REG - IP Group PLC - Final Results <Origin Href="QuoteRef">IPO.L</Origin> - Part 2

IPAnnouncement

10/03/2015 07:14

- Part 2: For the preceding part double click  ID:nRSJ9713Ga 

performed positively during the year. This increase was partially offset by a
decrease of £7.1m from the remainder of the division's portfolio. 
 
Ceres Power Holdings plc ("Ceres"), a world-leading developer of low cost, next generation fuel cell technology for use in
distributed generation and other applications, announced in July that it had raised £20m (gross of expenses) by way of an
oversubscribed placing. The purpose of the placing was to provide the company with sufficient working capital to enable it
to respond to the commercial interest it has generated, to continue to develop its technology roadmap and to enhance its
manufacturing capability. 
 
In March, Xeros Technology Group plc ("Xeros"), a spin-out from the University of Leeds that has developed a patented
polymer bead cleaning system, gained admission to AIM and raised gross proceeds of £27.6m. The admission and fundraising
allowed Xeros to accelerate the roll-out of its technology in commercial laundries and to fund the research and development
process through to commercialisation in other identified applications, not least the home. In May, Xeros announced that the
first major utility company in the US had launched energy incentive programmes for customers who commit to reducing their
energy consumption through the use of a Xeros Commercial Laundry System. To date, eight utility companies in the US have
launched similar energy incentive programmes. 
 
During 2014, the Group exited its remaining interest in Velocys plc. From the Group's initial investment date into Velocys
in 2005 to the final exit date in 2014, the Group had invested £0.4m in the company and realised cumulative proceeds of
£12.9m. 
 
An analysis of the number and value of portfolio companies in the sector by stage of development is as follows: 
 
 Stage                                     Number  Value (£m)  
 Incubation                                1       0.1         
 Seed                                      7       5.0         
 Post-seed                                 5       9.8         
 Quoted                                    5       40.1        
 Value not attributable to equity holders  n/a     1.2         
 Total                                     18      56.2        
 
 
Biotech 
 
                                                                                   Group stakeat 31 Dec2014(i)  Fair value of Group holding at 31 Dec 2013  Year to 31 December 2014       
 Net investment/ (divestment)              Acquired with Fusion                    Fair value movement          Fair value of Group holding at 31 Dec 2014  
 Company name                              Description                             %                            £m                                          £m                        £m   £m   £m    
 Diurnal Limited                           Novel treatments of hormone deficiency  51.7%                        -                                           4.0                       5.1  1.0  10.1  
 Absynth Biologics Limited                 Vaccines and therapeutic antibodies     45.0%                        -                                           0.3                       1.5  -    1.8   
 Karus Therapeutics Limited                Inflammatory disease and cancer         8.6%                         0.9                                         0.6                       -    -    1.5   
 Synairgen plc                             Respiratory diseases                    -                            4.3                                         (4.3)                     -    -    -     
 Other companies                                                                                                1.6                                         0.5                       0.9  -    3.0   
 IP Group total                                                                                                 6.8                                         1.1                       7.5  1.0  16.4  
 Value not attributable to equity holders                                          -                            -                                           -                         -    -    
 Total                                                                                                          6.8                                         1.1                       7.5  1.0  16.4  
 
 
(i)   Represents the Group'sundiluted beneficial equity interest (excluding debt) including the portion of IPVFII's stake
attributable to the Group. 
 
While there was a modest increase in the fair value of the Group's holdings in Biotech portfolio companies, largely as a
result of Diurnal Limited's £6m fundraising being completed at a premium to its previous financing round, additionally
there were significant underlying developments within Diurnal Limited itself and portfolio companies Modern Biosciences plc
and Synairgen plc. 
 
Diurnal Limited ("Diurnal"), a spin-out company from the University of Sheffield, announced positive Phase 2 data for its
lead product, Chronocort. Chronocort is in development for the treatment of Congenital Adrenal Hyperplasia ("CAH"), a rare
condition characterised by a lack of the natural steroid-hormone, cortisone. Chronocort represents an entirely novel
approach to a debilitating disease that is inadequately controlled by current drugs and is the subject of Orphan Drug
designation from the European Medicines Agency. During 2014, the Group took the decision to lead a round designed to fund
Chronocort's pivotal Phase 3 studies, with a view to eventually taking the product to market. The Group anticipates that
Diurnal's lead product Chronocort and its second product, Infacort, for the treatment of childhood CAH, will enter Phase 3
studies during 2015. 
 
Modern Biosciences plc ("MBS"), a subsidiary company of the Group that in-licenses and develops intellectual property
relating to new therapeutic compounds using a virtual drug-discovery model, entered into an R&D alliance and global option
and licence agreement with Janssen Biotech, Inc. in relation to MBS's novel bone-protective compounds for the treatment of
rheumatoid arthritis ("RA"). The goal of the collaboration, facilitated by the Johnson & Johnson Innovation Centre in
London, is to develop new drugs for the treatment of RA. The collaboration could be worth up to £176m comprising an upfront
payment, an option fee exercisable after or during the Phase 1 programme and development-related milestone payments.
Assuming developmental and regulatory success, the majority of the £176m could be received over the next 7-10 years. In
addition, MBS will be eligible to receive royalties on future sales of any products that may result from the alliance upon
successful launch and commercialisation. As MBS is currently consolidated into the Group's results, it is not attributed
any value in the Group's portfolio. 
 
Synairgen plc ("Synairgen"), a spin-out from the University of Southampton focused on respiratory disease, also announced a
global licensing deal for its lead asthma/COPD drug SNG001 with AstraZeneca. Total deal size was $232.5m, including a
$7.25m upfront payment and potential developmental, regulatory and commercial milestones, plus royalties. Shortly after the
announcement of this deal, the Group exited its position in Synairgen, realising proceeds of £4.3m against total capital
deployed of £1.3m. 
 
An analysis of the number and value of portfolio companies in the sector by stage of development is as follows: 
 
 Stage                                     Number  Value (£m)  
 Incubation                                2       0.1         
 Seed                                      3       -           
 Post-seed                                 6       16.0        
 Quoted                                    2       0.3         
 Value not attributable to equity holders  n/a     -           
 Total                                     13      16.4        
 
 
FINANCIAL REVIEW 
 
Statement of comprehensive income 
 
A summary analysis of the Group's financial performance during the year is provided below: 
 
 Net portfolio gains                                 22.8   83.0   
 Licensing income                                    3.0    -      
 Other income                                        2.6    2.4    
 Change in fair value of Oxford Equity Rights asset  (1.8)  (5.0)  
 Amortisation of intangible assets                   (4.9)  -      
 Acquisition costs                                   (1.1)  -      
 Administrative expenses - Modern Biosciences plc    (1.8)  (0.5)  
 Administrative expenses - all other businesses      (9.9)  (7.7)  
 Finance income                                      0.6    0.4    
 Profit and total comprehensive income for the year  9.5    72.6   
 
 
Profit and total comprehensive income for the year 
 
9.5 
 
72.6 
 
Net portfolio gains consist primarily of realised and unrealised fair value gains and losses from the Group's equity and
debt holdings in spin-out businesses as well as changes in the fair value of its limited and limited liability partnership
interests. A detailed analysis of fair value gains and losses is provided in the Portfolio review above. 
 
Other income for the year remained relatively consistent at £2.6m (2013: £2.4m). Other income comprises fund management
fees, as well as consulting and similar fees typically chargeable to its portfolio companies for services including
executive search and selection, legal and administrative support. Fund management fees are received from the Group's three
managed funds, two of which also have the potential to generate performance fees from successful investment performance (IP
Venture Fund ("IPVF") and North East Technology Fund ("NETF")). As a result of an extension by its limited partner during
the period, NETF's "investment period" is now anticipated to continue until the end of 2015, while that of IPVF ceased in
2012. The fund management fees for both funds reduce following the cessation of their investment periods. The results of
the Group's third managed fund, IPVFII, are consolidated into those of the Group and accordingly the fund management fees
received are not reflected in the statement of comprehensive income. 
 
As a result of Modern Biosciences plc's R&D alliance and global option and licence agreement with Janssen Biotech, Inc.
("Janssen"), the Group became entitled to an upfront payment of £3.0m (£2.1m net of sub-licensing and other costs) during
the period, which was subsequently received in cash in January 2015. The Group allocated an increased level of capital to
the evaluation and development of certain early-stage therapeutic programmes, including through its subsidiary Modern
Bioscience plc ("MBS"), during the year. The majority of these costs related to the OxteoRx programme that is the subject
of the R&D alliance with Janssen. All development costs are expensed to the statement of comprehensive income as they are
incurred. MBS continued to benefit from the recovery of a proportion of the OsteoRx costs through a Biomedical Catalyst
grant, with the net expense being reflected in the statement of comprehensive income. The Group intends to continue
developing a small number of early-stage therapeutic assets. 
 
The Group's administrative expenses, excluding those relating to MBS, increased during the period to £9.9m (2013: £7.7m).
This is predominantly due to an increase in the cost base, following the Fusion IP plc ("Fusion IP") acquisition, and is
inclusive of an IFRS 2 share-based payments charge totalling £0.9m (2013: £0.9m), which relates to the Group's Long-Term
Incentive Plan and Annual Incentive Scheme awards. This non-cash charge reflects the fair value of services received from
employees, measured by reference to the fair value of the share-based payments at the date of award, but has no net impact
on the Group's total equity or net assets. 
 
As a result of the Group's £97.4m equity capital raising (net of expenses) at the beginning of the year, and the resultant
increased average cash balance during the year, the Group's interest receivable during the period increased to £0.6m (2013:
£0.4m). 
 
Statement of financial position 
 
The Group ended the period with net assets attributable to shareholders of £526.2m, representing an increase of £189.2m
from the position at 1 January 2014 (£337.0m). As described above, the most significant contributing factors to the
increase in net assets during the period was the £97.4m (net of expenses) capital raising, the acquisition of Fusion IP and
the performance of the Group's portfolio of holdings in spin-out companies. "Hard" net assets, i.e. those excluding
intangible assets and the Oxford Equity Rights asset, totalled £451.3m at 31 December 2014 (2013: £315.5m). 
 
At 31 December 2014 the Group held cash and deposits of £97.3m (2013: £24.1m) and a diversified portfolio of equity and
debt investments in 90 private and publicly listed technology companies (2013: 72), 13 of which were added to the Group's
portfolio as a result of the Fusion IP acquisition. 
 
The value of the Group's holdings in portfolio companies increased to £349.9m at year end (2013: £285.9m) after net
unrealised fair value gains of £20.7m and net investment of £37.1m (2013: £82.4m net unrealised fair value gain; £22.0m net
investment). The Portfolio review above contains a detailed description of the Group's portfolio of equity and debt
investments including key developments and movements during the year. 
 
The Group's statement of financial position includes goodwill of £57.1m (2013: £18.4m), acquired intangible assets of
£16.5m and an equity rights asset of £1.1m (2013: £2.9m). The goodwill and acquired intangible assets values arose as a
result of the Group's acquisition of Fusion IP. The previous year's goodwill balance arose from historical acquisitions of
Techtran Group Limited (university partnership business, £16.3m; 2013: £16.3m) and Top Technology Ventures Limited (venture
capital fund management business, £2.1m; 2013: £2.1m). The intangible assets are separately identifiable assets resulting
from Fusion IP's agreements with its partner universities. The fair value of the intangible assets will be amortised on a
straight line basis over each partnership's useful economic life. 
 
The equity rights asset represents amounts paid to the University of Oxford in 2000 and 2001 giving the Group the right to
receive 50% of the university's entitlement to equity in any spin-out company and of any licensing income emanating from
the University of Oxford's Department of Chemistry until November 2015. Based on the Directors' calculations, and as
described more fully in note 14 to the Group's financial statements, the fair value of the contract at 31 December 2014 has
reduced by £1.8m (2013: £5.0m) to £1.3m (2013: £3.1m) and its value by 31 December 2015 will be £nil. 
 
Due to the nature of its activities, the Group has limited current assets or current liabilities other than its cash and
short-term deposit balances, which are considered in more detail below. 
 
Cash, cash equivalents and short-term deposits ("Cash") 
 
The principal constituents of the movement in Cash during the year are summarised as follows: 
 
 Net cash used in operating activities (excluding cash flows to/from deposits)  (6.4)   (1.9)   
 Net cash used in investing activities                                          (35.4)  (21.9)  
 Issued share capital                                                           97.4    -       
 Acquisition of subsidiary                                                      17.6    -       
 Movement during period                                                         73.2    (23.8)  
 
 
Movement during period 
 
73.2 
 
(23.8) 
 
At 31 December 2014, the Group's Cash totalled £97.3m, an increase of £73.2m from a total of £24.1m at 31 December 2013
predominantly due to a net £97.4m increase from the issue of new equity capital and £17.6m through the acquisition of
Fusion IP offset by net investment in the Group's spin-out companies. 
 
The Group's net cash used in investing activities increased during 2014, reflecting both an increase in investments (2014:
£46.8m; 2013: £27.5m) and an increase in realisations (2014: £9.7m; 2013: £5.5m). As described in more detail in the
Portfolio review above, the Group allocated a total of £46.8m across 51 portfolio companies during the period (2013:
£27.5m; 44 companies). 
 
A further £0.3m was committed to IP Venture Fund (2013: £0.2m), which in turn invested £2.7m across eight portfolio
companies (2013: £1.4m; 6 companies). The Group received a distribution of £1.1m following IP Venture Fund realising £11.1m
from two exits and one partial disposal. 
 
Overall, net cash used in investing activities totalled £35.4m (2013: £21.9m). 
 
Primarily as a result of an increase in the Group's cost base post the acquisition of Fusion IP, cash used in operating
activities increased to £6.4m (2013: £1.9m). 
 
It remains the Group's policy to place cash, which is surplus to near-term working capital requirements, on short-term and
overnight deposits with financial institutions that meet the Group's treasury policy criteria or in low-risk treasury funds
rated "A" or above. The Group's treasury policy is described in detail in note 2 to the Group financial statements
alongside details of the credit ratings of the Group's cash and deposit counterparties. 
 
At 31 December 2014, the Group recognised £4.5m of loans (2013: £1.3m) from the limited partners of IPVFII, a fund raised
during 2013 that is consolidated by the Group. These loans are repayable only upon IPVFII generating sufficient returns to
repay the limited partners. Whilst the Group continued to have no borrowings, it may in the future consider introducing a
modest level of gearing into the business if this is considered to be in the best interests of the Group. 
 
At 31 December 2014 the Group had a total of £1.2m (2013: £0.1m) in US Dollars held to meet the short-term working capital
requirements of its US operations, including capital anticipated to be required by new and existing spin-out company
opportunities. 
 
Taxation 
 
Since the Group's activities, including its activities in the US, are substantially trading in nature the Directors
continue to believe that the Group qualifies for the Substantial Shareholdings Exemption ("SSE") on chargeable gains
arising on the disposal of qualifying holdings and, as such, the Group has continued not to recognise a provision for
deferred ta