute resolution process in March 2018. |
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What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? | ||||||||
· Competitor products are approved and launched while the additional CEP study is completed.
| Failure to complete the Clinical Endpoint study in a timely manner could result in the product being launched later than those of competitors resulting in loss of potential future revenues and funds for investment. | The Group is unable to take direct action to mitigate this risk.
In anticipation of an unfavourable outcome from the dispute resolution process, Hikma has already finalised the planning of a new clinical study and expects to start patient enrolment in the coming weeks. Hikma anticipates being able to submit a response to the FDA with new clinical data as early as possible in 2019. A joint clinical team is in place to oversee the conduct of the study.
In addition, the Group has responded to the delay alongside other factors by reviewing its R&D investment strategy and, as a result, the Group plans to reduce its pipeline risk as detailed above.
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Partner failure - Operational Risk |
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What is the risk? Vectura operates a partnering business model and therefore is reliant on partners for development and commercialisation of pipeline assets. In addition, Vectura earns revenues from a number of partnered on-market assets and is dependent upon those partners for maintaining regulatory approvals and for marketing of the products. Strategic Priorities impact: · Maximising pipeline value · Maximising partnering value Risk movement: Stable Changes since last report: No change |
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What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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· Change in partner strategy or priorities.
· Partner trading issues / insolvency.
· Failure by a partner to market the product successfully.
· Partner failure to obtain appropriate pricing and reimbursement. | Failure by a strategic partner to deliver on their obligations during the development phase could result in a delay or cessation of development; this in turn could cause a delay in the product reaching the market which could undermine the product's commercial potential and result in lower returns on investment for Vectura. The marketing and commercialisation strategy taken by partners for existing on-market products could materially impact the level of royalties and sales milestones earned by Vectura. | Vectura has a broad range of disclosed and undisclosed partners. All collaborations are performed under a suitable legal agreement which is assessed by Vectura and its legal advisors. Typically, for collaborations, a joint steering committee (JSC) is established involving both Vectura and partner personnel. This provides Vectura with a mechanism to ensure that any joint project activity is managed appropriately. Where the Group supplies product, regular operational meetings take place to review demand forecasts.
The Group also has a commercial and business development department which maintains regular dialogue with existing and potential new partners. |
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Industry-related risks |
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| Failure or delay in achieving development milestones required to advance the product pipeline - Operational Risk |
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| What is the risk? Vectura increases the value potential of its research and development by successfully advancing its pipeline projects through the development cycle.
Failure or delay in achieving development milestones for the Group's late-stage product development pipeline (e.g. VR475 (EU) and VR647 (US)), generic programmes and other new development opportunities would impact the potential value of these programmes.
Strategic Priorities impact: · Maximising pipeline value · Operational excellence · Maximising partnering value · Strong financial discipline Risk movement: Decreasing Changes since last report: Risk decreasing as a result of Vectura's revised investment strategy which seeks to reduce overall pipeline delivery risk with increased focus on enhanced delivery of existing medicines and extending our inhaled generics portfolio. |
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| What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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| · Phase III (VR475 (EU)) or Phase II (VR647((US)) clinical trials could be unsuccessful. · Manufacturing issues associated with a particular device or product for clinical trials. · Ineffective design and execution of clinical programmes and protocols. · Failure of outsourced provider of clinical trials. · Constraints in R&D capacity and investment. | Pipeline failures or delays could materially impact the future revenues, profitability and prospects of Vectura. | Vectura has an established governance process to oversee the conduct and delivery of all development programmes and to ensure that any potential changes to the development plan or budget are identified and discussed in a timely manner such that mitigating activities or actions can be put in place as required.
Vectura works closely with expert regulatory advisors and, when appropriate, seeks advice from regulatory authorities on the design of key development plans for pre-clinical and clinical programmes.
Clinical trials are conducted in accordance with prevailing practice and statutory/regulatory requirements.
Individuals with the necessary skills and experience have been recruited to lead and oversee the development of our late-stage assets. Vectura continues to work with a network of experienced consultants and contractors which provide additional support and expertise as required. Operational Excellence initiatives within the R&D function have been established to increase productive capacity. |
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| Changes in the regulatory, operating or pricing environment (excluding Brexit)- Operational Risk |
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| What is the risk? Vectura operates in the highly regulated international pharmaceutical industry which is subject to change. Strategic Priorities impact: · Maximising pipeline value · Maximising partnering value · Strong financial discipline Risk movement: Stable Changes since last report: No change |
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| What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? | |||||||
| · Political change. · Competitor pricing strategies. · Regulatory action on pricing.
| Changes in the pharmaceutical regulatory landscape, operational restrictions and downward pricing pressure could impact whether a development product can be developed into a viable marketable product and the amount of time and expenses associated with such development. Even if products are approved, they may still face subsequent difficulties resulting in financial loss and reputational damage. | Regulatory changes tend to be slow due to lengthy consultations and discussions between regulators and the pharmaceutical industry. We work closely with expert regulatory advisors and, when appropriate, seek advice from regulatory authorities on the design of key development plans for pre-clinical and clinical programmes. We work with a number of blue-chip pharmaceutical partners who have significant regulatory expertise. Our business strategy includes investment in generic products which support government initiatives to reduce cost. |
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| Failure to attract or retain talent / key personnel - Strategic and Operational Risk |
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| What is the risk? Vectura relies upon a number of key qualified management, scientific, technical, marketing and support personnel. Competition for such personnel is intense and there can be no assurance that the Group will be able to continue to attract and retain such personnel. Strategic Priorities impact: · Maximising pipeline value · Operational excellence · High performance culture Risk movement: Stable Changes since last report: No change |
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| What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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| · Inadequate succession planning/talent management. · Organisational disruption and/or change. · Failure to attract the correct calibre of candidates. | The loss of talent or key personnel could adversely impact the effectiveness of the Group's operations. | Vectura seeks to develop employees for current and future roles and our career development and talent management programmes remain a key area of focus for the Executive Leadership Team. We continue to invest in ongoing training and development. New leadership development training has been developed in 2017 and is currently being rolled out, starting with the Executive and Business Leadership Teams. Succession plans for key roles have been developed to ensure a talent pool is identified, developed and ready for implementation. These plans include the identification of 'emergency successors' in the case of unanticipated and immediate absence. Vectura offers market-competitive reward packages and a clear career development framework Our multiple locations provide flexibility for potential employees and an ability to target talent pools across a wide geography
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| Not specific to the industry or Vectura |
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| Failure to protect intellectual property - Operational Risk |
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| What is the risk? Patent infringement by a competitor organisation or failure to obtain patents for Vectura-related development could impact on Vectura's ability to deliver its product pipeline or impact on-market products. Strategic Priorities impact: · Maximising pipeline value · Operational excellence · Strong financial discipline Risk movement: Stable Changes since last report: No change |
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| What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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| · Competitor successful in challenging Vectura or partner patent.
· Critical information missing from filed patent.
| Such infringement or failure could result in Vectura or a partner having to take a licence to third party IP in order to develop a product, or even being unable to commercialise a product, materially impacting Vectura's future revenues, profitability and prospects. | Dedicated internal resource, supplemented with external expertise, files for and prosecutes patents and other forms of intellectual property. In conjunction with our partners, where relevant, Vectura takes steps to enforce these rights. Third-party rights that may be of interest to and/or have adverse effects on Vectura's activities are also monitored so that action can be initiated where appropriate. |
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Brexit uncertainty - Strategic and Operational Risk | ||||||||||
What is the risk? While the impact from the UK's decision to leave the European Union (EU) in March 2019 is still uncertain, Brexit may result in an increase in cost of operations of the Group and disruption to the Group and partner supply chains, particularly flutiform®, where most raw materials are imported from the EU into the UK by Vectura and finished product is exported from the UK into the EU by a partner.
Strategic Priorities impact: · Maximising pipeline value · Operational excellence · Maximising partnering value · Strong financial discipline · High performance culture Risk movement: Increasing Changes since last report: Increasing risk as negotiations between the UK and EU are ongoing and the deadline of 29 March 2019 is now closer, but an approach to the exit and a transition plan are still to be established. | ||||||||||
What could cause the risk to be realised? | What would be the impact? | How do we manage the risk? |
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· Failure by the UK to negotiate an adequate transition period to prepare for exit from the EU. · Tariffs introduced on flow of goods between the UK and EU. · Inability to perform quality assurance release testing for products supplied by the Group into the EU. · Reduced labour pool and increased competition for labour from EU citizens not wishing or able to work in the UK. · Partner failure to mitigate risks from Brexit (see risk #5 above). | Disruption to or additional cost associated with managing an intra-EU supply chain.
Delays may also arise in progressing the R&D pipeline due to potential skills shortages and changes in the regulatory landscape for the UK pharmaceutical industry.
Further volatility in exchange rates, particularly in the euro and US dollar versus sterling could materially impact the Group's reported financial results.
| A team comprising senior representatives from relevant functions is in place responsible for monitoring and mitigating the risks from Brexit. The Group and individuals on the team are members of various professional bodies and trade organisations. Guidance and intelligence from these organisations is monitored and actions taken accordingly. Process mapping is taking place in the supply chain to identify all potential points where Brexit could impact the Group's ability to meeting its product supply obligations. The Group is raising the risk from Brexit with its partners and suppliers, providing support where required. |
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Related-party transactions
Associates
In order to finalise the valuation process of the Group's Chinese associate, costs of £1.6m have been incurred comprising £0.6m for the cost of new equipment and a £1.0m waiver of a loan previously made to the associate. These contributions are considered arms-length related party transactions, necessary to finalise the valuation process.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, was £2.6m and is set out below:
Year ended 31 December 2017 £m | 9 months ended 31 December 2016 £m | |
Short-term employee benefits | 1.0 | 0.9 |
Annual incentive plan | 0.7 | 0.8 |
Non-Executive Directors' fees | 0.4 | 0.3 |
Post-employment benefits | 0.2 | 0.2 |
Share-based payments | - | 0.4 |
Other | 0.3 | 0.9 |
Total remuneration of key management personnel | 2.6 | 3.5 |
Please refer to the Remuneration Report for the remuneration of each Director.
At 31 December 2017 P-O Andersson owed the Group £3,600 (2016: nil) this outstanding amount was fully recovered in January 2018, no other amounts were outstanding between the Group and the Directors (2016: nil).
Directors' responsibilities statement
The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and have elected to prepare the parent Company financial statements in accordance with UK accounting standards, including FRS 101 - Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of their profit or loss for that period. In preparing each of the Group and parent Company financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable, relevant, reliable and prudent;
· for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU;
· for the parent company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements;
· assess the Group and parent company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
· use the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
· the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.
James Ward-Lilley Andrew Derodra
Director Director
20 March 2018 20 March 2018