REG - IP Group PLC - IP Group plc Annual Results Release <Origin Href="QuoteRef">IPO.L</Origin> - Part 2
07/03/2017 07:07
- Part 2: For the preceding part double click ID:nRSG6795Ya
(14.7) 75.2
Exclude:
Amortisation of intangible assets and amortisation of Oxford Equity Rights asset 5.6 7.3
Share based payment charge 1.5 1.5
Return on Hard NAV (7.6) 84.0
1. Defined in the Portfolio review section
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. A detailed analysis of fair value gains and losses is provided in
the Portfolio review, above.
Other income comprises fund management fees, corporate finance fee income and
other fees typically chargeable to its portfolio companies for services
including executive search and selection, legal and administrative support.
Other income for the year decreased to £2.6m (2015: £3.6m). The decrease was
primarily due to lower fund management fees due to the end of the investment
period for North East Technology Fund ("NETF") in December 2015, resulting in
a lower management fee being charged in the current year. Additionally, there
was a lower level of corporate finance fee income, reflecting the lower level
of investment into the portfolio in 2016. In 2016 we settled approximately
half of these fees via the receipt of equity in portfolio companies, which we
believe aligns IP Capital with value creation in the portfolio companies that
are the subject of its mandates.
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 and the NETF). 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 described in the portfolio review, the results of the Group's drug
development subsidiary, MBS, are consolidated into those of the Group. MBS
continues to make good progress in its lead MBS2320 programme, partnered with
Janssen Biotech, Inc. The timing of payments under this partnership are linked
to the development of the programme and none were scheduled or paid during the
year. All development costs are expensed to the income statement 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.
Included within the Group's administrative expenses are costs in respect of a
small number of other portfolio companies. Typically, the Group owns a
non-controlling interest in its portfolio companies however, in certain
circumstances the Group will take a controlling stake and hence consolidate
the results of a portfolio company into the Group's financial statements. The
administrative expenses included in the Group's results for such companies
primarily comprise staff costs, R&D and other operating expenses.
Other central administrative expenses, excluding performance-based staff
incentives and share based payments charges, have increased to £13.0m during
the period (2015: £11.0m), as a result of increases in staffing costs and
other overhead costs as we continue to build our teams, most notably in the
US.
Administrative expenses resulting from performance-based staff incentives and
share-based payment charges decreased significantly to £1.5m during the period
(2015: £3.4m), as the Group's return on Hard NAV during the period is below
the minimum threshold for any payments to be awarded under the Group's Annual
Incentive Scheme. The full current year cost therefore relates to the IFRS 2
share-based payments charge attributable to the Group's Long-Term Incentive
Plan and Deferred Bonus Share Plan awards schemes. 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".
Statement of financial position
The Group ended the period with net assets attributable to shareholders of
£768.4m, representing a decrease of £12.0m from the position at 1 January 2016
(£780.4m). As described above, this decrease in net assets resulted from the
£14.8m loss in the year. "Hard" net assets, i.e. those excluding goodwill and
other intangible assets, totalled £706.5m at 31 December 2016 (2015: £714.3m).
Based on the Group's shares in issue at 31 December 2016 of 565,221,967, this
represents 125.0p per share (2015: 564,648,168 shares; 126.5p)
2016 £m 2015 £m
Total Equity or Net Assets 768.7 781.9
Exclude:
Goodwill (57.1) (57.1)
Other intangible assets (5.1) (10.5)
Hard NAV 706.5 714.3
Hard NAV per share 125.0p 126.5p
At 31 December 2016, the Group held gross cash and deposits of £112.3m (2015:
£178.8m) and a diversified portfolio of equity and debt investments in 90
private and publicly listed technology companies (2015: 82).
The value of the Group's holdings in portfolio companies increased to £614.0m
at year end (2015: £552.2m) after net fair value gains of £6.5m (2015: £86.2m)
and net investment of £55.0m (2015: £115.3m). 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 (2015:
£57.1m) and acquired intangible assets of £5.1m (2015: £10.5m). £38.7m (2015:
£38.7m) of the goodwill and substantially all of the acquired intangible asset
value arose as a result of the Group's acquisition of Fusion IP in 2014. The
remainder of the goodwill balance arose from historical acquisitions of IP
Assist Services Limited (university partnership business, £16.3m; 2015:
£16.3m) and Top Technology Ventures Limited (venture capital fund management
business, £2.1m; 2015: £2.1m). Goodwill is tested at least annually for
impairment, as described in note 11. The intangible assets are separately
identifiable assets resulting from Fusion IP's agreements with its partner
universities. The fair value of the intangible assets is amortised on a
straight-line basis over each partnership's useful economic life.
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:
2016 £m 2015 £m
Net Cash (used)/generated by operating activities (excluding cash flows from deposits) (11.4) 2.3
Net Cash used in investing activities (55.2) (114.6)
Issue of share capital - 178.8
Drawdown of debt facility - 14.9
Effect of foreign exchange rate changes 0.1 0.1
Movement during period (66.5) 81.5
At 31 December 2016, the Group's Cash totalled £112.3m, a decrease of £66.5m
from a total of £178.8m at 31 December 2015 predominantly due to net
investment in the Group's spin-out companies and operating expenses.
Cash used in operations has increased from the comparable period in 2015, most
significantly due to the receipt of £11m of payments under MBS's agreement
with Janssen Biotech in 2015 (£3m of which had been recognised in debtors as
at 31 December 2014).
The Group's net cash used in investing activities decreased during 2016,
reflecting a reduction in the level of investment (2016: £69.7m; 2015:
£115.9m) and significant realisations in the year, most notably the disposal
of Tracsis plc for £13.1m bringing total cash realisations to £14.7m (2015:
£0.6m). As described in the Portfolio review, above, the Group allocated a
total of £58.8m across 55 portfolio companies during the period (2015: £75.9m;
53 companies) and £10.9m across two multi-sector platform investments (2015:
£40m; one multi-sector platform investments).
The Group made a £0.1m contribution to IP Venture Fund during 2016 (2015:
£nil), which made its final investment during the period (2015: none). The
Group received no distributions in the year (2015: £0.6m).
In 2015 the Group secured a £30m, 8-year debt facility from the European
Investment Bank ("the EIB"). The facility is to be disbursed in two tranches,
with the first tranche of £15m having been drawn down in December 2015 and the
second tranche is anticipated to be drawn in 2017. The facility provides IP
Group with an additional source of long-term capital and represents an
evolution in the Group's capital structure to support its future growth and
development.
It remains the Group's policy to place cash that 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 2016, the Group recognised £9.8m of loans (2015: £7.1m) 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. A further £15.0m of non-current
liabilities are recognised which arise from the Group's use of the EIB debt
facility described above.
At 31 December 2016, the Group had a total of £1.1m (2015: £1.3m) held in US
Dollars 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
The Group's business model seeks to deliver long-term value to its
stakeholders through the commercialisation of fundamental research carried out
at its partner universities. To date, this has been largely achieved through
the formation of, and provision of services and development capital to,
spin-out companies formed around the output of such research. The Group
primarily seeks to generate capital gains from its holdings in spin-out
companies over the longer-term but has historically made annual net operating
losses from its operations from a UK tax perspective. Capital gains achieved
by the Group would ordinarily be taxed upon realisation of such holdings,
however, 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"). This
exemption provides that gains arising on the disposal of qualifying holdings
are not chargeable to UK corporation tax and, as such, the Group has continued
not to recognise a provision for deferred taxation in respect of uplifts in
value on those equity holdings that meet the qualifying criteria. Gains
arising on sales of non-qualifying holdings would ordinarily give rise to
taxable profits for the Group, to the extent that these exceed the Group's
operating losses from time to time. The Group's unrecognised deferred tax
assets and liabilities are set out in note 9 to the financial statements.
In the Autumn Statement 2016, the UK Government announced its intention to
make certain changes to the SSE regime, principally from the Group's
perspective, to remove the requirement for the investing entity (in this case,
IP Group) to be a sole trading entity or member of a trading group and
extending the minimum 10% holding period to any 12-month period in the six
years prior to disposal. These changes are anticipated to be substantively
enacted in the Finance Bill 2017 to apply from 1 April 2017. The Group
welcomed these changes and the directors anticipate that they will have a
favourable impact on the Group, giving greater certainty over the exemption of
qualifying gains under SSE, and increasing the Group's flexibility over the
timing of future portfolio company disposals.
The Autumn Statement also included proposals to restrict companies' use of
brought forward losses. Under the proposed plan, the amount of profit that can
be mitigated by brought forward losses will be restricted to 50% of the amount
of profits in excess of £5m. The Directors do not currently consider that
these proposed changes will result in the recognition of a deferred tax
liability in respect of any unrealised gains that do not qualify for SSE, but
note that such liabilities may arise in the future.
Risk Management
"A robust and effective risk management framework is essential for the Group
to achieve its strategic objectives and to ensure that the directors are able
to manage the business in a sustainable manner, which protects its employees,
partners, shareholders and other stakeholders. Ongoing consideration of, and
regular updates to, the policies intended to mitigate risk enable the
effective balancing of risk and reward."
Governance
Overall responsibility for the risk framework and definition of risk appetite
rests with the Board, who through regular review of risks ensure that risk
exposure is matched with an ability to achieve the Group's strategic
objectives. Risk identification, using a structured risk framework, is carried
out primarily by the management team with non-executive review being carried
out by the audit and risk committee.
Risk management process
Ranking of the Group's risks is carried out by combining the economic,
operational or environmental impact of risks and the likelihood that they may
occur. Those risks that are considered to pose the greatest threat to the
Group and score the highest are identified as 'principal risks'. The
operations of the Group, and the implementation of its objectives and
strategy, are subject to a number of principal risks and uncertainties. Were
more than one of the risks to occur together, the overall impact on the Group
may be compounded.
The design and ongoing effectiveness of the key controls over the Group's
principal risks are documented using an 'assurance map', which includes an
assessment of the net risk impact and likelihood post mitigating controls. The
key controls over the Group's identified principal risks are reviewed by
management, the audit and risk committee and the Board at least twice a year.
However, the Group's risk management programme can only provide reasonable,
not absolute, assurance that principal risks are managed to an acceptable
level.
During 2016 we have continued to build on our existing risk management
framework, enhancing risk management and internal control processes. This
included the creation on a Risk Council in the latter part of the year, to
support the Executive Committee and Board in their risk management
responsibilities. In addition to our permanent risk management activities, our
priority for 2017 is to enhance risk management within our front line
operations, supported by a programme of activity including an external risk
review of the group's US operations.
Summary of principal risks and mitigants
A summary of the principal risks affecting the Group and the steps taken to
manage these is set out below.
1 It may be difficult for the Group and its early-stage companies to attract capital.The Group's operations are reliant on capital markets, particularly those in the UK. As the Group's operations, and the operations of the majority of its portfolio companies, are based in the UK, the financial and operational performance of the Group and particularly the ability of its portfolio companies to attract development capital is influenced by the general economic climate and trading conditions in the UK. The success of those portfolio companies which require significant funding in the future may be influenced by the market's appetite for investment in early stage companies, which may not be sufficient. Failure of companies within the Group's portfolio may make it more difficult for the Group or its spin-out companies to raise additional capital. The Group has significant balance sheet and managed funds capital to No change The Group announced the proposed acquisition of Parkwalk Advisors Ltd, the UK's leading university spin-out focused EIS fund manager. The acquisition reinforces IP Group's access to a diversified pool of capital for co-funding the earlier stages of the portfolio. The Group hosted investor relations roadshows in the UK and US DevelopDeliver Change in fair value of equity and debt investments. Total equity ("net assets"). Profit/loss attributable to equity holders.
deploy in attractive portfolio opportunities. The Group operates a
corporate finance function which carries out fundraising mandates for
portfolio companies. The Group maintains close relationships with a wide
variety of co-investors that focus on companies at differing stages of
development. The Group frequently forecasts cash requirements of the
portfolio and ensures all capital allocations are compliant with
budgetary limits, treasury policy guidelines and transaction
authorisation controls.
2 The returns and cash proceeds from the Group's early-stage companies can be very uncertain.The following risks are typically associated with early-stage companies:· may not be able to secure later rounds of funding; · may not be able to source or retain appropriately skilled staff; · competing technologies may enter the market; · technology can be materially unproven and may fail; · IP may be infringed, copied or stolen; · may be more susceptible to cyber crime; and · other administrative, taxation or compliance issues may lead to company failure. Portfolio company failure directly impacts the Group's value and profitability. At any time, a large proportion of the Group's portfolio value may be accounted for by one, or very few, companies, which could exacerbate the impact of any impairment or failure of one or more of these companies. Oxford Nanopore is an example of such a portfolio company that has the potential to materially impact the Group's results. The value of the Group's in-house drug discovery company MBS may be significantly impacted by a negative clinical trial result. Cash realisations from the Group's portfolio through trade sales and IPOs could vary significantly from year to year. The Group's staff have significant experience in sourcing, developing and No change The Group's portfolio companies raised approximately £230m of capital. The Group maintained board representation on approximately 80% of companies by number. 2016 saw significant volatility in equity markets, particularly around the timing of the Brexit referendum. Deliver Change in fair value of equity and debt investments. Purchase of equity and debt investments. Proceeds from the sale of equity investments.
growing early-stage technology companies to significant value, including
use of the Group's systematic opportunity evaluation and business
building methodologies within delegated board authorities. Members of
the Group's senior team often serve as non-executive directors or
advisers to portfolio companies to help identify and remedy critical
issues promptly. Support on operational, legal and company secretarial
matters is offered to minimise failures due to common administrative
factors. The Group has spin-out company holdings across different sectors
managed by experienced sector-specialist teams to reduce the impact of a
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