REG - Ergomed plc - Ergomed Interim results
Interim results for the six months ended 30 June 2021
Strong organic growth and acquisitions drive increased revenue and profit
Growth in new sales awards and order book underpins high levels of forward visibility
- Total revenue growth of 38.8% over H1 2020 to £56.0 million (up 48.1% in constant currency*)
- djusted EBITDA of £12.1 million up 33.0%
- Basic adjusted earnings per share of 16.8p, up 48.7%
- Service fee revenue growth of 29.3% (11.1% on a like-for-like basis, 18.2% in constant currency*)
- CRO revenue up 90.2% over H1 2020 to £27.2 million, with like-for-like growth of 16.1% (up 24.5% in constant currency*)
- Net new sales awards in H1 2021 increased by 50.8% over H1 2020
- Growth in order book maintained - up 18.0% since 1 January 2021 (£193.0 million) and up 50.5% on prior year to £227.8 million, providing high visibility into H2 2021 and beyond
- Continued international expansion with growing presence in the USA
- North America revenues up 70.8% to £35.5 million with recent acquisitions Ashfield Pharmacovigilance and MedSource fully integrated
- Cash balance increased to £24.6 million and debt free
*Constant currency growth is calculated by restating H1 2021 performance using H1 2020 exchange rates
Guildford, UK - 28 September 2021: Ergomed plc, (LSE: ERGO) ('Ergomed' or the 'Company'), a company focused on providing specialised services to the global pharmaceutical industry, announces its unaudited interim results for the six months ended 30 June 2021.
Financial Summary
First Half 2021
First
Half
2020
% change
Figures in £ millions, unless otherwise stated
Total Revenue
56.0
40.4
38.8
Service Fee Revenue
47.6
36.9
29.3
Like-for-like Service Fee Revenue (Note 1)
41.0
36.9
11.1
Gross Profit
23.0
18.5
24.3
Gross Margin (%)
Gross Margin Service Fee (%)
41.1%
48.2%
45.8%
50.1%
-4.7 ppts
-1.9 ppts
Adjusted EBITDA (Note 2)
12.1
9.1
33.0
Net cash at 30 June
24.6
14.1
74.5
Order book at 30 June
227.8
151.4
50.5
Basic adjusted earnings per share (pence) (Note 3)
16.8p
11.3p
48.7
Notes:
(1) Like-for-like Service Fee revenue excludes H1 2021 Service Fee revenues of £6.6m in MedSource acquired on 11 December 2020.
(2) Adjusted EBITDA is defined as operating profit for the period plus depreciation and amortisation, share-based payment charge, and other income and costs further detailed in Note 7 to the financial statements which management believes are not reflective of the Group's underlying trading performance.
(3) Basic adjusted earnings per share is defined as basic earnings per share after adjustment for certain income and costs detailed in Note 3 to the financial statements which management believes are not reflective of the Group's underlying trading performance.
Dr Miroslav Reljanović, Executive Chairman of Ergomed, said: "The excellent financial results that Ergomed has reported in the first half of 2021 reflect continued strong organic growth and the successful integration of value-enhancing acquisitions with significant new business won in both the pharmacovigilance and CRO businesses. Global demand for our services continues to strengthen and our confidence in the long-term growth of the Company is underpinned by the buoyant markets in which we operate, our acquisition strategy, and the robust platform provided by our order book and balance sheet."
Key Financial Highlights
· Revenue of £56.0 million, up 38.8% (H1 2020: £40.4 million)
· Adjusted EBITDA of £12.1 million, up 33.0% (H1 2020: £9.1 million)
· Basic adjusted earnings per share of 16.8p, up 48.7% (H1 2020: 11.3p)
· Net cash of £24.6 million, up 74.5% (30 June 2020: £14.1 million)
Operational Highlights
· Robust sales performance with net new sales awards up 50.8%
· Order book of future contracted revenue up 50.5% to £227.8 million (30 June 2020: £151.4 million) and up 18.0% since 1 January 2021 (£193.0 million)
· CRO division delivered strong growth with revenue up 90.2% over H1 2020 to £27.2 million, including the MedSource business acquired in 2020, with like-for-like growth of 16.1% (24.5% in constant currency)
· Integration of recent acquisitions of Ashfield Pharmacovigilance and MedSource completed
· North America revenues up 70.8% to £35.5 million, despite foreign exchange headwinds
Webcast and conference call for analysts:
A webcast and conference call for analysts will be held at 10.30am BST today, 28 September 2021.
Webcast link: https://edge.media-server.com/mmc/p/4p2rdmjm
Conference call details
UK Participant Local Dial-In: +44 (0) 2071 928338
US Participant International Dial-In: +16467413167
International Dial-In: +44 (0) 2071 928338
Conference ID: 6359509
Enquiries:
Ergomed plc
Tel: +44 (0) 1483 402 975
Miroslav Reljanović (Executive Chairman)
Richard Barfield (Chief Financial Officer)
Numis Securities Limited (Nominated Adviser and Joint Broker)
Tel: +44 (0) 20 7260 1000
Freddie Barnfield / Matthew O'Dowd
James Black (Broker)
Peel Hunt LLP (Joint Broker)
James Steel / Dr Christopher Golden
Tel: +44 (0) 20 7418 8900
Consilium Strategic Communications
Tel: +44 (0) 20 3709 5700
Chris Gardner / Matthew Neal
Angela Gray
About Ergomed plc
Ergomed provides specialist services to the pharmaceutical industry spanning all phases of clinical development, post-approval pharmacovigilance and medical information. Ergomed's fast-growing services business includes an industry-leading suite of specialist pharmacovigilance (PV) solutions, integrated under the PrimeVigilance brand and a full range of high-quality clinical research and trial management services under the Ergomed brand (CRO). For further information, visit: http://ergomedplc.com.
Forward-looking Statements
Certain statements contained within the announcement are forward-looking statements and are based on current expectations, estimates and projections about the potential results of Ergomed plc ("Ergomed") and the industry and markets in which Ergomed operates, the Directors' beliefs and assumptions made by the Directors. Words such as "expects", "anticipates", "should", "intends", "plans", "believes", "seeks", "estimates", "projects", "pipeline" and variations of such words and similar expressions are intended to identify such forward-looking statements and expectations. These statements are not guarantees of future performance or the ability to identify and consummate investments and involve certain risks, uncertainties, outcomes of negotiations and due diligence and assumptions that are difficult to predict, qualify or quantify. Therefore, actual outcomes and results may differ materially from what is expressed in such forward-looking statements or expectations. Among the factors that could cause actual results to differ materially are: the general economic climate, competition, interest rate levels, loss of key personnel, the result of legal and commercial due diligence, the availability of financing on acceptable terms and changes in the legal or regulatory environment.
These forward-looking statements speak only as of the date of this announcement. Ergomed expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in Ergomed's expectations with regard thereto, any new information or any change in events, conditions or circumstances on which any such statements are based, unless required to do so by law or any appropriate regulatory authority.
INTERIM MANAGEMENT REPORT
OPERATIONAL REVIEW
Introduction
Ergomed continued to make significant strategic progress in the first half of 2021, demonstrating its ongoing robustness globally throughout the COVID-19 pandemic, concluding its strategic transition to a services-based business model, and completing the integration of recent acquisitions. A further period of strong operational and financial performance was achieved in H1 2021, underlining the value of Ergomed's services model and the strength of the foundations which the Company is building for long-term growth.
Favourable market dynamics have continued and strengthened in the areas in which Ergomed operates, with increased research and development investment generally and particular strength in Ergomed's specialist areas of rare disease and oncology, where the Company's physician- and patient-centric model is also a key competitive advantage. In addition, regulatory scrutiny and harmonisation are also increasing, and the COVID-19 pandemic is accelerating innovation and the adoption of digital technologies. With the Company's growing order book, recognised expertise and brand recognition in our specialist fields, and complementary geographies and service offerings, Ergomed is well placed to take advantage of these favourable market dynamics.
Financial summary
Ergomed reported strong financial performance in the first half of 2021 with total revenues of £56.0 million (H1 2020: £40.4 million), an increase of 38.8% (48.1% in constant currency). Service fee revenues of £47.6 million (H1 2020: £36.9 million) were up 29.3% (37.7% in constant currency). This increase in revenues was driven by a robust order book at the beginning of 2021, combined with substantial levels of new business wins over the first half. Significant revenue growth in North America continued and was up 70.8% compared to H1 2020, despite the impact of foreign exchange headwinds. Like-for-like service fee revenue, excluding revenue from MedSource, the US-based CRO acquired in December 2020, grew 11.1% (18.2% in constant currency).
Adjusted EBITDA for the first half of 2021 was up 33.0% to £12.1 million compared to £9.1 million in H1 2020.
Cash generation in H1 2021 was strong and derived entirely from earnings with no debt or equity financing. After the payment of a property lease surrender premium of £0.5 million and taxation of £2.1 million in H1 2021 as the business switched to quarterly instalment payments, the net cash at 30 June 2021 was up 74.5% at £24.6 million compared to H1 2020. The Company continues to be debt free with committed banking facilities of £30 million available to support expansion.
Operational summary
Ergomed had an excellent first half with overall growth in revenue driven by increasing demand for its services across the business.
Ergomed's international expansion is continuing at pace. The Company's operational presence in the US continues to develop rapidly with strong organic growth alongside the integration of the two new US businesses acquired in 2020. There is also ongoing expansion into further geographic areas, including the development of operational capabilities in key European countries as well as the new operation in Japan, the fourth largest pharmaceutical market in the world. Ergomed is also recognised as a global provider of COVID-19 research support with involvement in a number of COVID-19 projects in its CRO and PV businesses.
A strong business development performance saw net sales of new business for H1 2021 increase by 50.8% to £90.8 million (H1 2020: £60.2 million), accelerated by effective cross-selling activities between the CRO and PV businesses as well as the expanded geographic territory and client bases from the two US acquisitions in 2020. The order book remains robust at £227.8 million at the end of H1 2021, up 18.0% from £193.0 million at 31 December 2020 and up 50.5% on the prior year (H1 2020: £151.4 million), providing excellent visibility of contracted revenues into the second half of 2021 and beyond. The order book has continued to develop well in the third quarter of 2021 with further substantial wins.
The increase in total revenues of 38.8% to £56.0 million (H1 2020: £40.4 million) was achieved across both the PrimeVigilance and Clinical Research Services businesses.
PrimeVigilance
Ergomed's pharmacovigilance (PV) business saw total revenue increase to £28.8 million in H1 2021 from £26.1 million in H1 2020, up by 10.3% (16.2% in constant currency). Reported gross profit increased from £13.4 million to £14.6 million, up 9.0%, whilst gross margin was broadly flat at 50.7% (H1 2020: 51.3%).
During the first half of 2021, further progress was made through strategic partnerships with key vendors to develop the technology suite and optimise processes and systems to support increased revenues and profitability. The Japan office is now fully operational, with local pharmacovigilance experts providing fully integrated and comprehensive medical information and PV services compliant with Japan's Pharmaceutical and Medical Devices Agency requirements.
Clinical Research Services (CRO)
The Clinical Research Services (CRO) division has seen further acceleration of the growth that resumed in the second half of 2020. Including MedSource, acquired in December 2020, the CRO division saw its total revenue increase by 90.2% from £14.3 million in H1 2020 to £27.2 million in H1 2021 (up 106.4% in constant currency). Excluding MedSource, the CRO division revenue increased by 16.1% (24.5% in constant currency) from £14.3 million in H1 2020 to £16.6 million in H1 2021.
Reported gross profit in the CRO division increased by 64.7% to £8.4 million (H1 2020: £5.1 million) and service fee gross margin was 44.2% (H1 2020: 45.9%). The reduction in overall gross margin was as anticipated and was due to foreign exchange headwinds and increased staffing in the USA to facilitate further revenue growth from the Company's growing order book.
During the first half of 2021, substantial operational progress was achieved, which is expected to further strengthen Ergomed's CRO services and accelerate patient recruitment on behalf of clients. This included the expansion of operational capabilities in Spain, Bulgaria, Romania and Georgia, significant organisational improvements including the enhancement of global study start-up capabilities, and the rationalisation of standard operating procedures. Ergomed's strategic focus on rare disease and oncology was strengthened with over 80% of revenues now generated in these therapeutic areas.
The MedSource CRO business performed well over the first half of 2021. In July 2021 Ergomed agreed with the former MedSource owners that the earn-out agreed as part of the acquisition terms would be accelerated with final payments totalling $3.8 million (£2.7 million) to be paid during the third quarter of 2021. This has facilitated the full integration of all CRO activities in North America under the Ergomed CRO brand and management, and enabled the business to realise fully the benefit of a wider CRO operational base in North America significantly ahead of schedule.
Acquisitions
The acquisitions of Ashfield Pharmacovigilance and MedSource in 2020 have proved successful with both businesses now fully integrated and delivering significant new sales, cross-selling benefits and cost synergies. Both acquisitions were completed using internally generated cash resources without utilising available debt facilities and have significantly augmented Ergomed's underlying organic growth. The Company continues to review acquisition opportunities to further grow the CRO and PV businesses and deliver enhanced shareholder value.
Board Changes
As previously announced, Rolf Soderstrom has informed the Board of his intention to step down from the Board to focus on his other business activities and will leave the Board on 30 September 2021. We thank Rolf for the significant contribution he has made to Ergomed's growth and success during the recent period and we wish him well in all his future endeavours.
During the first half the Board was strengthened by the appointments as Non-Executive Directors of Dr Llew Keltner, M.D., Ph.D., in April, and Mark Enyedy, in June.
Current trading and outlook
The excellent results that Ergomed has reported in the first half of 2021 reflect continued strong organic growth and the successful integration of value enhancing acquisitions with significant new business won in both the pharmacovigilance and CRO businesses. Global demand for our services continues to strengthen and our confidence in the long-term growth of the Company is underpinned by the buoyant markets in which we operate, our acquisition strategy, and the robust platform provided by our order book and balance sheet.
Dr Miroslav Reljanović
Executive Chairman
FINANCIAL REVIEW
The unaudited primary financial statements of Ergomed plc for the six months ended 30 June 2021 are presented later in this announcement along with the key accounting policies, notes to the financial statements and the independent review report from KPMG.
Key performance indicators
The Directors consider the principal financial performance indicators of the Company and its subsidiary undertakings (together the 'Group') to be:
£ million (unless stated otherwise)
H1 2021
H1 2020
Total revenue
56.0
40.4
Gross profit
23.0
18.5
Gross margin% on service fee revenue
Profit after tax
48.2%
6.6
50.1%
4.3
Adjusted EBITDA (Note 7)
12.1
9.1
Cash and cash equivalents
Cash generated from operating activities
24.6
10.6
14.1
8.2
Basic adjusted earnings per share (Note 3)
16.8p
11.3p
Consolidated income statement
Total revenue on a reported basis for the six months ended 30 June 2021 was £56.0 million (H1 2020: £40.4 million), an increase of 38.8%, driven by growth in the PV division (up 10.3%) and the CRO division (up by 16.1% on a like-for-like basis), as well as revenues of £10.6 million in MedSource acquired in December 2020. Revenues in the key North American market grew by 70.8% to £35.5 million (H1 2020: £20.8 million), despite the impact of adverse foreign exchange headwinds.
Gross profit was £23.0 million and service fee gross margin was 48.2% (H1 2020: gross profit £18.5 million and service fee gross margin 50.1%), the slightly lower gross margin percentage being an anticipated result of foreign exchange headwinds and increased staffing in the USA ahead of expected further revenue growth. Selling, general and administration expenses including acquisition related costs were £14.8 million (H1 2020: £11.3 million). The potential risk of non-recoverability of certain trade receivables including as a result of COVID-19 has been assessed and the provision for net impairment losses remains at £0.9 million (H1 2020: £0.9 million). Research and development costs expensed in the period were £0.04 million (H1 2020: £0.10 million), the reduction being due to the strategic withdrawal from co-development projects.
Adjusted EBITDA increased to £12.1 million in H1 2021 from £9.1 million in H1 2020, with profit after tax up 53.5% at £6.6 million (H1 2020: £4.3 million). Basic adjusted earnings per share were up 48.7% to 16.8p (H1 2020: 11.3p).
Consolidated balance sheet
Net assets increased by £6.0 million during the first half of 2021 and amounted to £58.9 million at 30 June 2021 (31 December 2020: £52.9 million) including net cash and cash equivalents of £24.6 million (31 December 2020: £19.0 million).
Cash flow statement
At 30 June 2021, the Group's net cash balance was £24.6 million, having paid a property lease surrender premium of £0.5m and taxation of £2.1m in H1 2021 as the business switched to quarterly instalment payments (net cash at 30 June 2020: £14.1 million, 31 December 2020: £19.0 million).
Cash generated from operating activities was £10.6 million (H1 2020: £8.2 million) primarily due to the increased revenues and profitability of the business. Ergomed has no debt.
Net outflows from investing activities decreased to £0.9 million (net outflows from investing activities H1 2020: £7.9 million). Net outflows on financing activities for the period of £1.6 million was primarily related to lease costs and interest paid.
Richard Barfield
Chief Financial Officer
INDEPENDENT REVIEW REPORT TO ERGOMED PLC
Introduction
We have been engaged by the Company to review the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2021 which comprises Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and the related explanatory notes. Our review was conducted in accordance with the Financial Reporting Council's International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity'.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2021 is not prepared, in all material respects in accordance with IAS 34 as adopted for use in the UK and the AIM Rules.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the AIM rules. As disclosed in note 1, the annual financial statements of the Group for the period ended 30 June 2021 were prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act and the next annual financial statements will be prepared in accordance with UK-adopted international accounting standards.The directors are responsible for ensuring that the condensed set of consolidated financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted for use in the UK.
Our responsibility
Our responsibility is to express to the Entity a conclusion on the condensed set of consolidated financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with the Financial Reporting Council's International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We read the other information contained in the half-yearly financial report to identify material inconsistencies with the information in the condensed set of consolidated financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the review. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
The purpose of our review work and to whom we owe our responsibilities
This report is made solely to the Entity in accordance with the terms of our engagement. Our review has been undertaken so that we might state to the Entity those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Entity for our review work, for this report, or for the conclusions we have reached.
KPMG
27 September 2021
Chartered Accountants, Statutory Audit Firm
1 Stokes Place
St Stephen's Green,
Dublin 2,
Ireland
Consolidated Income Statement
For the six months ended 30 June 2021
Note
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Audited
Year
ended
31 December 2020
£000s
REVENUE
2
56,042
40,379
86,391
Cost of sales
(24,671)
(18,343)
(38,686)
Reimbursable expenses
(8,354)
(3,498)
(8,055)
GROSS PROFIT
23,017
18,538
39,650
Selling, general and administrative expenses
(14,848)
(11,327)
(27,518)
Selling, general and administrative expenses comprises:
Other selling, general and administrative expenses
(13,201)
(10,147)
(24,591)
Amortisation of acquired fair valued intangible assets
(728)
(675)
(1,332)
Share-based payment charge
(431)
(488)
(742)
Acquisition costs
6
(488)
(17)
(853)
Research and development expenses
(36)
(99)
(152)
Net impairment losses on trade receivable and contract assets
(533)
(937)
(285)
Other operating income
5
926
704
1,839
OPERATING PROFIT
8,526
6,879
13,534
Finance income
1
7
8
Change in fair value of equity investments
-
(686)
(511)
Finance costs
4
(213)
(234)
(403)
PROFIT BEFORE TAXATION
8,314
5,966
12,628
Taxation
8
(1,681)
(1,687)
(2,946)
PROFIT FOR THE PERIOD
6,633
4,279
9,682
All activities in the current and prior periods relate to continuing operations.
Consolidated Statement of Comprehensive Income
For the six months ended 30 June 2021
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Audited
Year
ended
31 December 2020
£000s
OTHER COMPREHENSIVE INCOME
Profit for the period
6,633
4,279
9,682
Exchange differences on translation of foreign operations
(1,001)
291
(59)
Other comprehensive income for the period net of tax
(1,001)
291
(59)
Total comprehensive profit for the period
5,632
4,570
9,623
All activities in the current and prior periods relate to continuing operations.
Note
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Unaudited
Year
ended
31 December 2020
£000s
EARNINGS PER SHARE
3
Basic
13.6p
8.9p
20.0p
Diluted
13.0p
8.4p
19.2p
Note
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Unaudited
Year
ended
31 December 2020
£000s
ADJUSTED EBITDA
(Adjusted Earnings Before Interest, Tax, Depreciation and Amortisation)
7
12,111
9,113
19,370
ADJUSTED EARNINGS PER SHARE
3
Basic
16.8p
11.3p
25.8p
Diluted
16.1p
10.7p
24.7p
Consolidated Balance Sheet
As at 30 June 2021
Note
Unaudited
30 June 2021
£000s
Unaudited
30 June 2020
£000s
Audited
31 December 2020
£000s
Non-current assets
Goodwill
9
25,646
17,895
24,605
Other intangible assets
10
7,683
4,508
9,618
Property, plant and equipment
1,957
1,916
1,742
Right-of-use assets
3,731
5,630
4,715
Equity investments
-
-
-
Deferred tax asset
5,343
3,184
4,898
44,360
33,133
45,578
Current assets
Trade and other receivables
11
21,966
17,418
22,224
Accrued revenue
2
4,268
4,957
5,553
Cash and cash equivalents
12
24,571
29,116
18,994
50,805
51,491
46,771
Total assets
95,165
84,624
92,349
Current liabilities
Borrowings
12
-
(15,000)
-
Lease Liabilities
(1,338)
(2,000)
(1,978)
Trade and other payables
13
(13,180)
(11,549)
(15,702)
Contingent and deferred consideration
-
-
(328)
Deferred revenue
2
(15,489)
(5,139)
(13,829)
Current tax liability
(1,676)
(2,098)
(1,775)
(31,683)
(35,786)
(33,612)
Net current assets
19,122
15,705
13,159
Non-current liabilities
Lease Liabilities
(2,429)
(4,015)
(3,128)
Provisions
(19)
(353)
(317)
Deferred tax liability
(2,101)
(796)
(2,426)
(4,549)
(5,164)
(5,871)
Total liabilities
(36,232)
(40,950)
(39,483)
Net assets
58,933
43,674
52,866
Equity
Share capital
14
490
482
489
Share premium account
116
27,207
3
Merger reserve
1,349
11,088
1,349
Share-based payment reserve
5,473
4,788
5,042
Translation reserve
(386)
965
615
Retained earnings
51,891
(856)
45,368
Total equity
58,933
43,674
52,866
Consolidated Statement of Changes in Equity
For the six months ended 30 June 2021
Share
capital
£000s
Share
premium
account
£000s
Merger reserve
£000s
Share-based payment
reserve
£000s
Translation
reserve
£000s
Retained
earnings
£000s
Total
£000s
Balance at 1 January 2020
473
25,790
11,088
4,300
674
(5,505)
36,820
Profit for the period
-
-
-
-
-
4,279
4,279
Other comprehensive income for the period
-
-
-
-
291
-
291
Total comprehensive income for the period
-
-
-
-
291
4,279
4,570
Shares issued on exercise of share options
9
1,417
-
-
-
-
1,426
Equity-settled share-based payment charge
-
-
-
488
-
-
488
Deferred tax credit taken directly to equity
-
-
-
-
-
370
370
Total transactions with shareholders in their capacity as shareholders
9
1,417
-
488
-
370
2,284
Balance at 30 June 2020
482
27,207
11,088
4,788
965
(856)
43,674
Profit for the period
-
-
-
-
-
5,403
5,403
Other comprehensive income for the period
-
-
-
-
(350)
-
(350)
Total comprehensive income for the period
-
-
-
-
(350)
5,403
5,053
Shares issued on exercise of share options
5
438
-
-
-
-
443
Equity-settled share-based payment charge
-
-
-
254
-
-
254
Deferred tax credit taken directly to equity
-
-
-
-
-
2,091
2,091
Shares issued for non-cash consideration
2
-
1,349
-
-
-
1,351
Transactions with shareholders - capital reduction
Capitalisation of Merger reserve to B Ordinary Shares
11,088
-
(11,088)
-
-
-
-
Cancellation of B Ordinary Shares
(11,088)
-
-
-
-
11,088
-
Cancellation of Share Premium
-
(27,642)
-
-
-
27,642
-
Total transactions with shareholders in their capacity as shareholders
7
(27,204)
(9,739)
254
-
40,821
4,139
Balance at 31 December 2020
489
3
1,349
5,042
615
45,368
52,866
Profit for the period
-
-
-
-
-
6,633
6,633
Other comprehensive income for the period
-
-
-
-
(1,001)
-
(1,001)
Total comprehensive income for the period
-
-
-
-
(1,001)
6,633
5,632
Shares issued on exercise of share options
1
113
-
-
-
-
114
Equity-settled share-based payment charge
-
-
-
431
-
-
431
Deferred tax credit taken directly to equity
-
-
-
-
-
(110)
(110)
Total transactions with shareholders in their capacity as shareholders
1
113
-
431
-
(110)
435
Balance at 30 June 2021
490
116
1,349
5,473
(386)
51,891
58,933
Consolidated Cash Flow Statement
For the six months ended 30 June 2021
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Audited
Year
ended
31 December 2020
£000s
Cash flows from operating activities
Profit before taxation
8,314
5,966
12,628
Adjustment for:
Amortisation and depreciation
2,623
2,411
4,843
Profit on disposal of Right-of-use assets
(145)
-
-
Share-based payment charge
431
488
742
Change in fair value of equity investments
-
686
511
RDEC income
(559)
(527)
(1,188)
Finance costs
213
234
403
Other non-cash movements
162
(3)
8
Operating cash flow before changes in working capital and provisions
11,039
9,255
17,947
Decrease/(increase) in trade, other receivables and accrued revenue
1,672
(4,071)
(6,137)
(Decrease)/increase in trade, other payables and deferred revenue
(1,833)
3,039
7,182
(Decrease)/increase in provisions
(298)
19
(18)
Cash generated from operating activities
10,580
8,242
18,974
Taxes paid
(2,059)
(119)
(926)
Net cash from operating activities
8,521
8,123
18,048
Cash flows from investing activities
Finance income received
1
7
8
Acquisition of intangible assets
(14)
(128)
(542)
Acquisition of property, plant and equipment
(545)
(261)
(432)
Proceeds from the sale of property, plant and equipment
14
12
46
Proceeds on the disposal of equity investments
-
36
175
Acquisition of subsidiaries, net of cash acquired
-
(7,613)
(12,031)
Acquisition related earn-out paid
(318)
-
-
Net cash used in investing activities
(862)
(7,947)
(12,776)
Cash flows from financing activities
Proceeds from the issue of new ordinary shares
114
1,427
1,869
Finance costs paid
(105)
(103)
(157)
Payment of lease liabilities
(1,607)
(1,107)
(2,189)
Proceeds from borrowings
-
15,000
15,000
Repayment of borrowings
-
-
(15,000)
Net cash (used in)/from financing activities
(1,598)
15,217
(477)
Net increase in cash and cash equivalents
6,061
15,393
4,795
Effect of foreign currency on cash balances
(484)
(536)
(60)
Cash and cash equivalents at start of the period
18,994
14,259
14,259
Cash and cash equivalents at end of period
24,571
29,116
18,994
Notes to the Consolidated Financial Statements
For the six months ended 30 June 2021
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES
The interim financial statements have been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards (IFRS) and IFRIC interpretations issued by the International Accounting Standards Board (IASB) adopted by the European Union.
The interim financial statements have been prepared in accordance with International Accounting Standard 34 ("IAS 34") - Interim Financial Reporting, and should be read in conjunction with the Group's last annual consolidated financial statements as at and for the year ended 31 December 2020. Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group's financial position and performance since the last annual financial statements.
The condensed financial statements have been prepared under the historical cost convention, except for the fair value of certain financial instruments which are further detailed in note 16.
The same accounting policies, presentation and methods of computation have been followed in these condensed financial statements as were applied in the preparation of the Group's financial statements for the year ended 31 December 2020.
These condensed financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2020 were approved by the Board of Directors and have been delivered to the Registrar of Companies. The audit report on those accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.
Risks and uncertainties
An outline of the key risks and uncertainties faced by the Group was described in the Company's Annual Report which is available on the Company website (www.ergomedplc.com). The principal risks were: competition; cancellation or delay of clinical trials or projects by customers including as a result of COVID-19; COVID-19 pandemic, natural disaster; dependency on pharmaceutical industry; legislation and regulation of the pharmaceutical and biotechnology industries; quality and third party oversight; information security and data privacy; UK withdrawal from the European Union; access to capital; retention of senior and key employees; and dependence on a limited number of key clients.
Critical accounting judgements and key sources of estimation uncertainty
In preparing these interim financial statements, management has made judgements and estimates that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense.
The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those described in the last annual financial statements and are summarised below.
Source of estimation uncertainty
Overview
Bad debt provision
The Group had provisions against trade receivables and accrued revenue at the period end of £841,000 (2020: £959,000) which resulted in a charge to the Income Statement in the period of £533,000 (2020: £937,000).
Impairment of goodwill
The impairment provision against goodwill at the period end was £2,143,000 (2020: £2,143,000) and related fully against the investment in Haemostatix Limited. £nil (2020: £nil) was charged to the Income Statement in the period.
Fair value assessments
During the year ended 31 December 2020 the Group acquired Ashfield Pharmacovigilance, Inc. ('Ashfield') and MS Clinical Services, LLC. and its subsidiaries ('MedSource'). At the acquisition date the Group is required to estimate the fair value of identifiable assets acquired and the liabilities assumed. Due to the substantial nature of the acquisitions, the Group engaged third-party qualified valuation experts to establish the appropriate techniques and inputs to complete this work.
Contingent consideration is measured using a discounted cash flow approach, utilising management's forecasts to estimate the likely pay out and discounting these using a risk-adjusted weighted average cost of capital. The contingent consideration payable in respect MedSource is categorised as level 3 within the fair value hierarchy. The fair value of contingent consideration and has been assessed at £nil as no conditions, including the subsequent agreement of a revised earn-out and settlement agreement, existed at the reporting date.
The Company has a 12-month measurement period from the date of acquisition, and therefore the measurement period will end on 11 December 2021.
Accounting policy
Critical judgements
Revenue from customer
contracts
Revenue for CRO services is recognised based on the costs incurred on a project as a proportion of total expected costs to determine a percentage of completion which is applied to the estimate of the transaction price. Given the long-term nature and complexity of clinical trials, the forecast costs to complete is judgemental and can impact the timing and value of revenue recognised for the CRO business.
Going concern
The financial statements have been prepared on the going concern basis, which assumes that the Group will have sufficient funds to continue in operational existence for the foreseeable future, being a period of no less than 12 months from the date these interim financial statements are approved. The Directors have reviewed cash flow forecasts for the period through to 31 December 2023, which is derived from the 2021 Board approved budget and a medium-term cash flow forecast through to 31 December 2023, which is an extrapolation of the approved budget under multiple scenarios and growth rates. The 2021 budget and medium‑term forecast represents the Directors' best estimate of the Group's future performance and necessarily includes a number of assumptions, including the level of revenues. The 2021 budget and medium-term forecast demonstrate that the Directors have a reasonable expectation that the Group will be able to meet its liabilities as they fall due for a period of at least 12 months from the date these interim financial statements are approved.
On the basis of the above factors and, having made appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.
Business Combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration transferred on acquisition is the fair value at the date of transaction for assets and liabilities transferred. All acquisition related costs are expensed as incurred.
Goodwill arises as the excess of acquisition cost over the fair value of the assets transferred at the date of transaction. Goodwill is reviewed for impairment annually and is carried at cost less accumulated impairment losses. Impairment losses are not reversed in subsequent periods.
Goodwill arising on the acquisition of a foreign operation, including any fair value adjustments to the carrying amounts of assets or liabilities on the acquisition, are treated as assets and liabilities of that foreign operation in accordance with IAS 21 and as such are translated at the relevant foreign exchange rate at the statement of financial position date.
2. REVENUE AND OPERATING SEGMENTS
The Group's revenue is disaggregated by geographical market and major service lines:
30 June 2021 Geographical market and major service lines
CRO services
£000s
PV services
£000sTotal services
£000s
Geographical market by client location
UK
2,444
4,534
6,978
Rest of Europe, Middle East and Africa
4,058
6,243
10,301
North America
18,843
16,661
35,504
Asia
1,860
1,399
3,259
27,205
28,837
56,042
30 June 2020 Geographical market and major service lines
CRO services
£000s
PV services
£000sTotal services
£000s
Geographical market by client location
UK
2,043
4,477
6,520
Rest of Europe, Middle East and Africa
5,261
6,124
11,385
North America
6,379
14,410
20,789
Asia
582
1,103
1,685
14,265
26,114
40,379
31 December 2020 Geographical market and major service lines
CRO services
£000s
PV services
£000sTotal services
£000s
Geographical market by client location
UK
3,589
8,590
12,179
Rest of Europe, Middle East and Africa
10,146
13,183
23,329
North America
15,828
30,836
46,664
Asia
1,753
2,466
4,219
31,316
55,075
86,391
The receivables, contract assets and liabilities in relation to contracts with customers are as follows:
30 June 2021
£000s
30 June 2020
£000s
31 December 2020
£000s
Contract assets
Trade receivables
18,900
14,791
19,079
Accrued revenue
4,268
4,957
5,553
23,168
19,748
24,632
Contract liabilities
Deferred revenue
(15,489)
(5,139)
(13,829)
Customer advances
(247)
(490)
(408)
(15,736)
(5,629)
(14,237)
Accrued revenue primarily relates to consideration for work completed but not billed at the reporting date. The contract assets are transferred to trade receivables when the rights become unconditional.
Deferred revenue primarily relates to the advance consideration received from customers. There are no significant financing components associated with deferred revenue.
Customer advances relate to deposits made by customers as security over future services and third-party costs incurred in relation to those services.
Operating segments
Information reported to the Company's Board, which is the chief operating decision maker ('CODM'), for the purpose of resource allocation and assessment of segment performance, is focused on the Group operating as two business segments, being Clinical Research Services ('CRO') and Pharmacovigilance ('PV'). All revenues arise from direct sales to customers. The segment information reported below all relates to continuing operations. The PV segment includes the revenues of Ashfield Pharmacovigilance, Inc. ('Ashfield') following its acquisition by the Group in January 2020. The CRO segment includes the revenues of MS Clinical Services, LLC. and its subsidiaries ('MedSource') following its acquisition by the Group in January 2020.
The accounting policies of the reportable segments are the same as the Group's accounting policies. Segment profit represents the gross profit earned by each segment. Other amounts, including selling, general and administration expenses were not allocated to a segment. This was the measure reported to the CODM for the purpose of resource allocation and assessment of segment performance.
30 June 2021
CRO
£000s
PV
£000s
Consolidated
total
£000s
Segment revenues
27,205
28,837
56,042
Cost of sales
(10,664)
(14,007)
(24,671)
Reimbursable expenses
(8,176)
(178)
(8,354)
Segment gross profit
8,365
14,652
23,017
Selling, general and administration expenses
(14,848)
Selling, general and administration expenses comprises:
Other selling, general and administration expenses
(13,201)
Amortisation of acquired fair valued intangible assets
(728)
Share-based payment charge
(431)
Acquisition costs
(488)
Research and development expenses
(36)
Net impairment of trade receivables and contract assets
(533)
Other operating income
926
Operating profit
8,526
Finance income
1
Change in fair value of equity investments
-
Finance costs
(213)
Profit before tax
8,314
30 June 2020
CRO
£000s
PV
£000s
Consolidated
total
£000s
Segment revenues
14,265
26,114
40,379
Cost of sales
(5,891)
(12,452)
(18,343)
Reimbursable expenses
(3,268)
(230)
(3,498)
Segment gross profit
5,106
13,432
18,538
Selling, general and administration expenses
(11,327)
Selling, general and administration expenses comprises:
Other selling, general and administration expenses
(10,147)
Amortisation of acquired fair valued intangible assets
(675)
Share-based payment charge
(488)
Acquisition costs
(17)
Research and development expenses
(99)
Net impairment of trade receivables and contract assets
(937)
Other operating income
704
Operating profit
6,879
Finance income
7
Change in fair value of equity investments
(686)
Finance costs
(234)
Profit before tax
5,966
31 December 2020
CRO
£000s
PV
£000s
Consolidated
total
£000s
Segment revenues
31,316
55,075
86,391
Cost of sales
(12,737)
(25,949)
(38,686)
Reimbursable expenses
(7,584)
(471)
(8,055)
Segment gross profit
10,995
28,655
39,650
Selling, general and administration expenses
(27,518)
Selling, general and administration expenses comprises:
Other selling, general and administration expenses
(24,591)
Amortisation of acquired fair valued intangible assets
(1,332)
Share-based payment charge
(742)
Acquisition costs
(853)
Research and development expenses
(152)
Net impairment of trade receivables and contract assets
(285)
Other operating income
1,839
Operating profit
13,534
Finance income
8
Change in fair value of equity investments
(511)
Finance costs
(403)
Profit before tax
12,628
Segment net assets
30 June 2021
£000s
30 June 2020
£000s
31 December 2020
£000s
CRO
27,609
9,932
24,156
PV
31,324
33,742
28,710
Consolidated total net assets
58,933
43,674
52,866
3. EARNINGS PER SHARE
The calculation of the basic and diluted earnings per share is based on the following data:
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Unaudited
Year
ended
31 December 2020
£000s
EARNINGS
Earnings for the purposes of basic and diluted earnings per share being net profit attributable to owners of the Company
6,633
4,279
9,682
Adjustments to earnings:
Amortisation of acquired fair valued intangible assets
728
675
1,332
Share-based payment charge
431
488
742
Acquisition costs (note 6)
488
17
853
Pay in lieu and non-compete compensation
45
-
232
Change in fair value of equity investments
-
686
511
RDEC income (2017)
-
(527)
(527)
Grants in recognition of employment creation in Serbia
-
(155)
(307)
Tax effect of adjusting items
(101)
(34)
(41)
Adjusted earnings for the purposes of basic and diluted earnings per share
8,224
5,429
12,477
No.
No.
No.
NUMBER OF SHARES
Weighted average number of shares for the purposes of basic earnings per share
48,910,834
48,050,454
48,323,814
Dilution effect of:
Share options
2,293,726
2,678,812
2,176,170
Weighted average number of shares for the purposes of diluted earnings per share
51,204,560
50,729,266
50,499,984
4. FINANCE COSTS
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Audited
Year
ended
31 December 2020
£000s
Operating lease interest
108
131
245
Other Interest payable
105
103
158
213
234
403
5. OTHER OPERATING INCOME
Unaudited
Six months
ended
30 June 2021
£000s
Unaudited
Six months
ended
30 June 2020
£000s
Audited
Year
ended
31 December 2020
£000s
Foreign grant income
298
147
574
RDEC income
559
527
1,188
Other income
69
30
77
926
704
1,839
6. ACQUISITION COSTS
Unaudited
Six months
ended
30 June 2021
Unaudited
Six months
ended
30 June 2020
Audited
Year
ended
31 December 2020
£000s
£000s
£000s
Acquisition of Ashfield Pharmacovigilance
-
17
14
Acquisition of MedSource
327
-
825
Other acquisition costs
161
-
14
488
17
853
7. EBITDA and Adjusted EBITDA
Unaudited
Six months
ended
30 June 2021
Unaudited
Six months
ended
30 June 2020
Unaudited
Year
ended
31 December 2020
£000s
£000s
£000s
Operating profit
8,526
6,879
13,534
Adjusted for:
Depreciation and amortisation charges within Other selling, general & administration expenses
1,895
1,736
3,511
Amortisation of acquired fair valued intangible assets
728
675
1,332
EBITDA
11,149
9,290
18,377
Adjusted for:
Share-based payment charge
431
488
742
RDEC Income (2017)
-
(527)
(527)
Grants in recognition of employment creation in Serbia
-
(155)
(307)
Acquisition costs (note 6)
488
17
853
Pay in lieu and non-compete compensation
43
-
232
Adjusted EBITDA
12,111
9,113
19,370
The Directors make certain adjustments to EBITDA to derive Adjusted EBITDA, which they consider are more reflective of the Group's underlying trading performance, enabling comparisons to be made with prior periods.
8. INCOME TAX EXPENSE
Income tax expense is recognised at an amount determined by multiplying the profit before tax for the interim reporting period by management's best estimate of the weighted-average annual income tax rate, adjusted for the tax effect of certain items recognised in full in the interim period. As such, the effective tax rate in the interim financial statements may differ from management's estimate of the effective tax rate for the annual financial statements.
The Group's consolidated effective tax rate in respect of continuing operations for the six months ended 30 June 2021 was 20.2% (twelve months ended 31 December 2020: 23.3%).
9. GOODWILL
Reconciliation of carrying amount:
Total
£000s
Balance at 30 June 2020
17,895
Arising on business combinations
7,250
Translation movement
(540)
Balance at 31 December 2020
24,605
Fair value adjustment arising on business combinations
1,520
Translation movement
(479)
Balance at 30 June 2021
25,646
10. OTHER INTANGIBLE ASSETS
Total
£000s
Cost
At 1 July 2020
27,497
Acquisitions through business combinations
6,179
Additions
414
Translation movement
(314)
At 31 December 2020
33,776
Fair value adjustment arising on business combinations
(586)
Additions
14
Disposals
(211)
Translation movement
(190)
At 30 June 2021
32,803
Amortisation
At 1 July 2020
22,989
Charge for the year
1,138
Translation movement
31
At 31 December 2020
24,158
Charge for the year
1,024
Translation movement
(62)
At 30 June 2021
25,120
Net Book Value
At 30 June 2021
7,683
At 31 December 2020
9,618
At 30 June 2020
4,508
11. TRADE AND OTHER RECEIVABLES
Unaudited
30 June 2021
£000s
Unaudited
30 June 2020
£000s
Audited
31 December 2020
£000s
Trade receivables
18,900
14,791
19,079
Other receivables
834
901
1,241
Derivative asset - Foreign currency forward contracts
13
-
-
Prepayments
1,572
1,475
1,482
Corporation tax receivable
647
251
422
21,966
17,418
22,224
12. CASH AND CASH EQUIVALENTS AND BORROWINGS
On 23 March 2020, the Company drew down £15 million against its multi-currency revolving credit facility ("RCF") with HSBC. The drawdown was instructed as a precautionary response to the COVID-19 outbreak. The interest rate payable on this borrowing was LIBOR plus 2.1%. On 19 August 2020 the entire drawdown of £15 million was repaid. The full RCF of £15 million remains available to the Company, along with an accordion option to increase this borrowing by an additional £15 million.
Unaudited
30 June 2021
£000s
Unaudited
30 June 2020
£000s
Audited
31 December 2020
£000s
Cash and cash equivalents
24,571
29,116
18,994
Borrowings
-
(15,000)
-
Cash and cash equivalents net of borrowings
24,571
14,116
18,994
13. TRADE AND OTHER PAYABLES
Unaudited
30 June 2021
£000s
Unaudited
30 June 2020
£000s
Audited
31 December 2020
£000s
Trade payables
3,435
2,224
4,197
Amounts payable to related parties
52
123
55
Social security and other taxes
859
732
1,112
Other payables
1,451
596
1,295
Derivative liability - Foreign currency forward contracts
98
-
-
Customer advances
247
490
408
Accruals
7,038
7,384
8,635
13,180
11,549
15,702
14. ORDINARY SHARE CAPITAL
Number
£000s
Ordinary shares of £0.01 each
Balance at 30 June 2020
48,215,791
482
Exercise of share options
503,735
5
Shares to be issued for non-cash consideration
155,558
2
Balance at 31 December 2020
48,875,084
489
Exercise of share options
80,155
1
Balance at 30 June 2021
48,955,239
490
15. ACQUISITION OF SUBSIDIARY - MEDSOURCE
On 11 December 2020, the Group acquired all of the issued share capital in MS Clinical Services, LLC, MedSource UK Ltd and MS Clinical Services (Canada) Inc ("MedSource") for $16,200,000 in cash, adjusted for net debt, and paid at the closing of the transaction, with further consideration of $1,800,000 payable in Ergomed plc equity issued at a price based on the average daily closing price for 30 days preceding the acquisition (155,558 shares at a price of £8.76) upon the satisfaction of certain representations and warranties. Up to a further $7,000,000 is payable, 90% in cash and 10% in equity, depending on MedSource's financial results in the year to 31 December 2021.
MedSource is a full-service CRO with a focus on complex diseases and study designs. The acquisition greatly expands the geographical presence of Ergomed's CRO service offering in the US whilst complementing the current business specialism in oncology and rare disease.
Book values
Fair value adjustments
Provisional valuation
£000s
£000s
£000s
Intangible assets
475
5,118
5,593
Property, plant and equipment
89
-
89
Right-of-use assets
-
131
131
Total non-current assets
564
5,249
5,813
Trade and other receivables
3,062
-
3,062
Cash and equivalents
4,346
-
4,346
Current assets
7,408
-
7,408
Trade and other payables
(2,348)
-
(2,348)
Lease liability
-
(131)
(131)
Deferred Revenue
(6,528)
(1,086)
(7,614)
Deferred tax liability
-
(1,454)
(1,454)
Financial liabilities
(8,876)
(2,671)
(11,547)
Total identifiable net assets
(904)
2,578
1,674
Goodwill
8,769
Total consideration
10,443
Satisfied by
Cash
9,092
Equity
1,351
Total consideration
10,443
Net cash outflow arising on acquisition
Cash consideration
8,764
Less: cash and cash equivalent balances acquired
(4,346)
Add: deferred consideration
328
Transaction expenses
1,152
5,898
The fair value of intangible assets relates to customer relationships of £4,317,000 and contracted order book of £1,276,000. The Group incurred acquisition related costs of £825,000 related to due diligence and legal activities in the year ended 31 December 2020 and £327,000 in the period to 30 June 2021. These costs have been included in acquisition costs within selling and administrative expenses in the Group's consolidated income statement.
In order to facilitate the full integration of all CRO activities under the Ergomed CRO brand and management, and fully realise the benefit of a wider CRO operational base in North America before the originally planned and anticipated earn-out and handover period at the end of 2021, the management of the Company and MedSource agreed a revised earn-out and settlement agreement after the period end on 23 July 2021. The revised earn-out and settlement agreement will give rise to final payments totalling $3.8 million in H2 2021, resulting in total expenditure of $17.9 million for the purchase of MedSource. Further details regarding management's assumption of the contingent consideration fair value at the reporting date are set out in note 16 - Financial Instruments.
The Company has a 12-month measurement period from the date of acquisition, and therefore the measurement period will end on 11 December 2021.
16. FINANCIAL INSTRUMENTS
Categories of financial instruments
The following table shows the carrying amounts and fair values of financial assets and financial liabilities at the reporting date.
30 June 2021
Carrying amount
Fair value
Financial
assets
at fair value
through
profit and
loss
£000s
Financial
assets at
amortised
cost
£000s
Financial
liabilities at
amortised
cost
£000s
Financial
liabilities at
fair value
through
profit and
loss
£000s
Total
£000s
Total
£000s
Financial assets
Equity investments
nil
-
-
-
nil
nil
Trade receivables
-
18,900
-
-
18,900
18,900
Accrued revenue (contract asset)
-
4,268
-
-
4,268
4,268
Other receivables
-
834
-
-
834
834
Derivative asset - Foreign currency forward contracts
13
-
-
-
13
13
Cash and cash equivalents
-
24,571
-
-
24,571
24,571
13
48,573
-
-
48,586
48,586
Financial liabilities
Lease liabilities
-
-
3,767
-
3,767
3,767
Trade payables
-
-
3,435
-
3,435
3,435
Amounts payable to related parties
-
-
52
-
52
52
Other payables
-
-
1,451
-
1,451
1,451
Derivative liability - Foreign currency forward contracts
-
-
-
98
98
98
Customer advances
-
-
247
-
247
247
Contingent and deferred consideration
-
-
-
nil
nil
nil
Accruals
-
-
7,038
-
7,038
7,038
-
-
15,990
98
16,088
16,088
30 June 2020
Carrying amount
Fair value
Financial
assets
at fair value
through
profit and
loss
£000s
Financial
assets at
amortised
cost
£000s
Financial
liabilities at
amortised
cost
£000s
Financial
liabilities at
fair value
through
profit and
loss
£000s
Total
£000s
Total
£000s
Financial assets
Equity investments
nil
-
-
-
nil
nil
Trade receivables
-
14,791
-
-
14,791
14,791
Accrued revenue (contract asset)
-
4,957
-
-
4,957
4,957
Other receivables
-
901
-
-
901
901
Cash and cash equivalents
-
29,116
-
-
29,116
29,116
-
49,765
-
-
49,765
49,765
Financial liabilities
Borrowings
-
-
15,000
-
15,000
15,000
Lease liabilities
-
-
6,015
-
6,015
6,015
Trade payables
-
-
2,224
-
2,224
2,224
Amounts payable to related parties
-
-
123
-
123
123
Other payables
-
-
596
-
596
596
Customer advances
-
-
490
-
490
490
Contingent and deferred consideration
-
-
-
-
-
-
Accruals
-
-
7,384
-
7,384
7,384
-
-
31,832
-
31,832
31,832
31 December 2020
Carrying amount
Fair value
Financial
assets
at fair value
through
profit and
loss
£000s
Financial
assets at
amortised
cost
£000s
Financial
liabilities at
amortised
cost
£000s
Financial
liabilities at
fair value
through
profit and
loss
£000s
Total
£000s
Total
£000s
Financial assets
Equity investments
nil
-
-
-
nil
nil
Trade receivables
-
19,079
-
-
19,079
19,079
Accrued revenue (contract asset)
-
5,553
-
-
5,553
5,553
Other receivables
-
1,241
-
-
1,241
1,241
Cash and cash equivalents
-
18,994
-
-
18,994
18,994
-
44,867
-
-
44,867
44,867
Financial liabilities
Lease liabilities
-
-
5,106
-
5,106
5,106
Trade payables
-
-
4,197
-
4,197
4,197
Amounts payable to related parties
-
-
55
-
55
55
Other payables
-
-
1,295
-
1,295
1,295
Customer advances
-
-
408
-
408
408
Contingent and deferred consideration
-
-
-
328
328
328
Accruals
-
-
8,635
-
8,635
8,635
-
-
19,696
328
20,024
20,024
Financial instruments measured at fair value
The financial instruments measured at fair value have been categorised within the fair value hierarchy based on the valuation technique used to determine fair value at the reporting date.
30 June 2021
£000s
30 June 2020
£000s
31 December 2020
£000s
Financial assets
Equity investments - Level 1
-
nil
-
Equity investments - Level 3
nil
nil
nil
Foreign currency forward contracts used for hedging - Level 2
13
-
-
Financial assets measured at fair value
13
-
-
Financial liabilities
-
-
-
Foreign currency forward contracts used for hedging - Level 2
98
-
-
Deferred and contingent consideration - Level 3
nil
-
328
Financial liabilities measured at fair value
98
-
328
Deferred and contingent consideration (Level 3)
Deferred and contingent consideration is measured using a discounted cash flow approach, utilising management's forecasts to estimate the likely pay out and discounting these using a risk-adjusted weighted average cost of capital, both of which are significant unobservable inputs. The contingent consideration payable in respect of MS Clinical Services, LLC. and its subsidiaries ('MedSource') is categorised as level 3 within the fair value hierarchy. The fair value of contingent consideration and has been assessed at £nil as no conditions, including the subsequent agreement of a revised earn-out and settlement agreement, existed at the reporting date. The deferred consideration for MedSource at 31 December 2020 of £328,000 is categorised as level 3 within the fair value hierarchy and is due upon the verification of the net assets acquired by the Group at the acquisition date and was settled in cash during in H1 2021.
Foreign currency forward contracts (Level 2)
The Group's foreign currency forward contracts are not traded in active markets. These contracts have been fair valued using observable forward exchange rates and interest rates corresponding to the maturity of the contract. The effects of non-observable inputs are not significant for foreign currency forward contracts.
Equity investments (Level 1 and 3)
Equity investments which are publicly quoted are measured based on the quoted market price. Unlisted equity investments are measured based on the market price of recent share issuances or, where not available, management's best estimate of the realisable value of those investments. The level 1 investment held as at 30 June 2020 related to Asarina Pharma AB and was disposed of in H2 2020 for proceeds (net of sale costs) of £175,000. The level 3 investment in Modus Therapeutics Holding AB at the reporting date had a £nil fair value, representing management's best estimate of the realisable value of the investment. The Modus investment was fully impaired during prior financial periods after the results of the most recently completed clinical trials were published.
Valuation techniques and significant unobservable inputs
The significant input for the fair value estimate is management's estimate of the probability that the contract's target level will be achieved. The following table provides information about the sensitivity of the fair value measurement to changes in that input:
Description
Significant
Unobservable input
Estimate of the input
Sensitivity of the fair value measurement to input
Contingent consideration
Probability of meeting earn-out targets
0%
An increase in the acquisition Adjusted EBITDA forecast of >12% for FY 2021 would result in earn-out consideration payments.
Equity investments - Modus (Level 3)
Probability of Modus securing additional funding for clinical trials
0%
The sensitivity is binary; either additional funds can be secured or not. Securing additional funding may not necessarily result in an increase in the fair value.
Given the nature and term of the deferred consideration balance as at the reporting date and 31 December 2020, the sensitivity of the fair value to possible increases in the significant unobservable inputs for the period were immaterial.
There are no major interrelationships between the significant input (management's estimate of the probability that the contract's target level will be achieved) and the unobservable inputs.
Reconciliation of Level 3 fair values
The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values.
Deferred and contingent
consideration
£000s
Equity
investments
£000s
At 30 June 2020
-
nil
Fair value of deferred and contingent consideration arising on business combinations
(328)
-
At 30 December 2020
(328)
nil
Cash settled in the period
318
-
Translation movement
10
-
At 30 June 2021
nil
nil
Interest rate benchmark reform
A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (IBORs) with alternative nearly risk-free rates (referred to as 'IBOR reform'). The Group has a limited exposure to IBORs in its existing financial instruments which will be reformed as part of these market-wide initiatives.
The Group's main financial instrument IBOR exposure at the reporting date is its borrowing facility (revolving credit and accordion facility) with HSBC. This facility was undrawn at the reporting date.
The potential IBOR exposure of the Group is dependent upon the currency in which the borrowing is drawdown. At 30 June 2020 the £15 million borrowing was in GBP and therefore, the exposure was to sterling LIBOR. The alternative reference rate for sterling LIBOR is the Sterling Overnight Index Average (SONIA).
On 5 March 2021, the Financial Conduct Authority announced that panel bank submissions for all LIBOR settings will cease as at 31 December 2021, after which representative LIBOR rates will no longer be available. The Group plans to finish the process of amending contractual terms in respect of its facility with HSBC by the end of 2021.
The Group anticipates that the IBOR reform will not have a significant financial or operational impact on the business.
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