Plc Pharma Quantum Annual Report and Accounts 2017 Accounts and Report Annual
Focused and simplified
Quantum Pharma Plc Annual Report and Accounts 2017 In this report Quantum Pharma Plc is a service-led niche pharmaceutical developer, manufacturer and supplier to the retail pharmacy, pharmaceutical wholesaler, hospital and homecare markets.
Market review Business model Strategy Page 6 Page 8 Page 18 Read about the UK’s prescribing Read more about the Group’s Read more about the Group’s hierarchy, the role of unlicensed and key strengths and competitive refreshed focused and simplified licensed medicines within it and how advantages that set it apart strategy that aims to leverage this offers growth opportunities for in the market and equip it to the strengths of the core Specials the Group. deliver growth. and Niche divisions.
www.quantumpharmagroup.com Strategic report 1
Highlights of the year Contents
Financial highlights Key developments Strategic report
All figures are for continuing operations • Transition to a more focused and Highlights of the year 1 unless otherwise stated. simplified business strategy led by At a glance 2 • Revenue increased by 28% to £88.8m a new Board. Chairman’s statement 4 (2016: £69.2m). • Group repositioned with a leaner Market review 6 • Gross profit remained flat at £25.9m operating structure and balance sheet Business model 8 (2016: £25.9m). aligned to simplified strategy. • Adjusted EBITDA1 of £10.1m (2016: • Secured renewal of long-term exclusive Chief Executive Officer’s review 10 £12.5m) with run-rate profitability contracts to supply unlicensed medicines Chief Financial Officer’s review 14 increasing. to three of the largest wholesale and Non-GAAP measures 17 • Statutory operating loss of £9.8m pharmacy chains in the UK. Strategy 18 (2016: £7.5m profit) resulting from • Successfully launched a number of Key performance indicators 20 decisive and one-off actions to simplify new products during the year and post Principal risks and uncertainties 22 and focus the business. year-end, including key unlicensed- Corporate social responsibility 24 • Net debt1 reduced by almost half to to-licensed product Glycopyrronium
£13.0m (2016: £24.6m). Bromide Oral Solution 1mg/5ml. Directors’ report • Simplified product portfolio performing well and refocused pipeline progressing Introduction from the Chairman 29 to plan. Board of Directors 30 • Successful placing in November 2016, Senior executives 32 raising £15.0m (before expenses) to Corporate governance statement 34 significantly reduce net debt. Directors’ report 37 • Closure of loss-making business NuPharm Laboratories Limited. Directors’ remuneration report 41
Financial statements
Independent Auditor’s report 45 2015 61.7 2015 12.2 Consolidated income statement 46 2016 69.2 2016 12.5 Consolidated statement of comprehensive income 46 2017 88.8 2017 10.1 Consolidated balance sheet 47 Consolidated statement Group revenue Adjusted EBITDA1 of changes in equity 48 Consolidated cash flow statement 49 Notes forming part of the £88.8m £10.1m financial statements 50 Company balance sheet 76 Company statement of changes in equity 77 2015 1.3 2015 9.0 Notes forming part of the Company statements 78 2016 4.7 2016 24.6
(6.7) 2017 2017 13.0
(Loss) earnings per share2 from Net debt 1 continuing operations (6.7p) £13.0m
1. Adjusted EBITDA and net debt are non-GAAP measures of profit and indebtedness respectively that the Group uses internally to measure business performance. The definitions of adjusted EBITDA and net debt are on page 17 and a reconciliation of adjusted EBITDA to statutory operating profit is set out on page 15. 2. (Loss) earnings per share is calculated using the average number of shares in issue for each period: 2017: 134.8m; 2016: 125.0m; 2015: 54.5m.
Quantum Pharma Plc Annual Report and Accounts 2017 2 Strategic report
At a glance A service-led niche pharmaceutical developer, manufacturer and supplier to the health and care sectors
The Group operates through three trading divisions incorporating 2017 Group revenue1 eight business units across seven locations in the UK and Europe, breakdown offering a portfolio of innovative and synergistic products and services. £88.8m
The Group’s strategic focus centres on two product development and licensing pipeline. key pillars represented by the Specials and The Niche division benefits from an in-house Niche Pharmaceuticals (‘Niche’) divisions. product development capability that manages the Group’s development pipeline alongside Specials a range of projects for third-party customers. Manufacture and supply The Specials division operates in the UK’s Licensing products, particularly those specials market where it manufactures, currently prescribed as specials, represents procures and supplies unlicensed medicines a growth opportunity for the Group. For more and imported medicines licensed abroad information of the UK’s prescribing hierarchy (collectively referred to as ‘specials’), and and the role of specials and licensed products special obtains. Its customers include the within the healthcare industry, turn to page 6. Specials main wholesale and retail pharmacy chains in Niche Pharmaceuticals the UK, with a number of these relationships Medication Adherence underpinned by exclusive supply agreements, Homecare and medication management Medication Adherence as well as hospitals. The division also operates The Group’s visibility over prescribing a dedicated aseptics compounding unit that trends and growth medicines has been manufactures bespoke intravenous specials complemented by the Medication Adherence 1 to order. division, which dispenses and supplies 2016 Group revenue medicines into the homecare market and breakdown The Specials division responds to prescription provides medication management services requests from healthcare professionals. It can through its innovative multi-dose tray system. deliver bespoke specials across a variety of £69.2m dosage forms and strengths in as little as Following implementation of the Group’s new 15 hours through its in-house, state-of-the-art strategy during the second half of this year, compounding and manufacturing facilities. which aims to tighten focus on the growth opportunities available to the Specials and The division therefore occupies a leading Niche divisions, the long-term fit of Medication position in the specials market that enables it Adherence within the Group is under review. to track shifts in demand for medicines across A more detailed explanation of the Group’s the community and hospital pharmacy sectors. new strategy is included in the Chief Executive Officer’s review on page 10, and in the strategy Niche summary on page 18. Develop and supply The Niche division uses this insight into the specials market, together with other data, to Specials identify where patient demand for a particular special is high. These products are assessed Niche Pharmaceuticals to determine their suitability to enter the Group’s Medication Adherence
1 From continuing operations
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 3
Specials Niche Medication Pharmaceuticals Adherence
The Specials division comprises The Niche Pharmaceuticals The Medication Adherence division three business units that division comprises three business comprises two business units that manufacture, procure and supply units that develop, license and provide products and services to unlicensed medicines, special commercialise medicines with support patients in adhering to their obtains and imported medicines a particular focus on those medication regime, patient-focused licensed abroad. currently prescribed as specials. homecare services and services to pharmaceutical companies.
The Specials division is the most The Niche Pharmaceuticals division uses The Medication Adherence division established of all the divisions, is profitable the excellent visibility of trends in the UK provides the Group with direct access and cash generative and provides the pharmacy and hospital markets gained to the homecare market. Group with a strong platform. Around 89% through the Specials division to supplement of unlicensed medicines and special external market data analysis, allowing early Key developments obtains volumes supplied into the retail and identification of opportunities to take products • Strong growth in homecare and wholesale pharmacy markets are under from unlicensed-to-licensed status (‘UL2L’). fertility volumes, particularly following exclusive supply contracts with customers. commencement of a major contract The division has a growing portfolio and with the Yorkshire and Humber NHS Key developments pipeline of UL2L products, as well as Pharmaceutical Purchasing Consortium. • Unlicensed medicines and special obtains complementary larger niche generic products • Following development of the Group’s volumes grew moderately despite market across a number of therapeutic areas that focused and simplified strategy (details and competitive pressure. the Group aims to commercialise either of which are explained on pages 18 and • Sales volumes of imported licensed independently or in partnership with other 19), a strategic review of the Medication medicines into the hospital sector pharmaceutical businesses. Adherence division has commenced. also grew. • New five-year contract extension signed Key developments with AAH Pharmaceuticals Limited, the • Launched a number of products during UK’s leading pharmaceutical wholesaler. the year and post year-end, including • Contract renewals with Phoenix Glycopyrronium Bromide Oral Solution Healthcare Distribution Limited and 1mg/5ml, the Group’s first major Bestway Panacea Healthcare Limited UL2L launch. (trading as Well Pharmacy) also secured • All UL2L products in the current pipeline on a long-term basis after the year-end. now in active development. • Contract manufacturing business • Profitability profile of the division NuPharm closed following a period of transformed through trading growth sustained trading losses, which resulted and elimination of costs supporting in a £13.7m loss on discontinued underperforming product lines that have operations shown in the consolidated been discontinued during the year. Turn income statement (see page 46). to the Chief Executive Officer’s review on page 10 for further details.
Adjusted EBITDA Adjusted EBITDA Adjusted EBITDA £10.1m £1.4m (£0.2m)
2015 12.7 2015 0.9 (1.1) 2015
2016 10.7 2016 2.1 2016 0.4
2017 10.1 2017 1.4 (0.2) 2017
Group adjusted EBITDA of £10.1m comprises the above divisional contributions and Group costs of £1.2m (2016: £0.7m, 2015: £0.3m). A definition of adjusted EBITDA is on page 17.
Quantum Pharma Plc Annual Report and Accounts 2017 4 Strategic report
Chairman’s statement Strongly positioned for success
I am pleased to introduce the Despite having only been Chairman since Much of the Group’s strategy over the past October 2016, it is already clear to me that the five years has been to equip itself with the Group’s Annual Report and Group benefits from a first-class infrastructure capabilities needed to fully address this Accounts for the year ended and talented workforce who are committed hierarchy through both organic growth and 31 January 2017 (‘FY17’). FY17 to upholding the highest standards of quality selective acquisitions. and service as the Group strives to deliver has been a year of significant on its strategy. Quantum Pharmaceutical is now the market change where some difficult but leader in the UK for the manufacture and Although we announced in October 2016 that supply of specials and special obtains; UL ultimately necessary decisions the expected FY17 outturn would be lower Medicines is number two in the UK market for have been made to put the than previously anticipated, I am pleased to sourcing and supplying imported medicines Group on a path to realising its report that the Group has delivered on the licensed abroad; Lamda is a leading specialist revised forecast of £10.1m adjusted EBITDA. development, formulation and licensing considerable potential. Revenue grew by 28% to £88.8m and the business capable of guiding products through Group’s net debt position was substantially the licensing process; and Colonis is an expert reduced to £13.0m following a £15.0m equity product development and commercialisation fundraise that was completed in November business equipped to take unlicensed-to- 2016. I am grateful for the continued support licensed (‘UL2L’) products to market. These and confidence shown by our major components are in place, are fully integrated shareholders in the Group’s prospects that and are key to future growth. this considerable fundraise serves to highlight. We must now focus on what we do well. Focused and simplified strategy Some of the Group’s difficulties this year are The premise on which the Company listed rooted in persevering with products where on AIM in December 2014 remains intact. it has not been first to market. The sales and The Group is seeking to leverage its market- marketing capability needed to successfully leading position in the manufacture, procurement launch products into such a marketplace and supply of unlicensed medicines (‘specials’) is considerable and the expertise needed and special obtains in the UK and use it to compete effectively against incumbent as a platform to license and commercialise product offerings is not a core competency a pipeline of the top specials. of the Group. It would require substantial investment and time in advance of securing The Group is therefore closely aligned to meaningful revenues for the Group to build the Medicines and Healthcare products this capability. Regulatory Agency’s (‘MHRA’) aim of reducing clinical risk by subjecting medicines to the licensing process and effectively moving them up the UK prescribing hierarchy. The component parts of the hierarchy are more fully explained on page 6.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 5
“The Board is confident in the future prospects of the Group and we look forward to reporting on further strategic progress as we move forward.”
The essence of the Group’s focused and Corporate governance Dividend simplified strategy is therefore to prioritise and The Board values corporate governance highly The Board has proposed not to pay a final concentrate its own launch efforts on UL2L and believes that it is integral to the delivery dividend for FY17 as the Group intends to products where it has first-mover advantage, of the Group’s strategy, to the generation of reinvest its profits to progress development and on larger niche generic non-UL2L shareholder value and to the safeguarding of the product pipeline as rapidly as possible. products where there is a market opportunity. of the long-term interests of its stakeholders. Meanwhile, we will seek to partner with Our employees and stakeholders businesses who specialise in marketing other As Chairman, I am responsible for the We rely on the skills, experience and types of non-UL2L products to fulfil the leadership of the Board and for ensuring its commitment of our team to drive the business potential of the remainder of the portfolio. effectiveness in all aspects of this role. The forward. Their enthusiasm, innovation and Board is responsible for the Group’s strategic perseverance remain key assets of the Group The launch of Glycopyrronium Bromide Oral development, monitoring and achievement of and are critical for its future success. On Solution 1mg/5ml (‘Glyco’) in August 2016 is a its business objectives, oversight of risk and behalf of the Board, I would like to thank all blueprint for the type of UL2L development and maintaining a system of effective corporate of our employees, customers, suppliers and launch that is now our priority. I am encouraged governance. More information about our stakeholders for their continued support over by the way we executed on the launch and that corporate governance controls and processes the last year. Glyco’s sales performance has subsequently is contained within the Directors’ report been in line with our pre-launch estimates. This starting on page 28. Summary bodes well for future UL2L launches and I am This year’s results draw a line under the past excited by some of the products in our pipeline Board changes performance of the Group. They mark the that display similar characteristics to Glyco in During the year we announced a number of transition to a more focused and simplified terms of our estimate of their market opportunity. changes to the Board. Following the business led by a new Board, and demonstrate resignation of Martin Such as Chief Financial real progress in executing our strategy. The The Group has also taken action this year Officer (‘CFO’) on 7 March 2016, Chris Rigg Board is confident in the future prospects of to remove distractions and address was appointed as his replacement. the Group and we look forward to reporting on underperforming businesses. The most further strategic progress as we move forward. significant example of these is NuPharm, On 12 July 2016 Andrew Scaife tendered his which ceased trading in January 2017 resignation as Chief Executive Officer (‘CEO’) following a period of sustained operating and left his role on 29 July 2016 following losses. Although this decision was taken which Chris Rigg was appointed Acting with great regret, the profitability profile of CEO on 1 August 2016. Chris was appointed the Group is much stronger as a result and permanent CEO on 19 October 2016 Ian Johnson management are now wholly focused on alongside a new Board comprising myself, Non-executive Chairman growing the core Specials and Niche divisions. Dr John Brown as Senior Independent 2 May 2017 Non-executive Director and Christopher Mills It is critically important that all our resources as Non-executive Director. John Clarke and and efforts are geared towards making our Sheila Kelly resigned from their roles as focused and simplified strategy a success Non-executive Chairman and Non-executive and that there are no other distractions. Director respectively.
Gerard Murray was appointed CFO on 23 January 2017, succeeding Chris Rigg, who had been performing both roles since 1 August 2016.
Quantum Pharma Plc Annual Report and Accounts 2017 6 Strategic report
Market review The prescribing hierarchy: safety, efficacy and quality
THE UK PRESCRIBING HIERARCHY
Preferred choice Imported product UK-licensed licensed in medicine (approved) country Lower risk of origin Off-label use of UK-licensed medicine
The prescribing hierarchy Approvals are given with specific reference Specials include: The UK prescribing hierarchy aims to to a medicine’s formulation, strength and • imported medicines licensed in another maximise patient safety by placing medicines form (e.g. tablet or liquid) and for a particular country by a regulatory body equivalent into a series of risk categories. Licensed clinical indication. to the MHRA; medicines sit at the top of the hierarchy as • different forms, such as converting a tablet they have been subjected to the most rigorous Licensed medicines are the preferred choice to a liquid; review and testing by a regulator as part of prescribers because their safety, efficacy • bespoke strengths; of a licensing process, and other types of and quality have been reviewed by a recognised • unusual formulations; and medicines then follow in order of their relative regulatory authority and so represent the • discontinued licensed products. risk to patients and prescribers. lowest risk to patients and prescribers. In 2015, licensed medicines represented over In 2015, the community specials prescriptions Licensed medicines 99% of the £9.8bn per annum community market in England and Wales 2 was worth over The Medicines and Healthcare products prescription market in England and Wales1. £80m3 per annum, representing less than 1% of Regulatory Agency (‘MHRA’) is the government all community prescriptions in those locations 4. body responsible for the regulation of medicinal Unlicensed medicines (‘specials’) products in the UK. One of the MHRA’s key Prescribers sometimes need to administer Since the introduction of a reimbursement tariff responsibilities is the evaluation and approval a medicine that is not licensed because in 2011 to drive down the cost of specials, which of medicinal products for use. a patient may, for example, need a weaker presently affects some but not all specials lines, dose or is unable to swallow a medicine in the value of the market has consistently fallen Pharmaceutical companies obtain approval to its licensed form. If a prescriber cannot treat year-on-year. market a product by applying for a marketing a patient with a medicine licensed in the UK authorisation (‘product licence’). A product they may look to prescribe a special. This is partly the result of a reduction in the licence may be granted if an applicant can mean cost of sourcing and manufacturing demonstrate a medicine is safe and effective specials but also reflects products moving in addressing a specific clinical need and can from an unlicensed-to-licensed status, at which be manufactured to a high level of quality. point they are no longer classified as a special.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 7
Crushing or splitting An extemporaneously licensed tablets dispensed medicine or capsules UK-manufactured Last choice special in MHRA-licensed facilities An imported product A non-UK-made Greater risk not licensed in the unlicensed medicine country of origin or food supplement
Unlicensed-to-licensed This creates opportunities for businesses that The prescribing hierarchy and the pathway Although a special manufactured in an are not only able to identify and understand from unlicensed-to-licensed status offers the MHRA-approved facility is inherently made the markets for these specials, but also Group an opportunity to leverage its strengths to a high standard, licensed medicines remain overcome the developmental challenges to protect and grow its existing market share the lowest risk and preferred choice of associated with obtaining a product licence of specials, where around 93% 5 of spend prescribers, placing them at the top of the for them. is concentrated in only 500 product lines. prescribing hierarchy. This opportunity is compelling when viewed Our market opportunity in the context of the drive to find savings Pharmaceutical companies typically pursue The Group operates in a number of markets, across the UK’s National Health Service product licences for products in the strength, serving community pharmacies, pharmaceutical (‘NHS’), which is creating pricing pressure formulation and form that addresses the wholesalers and hospitals across the UK. within the specials market and increasing clinical needs of a patient group offering the The Group occupies a leading position in competitiveness amongst specials providers. highest chance of regulatory success, leaving these markets that offers early visibility over, the more difficult-to-license derivatives and insight into, specials prescribing trends, The Group’s positioning and business model as specials. helping it to understand the dynamics around means it benefits from a number of key those products with the highest demand. advantages and competencies that are These difficulties are often linked to the atypical explained further on pages 8 and 9. The needs of the other patient groups and the The Group is therefore well-placed to identify Group’s focused and simplified strategy is associated challenges in demonstrating products with growth potential where there also described on pages 18 and 19. safety, efficacy and quality. could be licensing opportunities, as well as being alert to other products that may be Turn to page 10 to read more about the in decline. actions the Group has taken this year in the Chief Executive Officer’s review.
1. http://www.apsm-uk.com/specials-industry.php. 2. Those issued by community pharmacies and excluding those issued from other sources, such as hospital pharmacies. 3. http://www.apsm-uk.com/specials-industry.php. 4. Data covering Scotland unavailable. 5. http://www.apsm-uk.com/specials-industry.php.
Quantum Pharma Plc Annual Report and Accounts 2017 8 Strategic report
Business model
CHOICE/ PRESCRIBING HIERARCHY OUR BUSINESS MODEL OUR POSITIONING RISK
International Developing distribution partnerships UK-licensed medicine NICHE DIVISION UK PREFERRED LOWER / Secure & grow
IN-HOUSE REGULATORY DEVELOPMENT PATHWAY & REGULATORY EXPERTISE
Visibility of specials market Imported product licensed in (approved) country of origin
Global sourcing DIVISION SPECIALS capability
Established UK distribution network to pharmacies & hospitals UK-manufactured special in LESS PREFERRED/GREATER MHRA-licensed facilities Contracted relationships
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 9
The Group’s focus centres upon the manufacture, procurement and supply of unlicensed medicines (‘specials’) and special obtains to UK pharmacy chains, pharmaceutical wholesalers and hospitals, and on leveraging the product licensing opportunities offered by this market.
Specials Niche Pharmaceuticals Growth opportunities Established and market-leading In-house development, regulatory Unlicensed-to-licensed The Specials division, which includes and commercialisation expertise The Group has an opportunity to both Quantum Pharmaceutical Limited (‘QPL’) The Niche Pharmaceuticals division, which preserve and grow its UK market share and UL Medicines Limited (‘ULM’), occupies includes Colonis Pharma Limited (‘Colonis’) by taking a pipeline of unlicensed products a market-leading position that provides the and Lamda Laboratories SA (‘Lamda’), through the regulatory pathway in order Group with insight into prescribing trends is focused on developing, licensing and to license and commercialise them. across a large swathe of the specials market. commercialising currently unlicensed products. Work to identify and monitor the The Group is differentiated in this endeavour The Specials division’s offering is customer- market potential for these products draws by being able to combine the strong market focused and differentiated on quality and upon data and insight generated in the position and industry relationships secured service. QPL works to some of the shortest Specials division. through its established Specials division lead times in the industry, manufacturing and with the in-house product development delivering bespoke, unlicensed medication in Lamda, based in Athens, Greece, has sole and regulatory approval expertise in its as little as 15 hours. It benefits from state-of- responsibility for managing the development Niche division. the-art production facilities, warehousing and regulatory approval process. Its current and dispensary capabilities, along with the focus is on UK-unlicensed product opportunities, Successfully developing, licensing and expertise of a highly-skilled and committed where the division benefits from significant commercialising the product pipeline offers team of pharmacists, laboratory technicians knowledge and experience of the Medicines the Group the chance to not only protect and quality specialists. The division’s imported and Healthcare products Regulatory Agency’s the existing market share of the Specials medicines business ULM has a truly global (‘MHRA’) approval process. business, which operates in an environment reach with access to a range of more than of intense competition and price regulation, 500 imported lines sourced from more than If a development is successful and is but also potentially unlock the rest of the UK 24 countries. granted a marketing authorisation (‘product market for those products where it succeeds licence’), Colonis is responsible for taking in being the first licensed provider. Whilst this The Specials division’s reputation for reliability the product to market, either by selling is a growth opportunity for the Group it will and quality has helped it to build long-term directly to wholesalers or through partnerships also mean lower-risk medicines for patients relationships with several key customers with other pharmaceutical distributors. and healthcare professional alongside that are underpinned by exclusive supply Colonis manages a number of important potentially creating the economies of scale contracts. Approximately 89% of QPL’s order aspects of the go-to-market model, including required to bring down the cost of these volumes are generated from customers with the supply chain, packaging, quality and medicines to the healthcare sector. whom it has an exclusive supply agreement pharmacovigilance, whilst the Specials covering the supply of specials and special division supports on warehousing The Group’s existing UK presence means obtains. Whilst these agreements do not and distribution. it is well-placed to deliver on the potential guarantee order volumes they nevertheless of its licensed product portfolio in this market. create stability and provide visibility over a However, the Group is also focusing on large proportion of the revenue potential of the opportunities in other geographical markets Specials division in the short-to-medium term. and is working to broaden its network of international commercial, import and distribution partnerships with this in mind.
For more information on the Group’s strategy, which is seeking to better leverage the Group’s strengths, along with developments this year, turn to pages 18 and 19.
Quantum Pharma Plc Annual Report and Accounts 2017 10 Strategic report
Chief Executive Officer’s review Focusing and simplifying around our best growth opportunities
I am pleased to report that The impact of the actions taken to confront A focused and simplified strategy the challenges we have faced leave the Following the conclusion of a strategic review the Group has made excellent Group with a clean balance sheet and performed during the year, we have refocused progress in implementing its a leaner operating structure on which we and simplified the business to: more focused and simplified intend to build and grow. The Group’s • Closely align our business model to the UK profitability run-rate has been materially prescribing hierarchy by moving products strategy and that our improved and we are now well-placed from an unlicensed-to-licensed status. performance in the second to take advantage of existing and future • Maintain market-leading position in the opportunities within our core businesses. specials market whilst we progress the half of the year was very development and licensing of products encouraging. The Specials division (‘Specials’) remains in our pipeline where we have a profitable and cash generative, providing a competitive advantage. strong platform for our development programme • Invest in our UL2L development that is predominantly focused on unlicensed-to- programme to license key unlicensed licensed (‘UL2L’) products. The trading specials so that we can protect and grow performance of the Niche Pharmaceuticals our market share and secure economies division (‘Niche’) has been transformed by the of scale. successful launch of a number of products • Broaden our network of commercial during the year and post year-end, including partnerships to secure multiple routes our largest product to date Glycopyrronium to market for our product portfolio. Bromide Oral Solution 1mg/5ml (‘Glyco’), and the elimination of on-going losses, unnecessary UL2L prioritisation costs and marginal activities. In addition, the Prioritising our UL2L product developments drive to grow our network of commercial delivered through Niche, emphasising those partnerships is showing clear signs of progress. products where we can be first to market, Our focus on the two core pillars of Specials is a key part of our strategy. This type of and Niche will continue to drive development plays to our strengths, with performance improvement. less time and investment needed to penetrate the market and achieve scale. The long-term fit of the Medication Adherence (‘MA’) division within the Group, particularly Having simplified the product portfolio to given its low gross margin contribution, prioritise development of the Group’s top is under review. specials licensing opportunities, it currently comprises 57 products. 19 of these products have been launched or out-licensed in the UK, with 12 having been commercialised post-simplification. The overall performance of these products since simplification has been very good, with the benefits of portfolio rationalisation evident. A further 3 products have been licensed in the UK and are in the process of being commercialised. There are an additional 35 products in various phases of development, of which 25 are UL2L developments. All developments are currently progressing to timetable. Going forward we
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 11
“We are well-placed to deliver future growth by focusing on our core Niche and Specials businesses.”
will provide updates with respect to our market-leading Specials division. We also licensed product portfolio as part of our have extensive experience and understanding 2017 Niche portfolio interim and final results communications. of the UK’s development and regulatory breakdown approval process as governed by the MHRA In order to release investment capacity through the activities of our Niche division. Our to support UL2L prioritisation we have strategic position in the UK is therefore strong. 57 cancelled all development programmes where Total products1 we cannot identify a commercial partnership We are currently seeking to realise the and do not believe we can commercialise the potential of our product portfolio beyond opportunity ourselves. As a consequence, the UK and extend our reach into other £7.2m of balance sheet investment in these geographies by broadening our network products has been impaired, which is a key of international commercial partnerships. constituent of the reported statutory These partnerships will seek to emphasise operating loss. both export and localised manufacture together with distribution opportunities to Broadening our commercial partnerships secure market access without the need Our non-UL2L portfolio is comprised of niche to establish our own local presence. generic products where, although we will not have first-mover advantage and significant Consolidating our position sales and marketing capability will likely be in the specials market required to market them, we believe there Our Specials division continues to perform remains a market opportunity. robustly and reliably, and is cash generative. In development/licensing process This resilient performance is particularly Product licence received, Past experience tells us that taking share encouraging given the increasing competitiveness awaiting launch from incumbent competitors can be very and regulatory pressure within the specials challenging without an existing sales and market. We have cemented our market- Launched or out-licensed marketing capability, and that converting leading position by agreeing new long-term these non-UL2L opportunities takes time exclusive supply contracts with three of the 1 The portfolio breakdown defines and significant investment unless there is largest UK wholesale and pharmacy chains, individual products as those which an established market presence. being AAH Pharmaceuticals Limited, Bestway vary with respect to their active Panacea Healthcare Limited, trading as pharmaceutical ingredient, strength, We have therefore taken steps to commercialise Well Pharmacy, and Phoenix Healthcare form or branding. selected non-UL2L products in our portfolio Distribution Limited. Quantum Pharmaceutical by partnering with other businesses that have Limited, a business within the Specials more experience of taking generic products division, is the UK market leader in the supply to market, which will help us to commercialise of unlicensed medicines and around 89% of these developments to their fullest potential its volumes are under exclusive contracts. and accelerate our access to revenues through revenue-sharing agreements. We are progressing Our attention is now turning to driving partnerships to support this strategy. operational efficiencies and improvements in the Specials division to underpin profitability International opportunities and provide us with the commercial agility Our product pipeline holds significant value necessary to react to market dynamics. potential. In the UK market, the Group is well-established due to its existing infrastructure and commercial relationships built through our
Quantum Pharma Plc Annual Report and Accounts 2017 12 Strategic report
Chief Executive Officer’s review continued
NuPharm closure Colonis had invested ahead of meaningful sales total development capacity this year. The Following a period of sustained trading losses, activity to support the launch of a number of business has also continued to generate strong the Board took the decision in October 2016 products in the portfolio where we needed development, supply and royalty revenue from to commence consultation on the closure of engagement with healthcare professionals. a range of third-party projects. NuPharm. Trading ceased at NuPharm in January 2017 in line with our stated intention Following the decision to prioritise UL2L Specials division (‘Specials’) and it was placed into administration on developments a number of underperforming The Specials division delivered another solid 26 April 2017 following an orderly product lines were discontinued, including the performance during the year, generating 89% closure process. Mucodis range and Ergocalciferol 50,000 IU. of the Group’s adjusted EBITDA before Group This decision has allowed the division to focus costs. The division provides a strong platform The total loss incurred on the closure of investment on what it believes are the right for our product development and licensing NuPharm is £13.7m, which reflects trading products and stop on-going investment in the activities, as well as valuable insights into trends losses and closure costs of £1.7m, and discontinued products, yielding significant within the specials market that we use to inform £12.0m of written down balance sheet savings. Colonis therefore exited the year with our new product development decisions. investment. This loss is shown as a a positive monthly adjusted EBITDA run-rate, discontinued operation in the consolidated underpinned by strong contributions from Revenue increased by 7% to £57.6m income statement as NuPharm’s activities as Glyco alongside a number of other launched (2016: £53.6m) and adjusted EBITDA a contract manufacturer are considered to be products, and a lower cost base. contracted by 6% to £10.1m (2016: £10.7m). a separate major line of business. The cash Sales order volumes in Quantum impact of NuPharm’s trading losses and In addition to Glyco, we launched several Pharmaceutical Limited (‘QPL’) increased by closure costs during the year was £2.4m. other products during the second half of 6%, supported by volumes gained as a result the year and just after the year-end, which of the acquisition of 281 Sainsbury’s stores Divisional review are delivering in line with management by Lloyds Pharmacy in September. This was Niche Pharmaceuticals division (‘Niche’) expectations. These include: partly offset by the impact of our licensing of The financial year ended 31 January 2017 • Aviticol™ and Colecalciferol capsules Glyco in August 2016, which cannibalised has been a pivotal year for the Niche division (licensed for the treatment and prevention some existing specials sales. following the launch of a number of new of vitamin D deficiency) in an 800 IU products, the most significant of which has strength in July 2016 and 1,000 IU strength The drive to secure efficiency savings across been Glycopyrronium Bromide Oral Solution in August 2016; the NHS continues to create pricing pressures 1mg/5ml (‘Glyco’), and substantial operational • Metformin Oral Solution (licensed for and changes to prescribing trends in favour changes to focus and simplify the business the treatment of type 2 diabetes) in of more cost-effective medicines. We are in line with our strategy. 500mg/5ml, 850mg/5ml and 1,000mg/5ml seeing this most notably through a gradual strengths in December 2016; shift towards prescription of tariff medicines Revenue grew 35% during the year to • Folic Acid Oral Solution 1mg/1ml (licensed in place of clinically equivalent but sometimes £5.8m (2016: £4.3m), driven primarily by the for the treatment of folate deficiency) and more expensive non-tariff alternatives. This has contribution from Glyco following its launch Acetylcysteine Sachets 200mg (licensed been a feature of the industry for a number in August 2016. Adjusted EBITDA contracted as a mucolytic) during February and of years and we are continuing to manage by 33% to £1.4m (2016: £2.1m) with Glyco’s March post year-end; and this dynamic through a variety of initiatives, trading contribution offset by a reduction • Levothyroxine Oral Solution (indicated including margin improvement through the in out-licensing income of £0.5m and an for hyperthyroidism) in 25mcg/5ml, manufacture of more products in-house as increased operating cost base that has now 50mcg/5ml and 100mcg/5ml strengths opposed to external sourcing. been addressed. launched in April 2017. QPL was also successful in retaining all The adjusted EBITDA monthly run-rate Lamda Laboratories SA (‘Lamda’), the product major key accounts during the year, including of Colonis Pharma Limited (‘Colonis’), the development and licensing arm of the Niche securing a five-year exclusive supply relationship commercialisation arm of the Niche division, division, delivered another good performance. with our largest customer, AAH Pharmaceuticals has been transformed during the second half The development pipeline is now fully integrated Limited, which supplies over 1,800 Lloyds of the year. During the first half of the year at Lamda, absorbing around 60% of Lamda’s Pharmacy stores and 8,000 independents
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 13
across the UK. Post the year-end we entered The significant revenue base in the MA We exited the financial year with a much into long-term exclusive supply agreements division is due to Biodose Services and the improved profitability run-rate that is with Bestway Panacea Healthcare Limited, inherent characteristics of its homecare supportive of market expectations for the trading as Well Pharmacy, and Phoenix business model. The business model requires current financial year and we are well-placed Healthcare Distribution Limited, who supply high-value medicines to be dispensed and to deliver future growth by focusing on our Rowlands pharmacies, for two and three delivered to patients at home, which results core Niche and Specials businesses. years respectively. Securing these agreements in high levels of revenue and costs and a low mean we supply three out of the four largest gross margin profile. national pharmacy chains in the UK on an exclusive basis, satisfying all of their Trading in Protomed has been steady as unlicensed medicine and special obtain the number of patients benefiting from the demand. Around 89% of our specials and multi-dose tray system has remained similar to Chris Rigg special obtains sales volumes in QPL are last year. The business has historically sought Chief Executive Officer sourced from customers with whom we have to commercialise Biodose Connect™, which 2 May 2017 an exclusive supply relationship, providing is an extension of the multi-dose tray system. us with good visibility over our future It allows carers and clinicians to remotely revenue potential. monitor a patient’s adherence to their medication regime. It has become clear that UL Medicines Limited, which primarily serves Biodose Connect™ will require substantial the hospitals sector, exited the year strongly further investment to establish it in the following a softer first half. The business domiciliary care market, which is no longer continues to consolidate its position as one of a core area of focus for the Group. the leading suppliers of unlicensed imported medicines to the NHS. Following the result of Following our decision to focus our efforts the EU referendum in June 2016, the business on our core Specials and Niche businesses, has faced challenges relating to the impact we have commenced a strategic review of the of Sterling weakness on the cost of imported MA division to conclude on its long-term fit lines, however underlying hospital volumes are within the Group. growing and the business has benefited from temporary supply opportunities following Summary and outlook shortages of licensed products. I am very pleased with the progress we have made to date. We have driven a step Medication Adherence division (‘MA’) change in the profitability of the Niche The MA division comprises Total Medication Pharmaceuticals division in the second half Management Services Limited (trading as by focusing on launching and commercialising ‘Biodose Services’), a homecare dispensary products where we have a competitive and delivery business, and Protomed Limited, advantage. In addition, the Group has which provides medication management cemented its position as the UK’s market- services through Biodose, its innovative leading specials business by renewing multi-dose tray system. Divisional revenue exclusive contracts with three of the four main increased by 125% to £25.4m (2016: £11.3m), wholesale and pharmacy chains in the UK. driven by Biodose Services, which secured a Operating costs across the Group have been number of new homecare contracts and saw reduced and our net debt position at the continued growth in the Stork Fertility Service year-end was lower than expected at £13.0m. (‘Stork’). The division delivered an adjusted EBITDA loss in the year of £0.2m (2016: £0.4m profit) overall, however the division was generating monthly profits as it exited the year.
Quantum Pharma Plc Annual Report and Accounts 2017 14 Strategic report
Chief Financial Officer’s review Repositioned for growth
The cumulative financial impact Underlying these results is a core Specials The Specials division delivered a strong business model that is profitable and cash performance during the year. It operates in a of the Group’s transition over generative and a product development challenging market that is subject to regulated the past financial year saw programme that is focused on the Group’s pricing across some of the division’s product significant benefits to the unlicensed-to-licensed (‘UL2L’) strategy. range. Despite these challenges, however, unlicensed medicines and special obtains underlying profitability run-rate All figures in this section refer to continuing volumes grew by 6% and demand for bespoke, although this resulted in operations unless otherwise stated. aseptically-prepared specials also drove growth. substantial non-recurring and Group performance The Niche division licensed and launched non-operational charges arising The Group performance is summarised Glycopyrronium Bromide Oral Solution from discontinued operations, in the following measures: 1mg/5ml (‘Glyco’) in the UK in August 2016, • revenue increased by 28% to £88.8m its first UL2L product with meaningful volume. impairment of product (2016: £69.2m); Following the licensing of Glyco, other specials developments and costs • gross profit remained flat at £25.9m manufacturers of the medicine in the UK (2016: £25.9m); were required to cease supplying the market, incurred in implementing the • gross margin declined to 29.2% making the Group the only licensed supplier at simplified strategy. (2016: 37.4%); launch. The launch of Glyco is the main driver • adjusted EBITDA declined to £10.1m behind the Niche division’s revenue growth of (2016: £12.5m); 35%, albeit this growth is on a low base. • loss before tax of £10.9m (2016: £6.7m profit); The MA division exited the care home sector • capitalised development expenditure in the prior financial year to focus on pursuing of £4.0m was incurred (2016: £6.4m); and alternative dispensing contract opportunities • net debt reduced by almost half to in the homecare sector. This revised strategy £13.0m (2016: £24.6m). has been implemented successfully resulting in a number of important contracts with large Revenue pharmaceutical companies and NHS Trusts being secured during the financial year. The Revenue by division (£m) 2017 2016 characteristic of this business is that the Specials 57.6 53.6 revenue recognised relates to the value of the Niche 5.8 4.3 medicines being dispensed, which generates Medication Adherence 25.4 11.3 a high level of revenue in this division and low Group 88.8 69.2 levels of gross profit.
Gross profit Group revenue grew by 28% to £88.8m Despite the increase in Group revenue, (2016: £69.2m), primarily as a result of the gross profit was unchanged at £25.9m revenue growth delivered in the Medication (2016: £25.9m) leading to a reduced gross profit Adherence (‘MA’) division of £14.1m, margin of 29.2% (2016: 37.4%). This reduction is representing 72% of the Group’s total revenue the result of the divisional revenue mix changing increase of £19.6m. The balance of the year-on-year and, in particular, the increase in Group’s revenue growth of £5.5m was lower margin homecare contracts in the MA represented by the Specials division division. The gross profit margin in the core (£4.0m) and the Niche Pharmaceuticals Specials business remained stable. (‘Niche’) division (£1.5m).
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 15
“Underlying these results is a core Specials business model that is profitable and cash generative and a product development programme that is focused on the Group’s unlicensed-to-licensed strategy.”
Adjusted EBITDA operational issues that needed to be addressed. Despite additional investment by Adjusted EBITDA by division (£m) 2017 2016 the Group and the dedication of management Specials 10.1 10.7 time since its acquisition, NuPharm suffered Niche 1.4 2.1 trading losses. Medication Adherence (0.2) 0.4 Group costs (1.2) (0.7) The Board concluded that it would take Group adjusted EBITDA 10.1 12.5 unacceptable additional investment, further cash losses and management time to address the operational issues and that NuPharm was Reconciliation to operating (loss) profit (£m) 2017 2016 not capable of becoming earnings-enhancing. Consequently the Board took the decision to Group adjusted EBITDA 10.1 12.5 proceed with a closure plan for NuPharm and Intangible amortisation and impairment (11.2) (0.7) trading ceased in January 2017. Following Depreciation and impairment (1.6) (0.9) an orderly closure process NuPharm was Impairment of investment (0.1) – placed into administration on 26 April 2017. Board restructuring (1.1) – NuPharm’s results are included along with Deferred consideration (Lamda) (2.0) (1.5) the impairment of its associated intangible Share based payments (0.8) (0.1) assets and closure costs within the loss Niche reorganisation (2.7) – from discontinued operations of £13.7m Non-recurring costs (0.4) (0.4) (2016: £0.3m) shown in the consolidated Deal costs – (0.6) income statement as it represents a separate Divestment of Care Home operation – (0.8) major line of business. Group statutory operating (loss) profit (9.8) 7.5 (Loss) profit before tax Adjusted EBITDA declined to £10.1m Non-recurring or non-operational items Reconciliation to (loss) profit for (2016: £12.5m) after adjusting for; include a charge of £2.0m (2016: £1.5m) the year (£m) 2017 2016 depreciation, amortisation and impairments of deferred consideration for the Lamda Group statutory operating of £12.9m (2016: £1.6m); non-recurring or acquisition, £1.1m (2016: £nil) for Board (loss) profit (9.8) 7.5 non-operational items totalling £6.2m restructuring and a £2.7m loss (2016: £nil) (2016: £3.3m); share based payments of relating to the Niche reorganisation and Net financing expense (1.2) (0.9) £0.8m (2016: £0.1m); and excluding a loss discontinuation of products where Share of profit of equity- on discontinued operations of £13.7m management do not believe the Group accounted investees, (2016: £0.3m). The contraction in adjusted has a strategic market advantage. net of tax 0.1 0.1 EBITDA was evenly spread across all of the Taxation 1.8 (0.8) Group’s divisions. Notable drivers include Discontinued operation (Loss) profit for the year a year-on-year reduction in out-licensing In July 2015 the Group acquired NuPharm – continuing revenue, an increased operating cost base in Laboratories Limited (‘NuPharm’), a small- operations (9.1) 5.9 the first half and underperformance in certain scale batch-made specials manufacturer, Loss from discontinued areas of the business during a period of which was intended to provide the Group with operations (13.7) (0.3) substantive change. Management actions an internal capability to batch manufacture taken during the second half of the financial both unlicensed and licensed medicines. (Loss) profit for the year (22.8) 5.6 year, particularly in the Niche division, have At the time of acquisition NuPharm was under successfully addressed a number of these MHRA manufacturing restrictions. Following underperformance issues. acquisition the Group encountered further
Quantum Pharma Plc Annual Report and Accounts 2017 16 Strategic report
Chief Financial Officer’s review
The Group incurred a loss for the year of Net cash inflows from working capital during Dividend £22.8m (2016: £5.6m profit) comprising losses the year were £2.6m compared to £0.7m net The Board has decided not to declare a from discontinued operations of £13.7m outflows in 2016. dividend in respect of the current financial (2016: £0.3m) and from continuing operations year (2016: 1.5 pence per share). of £9.1m (2016: £5.9m profit). The statutory Discontinued operations incurred net cash loss from continuing operations includes a outflows from operating activities of £2.2m number of non-recurring and non-operational (2016: £0.9m). costs associated with the transition to a more focused and simplified strategy that have Investment Gerard Murray been explained in the adjusted EBITDA During the year the Group’s capitalised Chief Financial Officer section on page 15. development expenditure was £4.0m (2016: 2 May 2017 £6.4m) with development activities now focused (Loss) earnings per share – continuing on a clearly defined set of products aligned with operations the Group’s strategy. At the same time all of the Group’s development projects with the Movement in basic (loss) earnings exception of one have been transferred from a per share (pence) 2017 2016 portfolio of third-party contracted development Prior year earnings per share 4.7 1.3 organisations to Lamda to improve efficiency of Change due to: execution and measurement of progress. (Loss) profit for the year (12.3) 8.9 Weighted average number Net debt and banking facilities of shares in issue 0.9 (5.5) (Loss) earnings Net debt (£m) 2017 2016 per share (6.7) 4.7 Cash and cash equivalents (7.9) (4.2) Term loan 21.2 24.2 Revolving credit facility – 5.0 The table bridges the movement in (loss) Unamortised loan earnings per share year-on-year, showing the issue costs (0.3) (0.4) value of the movement that is attributable to the change in earnings and the value that is Net debt 13.0 24.6 due to a change in the number of ordinary shares in issue. Net debt was better than expected, reducing by 47% to £13.0m (2016: £24.6m), and Operating cash flow comprised borrowings net of unamortised The Group generated net cash inflows from loan issue costs of £20.9m (2016: £28.8m) continuing operating activities of £6.1m and cash and cash equivalents of £7.9m (2016: £7.9m) from a loss after tax for the year (2016: £4.2m). This was mainly due to the of £9.1m (2016: £5.9m profit). The loss after successful completion of a £15.0m (before tax from continuing operations includes expenses) equity fundraise in November 2016 non-cash charges relating to depreciation, and tighter working capital management amortisation and impairment of £12.9m (2016: across the year. £1.6m). These non-cash charges explain why the Group’s net cash inflows from operating During the prior year, the Group agreed new activities in the current year are only £1.8m banking facilities with RBS and Lloyds that lower than the prior year. The other contributing increased overall debt facilities to £35.0m factor is the improved working capital controls comprising a £25.0m term loan plus £10.0m that have been implemented during the year. revolving credit facility, which was undrawn at the year-end.
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Non-GAAP measures Our non-GAAP measures defined and explained
Metric Description Why we use it
Adjusted EBITDA Adjusted EBITDA is statutory operating profit Adjusted EBITDA is profitability stated before excluding: the non-cash accounting impact of depreciation, • depreciation and impairments of tangible amortisation, impairments and share based non-current assets; payments, and excludes the potentially distorting • amortisation and impairments of intangible effects of non-recurring and non-operational items. non-current assets; This is the measure management use internally • items that management judge to be one-off to assess the underlying trading performance of or non-operational; and the business. • acquisition-related items.
A reconciliation is set out on page 15.
Adjusted earnings per share Adjusted earnings per share is adjusted profit after Adjusted earnings per share (and the growth tax divided by the weighted average number of or contraction versus previous periods) allows ordinary shares in issue during the financial year. management to assess the post-tax underlying trading performance of the business in combination Adjusted profit after tax is adjusted EBITDA: with the impact of capital structuring actions on • less depreciation and amortisation; the share base (e.g. as a result of a share issue • less net financing expenses; or a share buyback programme). • plus the Group’s share of profit of equity- accounted investees, net of tax; • includes an accrued charge or credit for corporation tax on taxable profits; and • includes movement in provisions for deferred tax.
All adjustments made to adjusted EBITDA as set out in the definition above are net of tax where applicable.
A reconciliation to earnings per share is provided in Note 10 to the financial statements on page 62.
Net debt Net debt comprises: This represents the amount of the Group’s funding • the carrying value of all bank term loans; and structure that is provided through debt finance, • the carrying value of all drawn revolving credit net of cash. facilities and overdrafts.
Less: • cash and cash equivalents; and • unamortised loan issue costs.
All amounts are closing balances as at the relevant balance sheet date.
A breakdown of net debt is set out on page 16.
Quantum Pharma Plc Annual Report and Accounts 2017 18 Strategic report
Strategy Focus, simplify, consolidate and partner
OUR STRATEGIC PRIORITIES DESCRIPTION
The Group is tightening its focus around developing, licensing and commercialising the top Focus and unlicensed medicines (‘specials’), which the business is well-positioned to identify through its own Specials division.
simplify The Group is prioritising products that it classifies as unlicensed-to-licensed (‘UL2L’), which are those offering first-mover advantage, and the Group will typically take these products to market itself. The Group will also take to market larger niche generic non-UL2L products where it identifies a market opportunity.
The Group is also looking to partner with other businesses who have experience of commercialising non-UL2L products, where maximising their potential typically requires more time, investment and marketing expertise.
The Specials division occupies a leading position in the specials market, is highly profitable and Consolidate cash generative and benefits from a number of exclusive supply relationships with some of the market’s biggest wholesale and pharmacy businesses. It therefore provides a stable platform our market for the Group’s product licensing activities. In an environment of price regulation and increasing competitiveness it is important to take steps to ensure this position is maintained. This strategic priority therefore focuses on actions to preserve position and reinforce the Group’s advantages and strengths within the specials market, which includes: • preserving key customer relationships; • eliminating the cash drain of loss-making operations; • identifying and delivering on opportunities to improve efficiency and profitability; and • de-emphasising activities that do not support the long-term growth potential of the Specials and Niche divisions.
The Group’s specials product range, which is manufactured from MHRA-licensed facilities, and Partnership its licensed product portfolio hold significant value potential beyond the UK, which is where the Group is currently strongest and well-established.
The Group is working to realise this potential by expanding the addressable market for these products through establishing a broader network of international commercial partnerships, with a particular focus on exporting and localised manufacture and distribution agreements in order to remove the need to build these capabilities internally.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 19
ACTIVITIES
• Strategic review performed in August 2016 to assess the Group’s • Discontinued unprofitable product lines within the Niche direction, businesses, products and priorities, leading to increased Pharmaceuticals division, allowing management to focus focus on UL2L developments in the Niche division. on those offering best opportunities for growth.
• All UL2L products in the current pipeline moved into active • New Board appointed to lead and deliver against the strategy. development, and a number of non-UL2L products removed from the pipeline.
• Launched eight new products and out-licensed a further four during the year and post year-end, including Glycopyrronium Bromide Oral Solution 1mg/5ml, the Group’s first major UL2L product launch.
• On-going trading losses eliminated across the Group, • Significantly reduced the Group’s net debt through successful supported by the closure of NuPharm, a loss-making completion of a £15.0m equity fundraise (before expenses) in contract manufacturing business. November 2016, providing the Group with increased headroom and flexibility going forward. • Renewal of exclusive contractual relationship with AAH Pharmaceuticals Limited, the Group’s largest specials • Commenced review of the Medication Adherence division to customer, for a further five years. consider its long-term fit within the Group.
• Other key renewals occurring post year-end include relationships with Phoenix Healthcare Distribution Limited and Bestway Panacea Healthcare Limited (trading as Well Pharmacy).
• Progress in this area is at an early stage. A key first step has been to appoint a Chief Commercial Officer to ensure this priority is supported by dedicated resource with a clear brief, and who will work across divisions to bring together all of the Group’s commercial partnership activities.
Quantum Pharma Plc Annual Report and Accounts 2017 20 Strategic report
Key performance indicators
The Group’s management team uses various key performance indicators (‘KPIs’) to monitor financial and non-financial performance of their business units. Below are the measures which the Board believes best indicate the performance of the Group as a whole.
All metrics relate to continuing operations unless otherwise stated.
KPI PERFORMANCE MEASUREMENT COMMENT
Revenue Sale of goods and services Revenue growth primarily driven £88.8m net of value added tax and by high-value new contract wins sales-related discounts, and volume growth in the recognised at point of despatch. Medication Adherence division, 2015 61.7 new product launches in the Niche Pharmaceuticals (‘Niche’) 2016 69.2 division and volume growth in special obtains. These offset 2017 88.8 a reduction in year-on-year out-licensing revenue.
Gross profit The profit achieved on revenue, Gross profit remained flat £25.9m after taking account of direct costs compared to last year due incurred in bringing the goods and to inclusion of £1.6m of services to a saleable condition. one-off costs relating to the 2015 25.9 simplification of the Niche division. These costs form part 2016 25.9 of the £2.7m excluded from
2017 25.9 adjusted EBITDA shown in the reconciliation on page 15.
Gross margin The percentage profit achieved Gross profit margin has reduced 29.2% on revenue. due to a change in the divisional revenue mix year-on-year, particularly as a result of the 2015 42.0% increase in lower margin homecare contract revenue, 2016 37.4% and the impact of one-off 2017 29.2% simplification costs.
Adjusted Turn to page 17 for Adjusted EBITDA has fallen £10.1m a full description of this due to a year-on-year reduction EBITDA non-GAAP measure. in out-licensing revenue and underperformance issues in 2015 12.2 certain areas of the business during a period of substantive 2016 12.5 change that have now been 2017 10.1 addressed.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 21
KPI PERFORMANCE MEASUREMENT COMMENT
(Loss) Statutory profit after tax divided Earnings per share has fallen (6.7p) by the weighted average number primarily due to £10.0m of earnings per of shares in issue during the impairments and £4.2m of share from financial year. non-recurring and non-operational continuing 2015 1.3 items relating to the simplification of the Group’s strategy. In addition, 1 operations 2016 4.7 a £2.0m deferred consideration payment for Lamda Laboratories (6.7) 2017 SA has been accounted for as an expense.
Capitalised Capitalised development The Group continues to £4.0m expenditure represents invest heavily in its product development investment in product pipeline and will continue to expenditure development activities where do so to ensure developments 2015 3.1 technical and commercial are progressed as quickly feasibility have been confirmed. as possible. 2016 6.4
2017 4.0
Net debt Turn to page 17 for Net debt was substantially £13.0m a full description of this reduced during the year non-GAAP measure. following a £15.0m equity fundraise (before expenses) 2015 9.0 and tighter working capital management, particularly in the 2016 24.6 Medication Adherence division 2017 13.0 where high-value medicines are dispensed.
1. (Loss) earnings per share from continuing operations is calculated using the average number of shares in issue for each period. 2017: 134.8m; 2016: 125.0m; 2015: 54.5m.
Quantum Pharma Plc Annual Report and Accounts 2017 22 Strategic report
Principal risks and uncertainties
The Group maintains a consolidated corporate risk register. This register is reviewed and updated quarterly, with each risk assessed against likelihood of occurrence and the potential impact of the risk being realised. Mitigation and any necessary action plans are also recorded as appropriate.
The Group takes a proactive approach to the management of risk in order to protect the business, and secure growth and value protection for its shareholders. An analysis of the key risks identified for 2017 are set out below.
Risk trend Increasing Unchanged Decreasing
RISK IMPACT MITIGATION MOVEMENT Key products The Group is exposed to a variety of product The Group is prioritising unlicensed-to-licensed risks. Although the Specials division supplies (‘UL2L’) product developments to increase the a broad range of products, a material portion chances of being first to market, and as the of the revenue base is derived from a relatively pipeline contains a number of products considered small number of key unlicensed medicines to be key specials, the Group’s growth and (‘specials’). These products have been consolidation plans do not rely solely on the prioritised in the Group’s development pipeline. success of any one product to defend its existing In this respect, there is also a risk that position or deliver meaningful growth. Many competitors succeed in licensing those key specials are also technically challenging to develop products ahead of the Group, thereby securing and license, which can act as a barrier to entry. first-mover advantage. If the Group succeeds The launch of rival generic products is a feature of in licensing products, competitors remain able the industry and being first to market is often key to to launch rival alternatives, which could erode cementing market position. The Group’s exposure market share the Group has secured. All of to the impact of this risk will reduce as more these risks have the potential to impact the products are launched and the licensed product Group’s current and future revenues and portfolio diversifies. profitability.
Key customers The Group has a number of key customers, The Group has actively pursued a strategy of particularly in the Specials business, in markets securing and maintaining multi-year exclusive that are highly competitive. There are risks that contracts with customers in the Specials division, these key customer relationships could come which serves to protect the Group from key to an end for a variety of commercial reasons, account losses to competitors. For example, which would adversely impact Group revenues. contracts with three of the four largest national wholesaler and retail pharmacy chains were renewed during the year and post year-end. The Group also endeavours to be commercially agile to respond to evolving customer priorities whilst continuing its commitment to market-leading service where customers value it.
Regulatory The Group holds certain licences and consents The Group operates under a robust and compliant from the Medical Healthcare products Regulatory Quality Management System that is verified by clearance Agency (‘MHRA’), the Home Office and other regulators through frequent routine compliance regulatory bodies. Loss or suspension of any of inspections. The Group works hard to develop these licences or consents could have a material and maintain close, co-operative relationships adverse impact on the Group’s performance. with inspectors at a number of levels within their respective organisations. By promoting a culture of transparency with inspector partners, the Group seeks to ensure that any issues raised by them can be solved collaboratively.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 23
RISK IMPACT MITIGATION MOVEMENT Marketing Success in the Group’s product development The Group acquired the Lamda group of and licensing business is dependent on companies in April 2015. Lamda’s experience and authorisations achieving licensed status for products in the expertise is a key competitive advantage for the (‘product pipeline. If a development fails, product licence Group and provides greater control over the timing, licences’) for approval is unsuccessful or the process takes costs and completion of internal development longer than expected, the Group’s plans and projects. The product development pipeline is now new products expected returns could be adversely affected. fully integrated at Lamda.
Facilities Manufacturing and warehouse management are The Group has in place appropriate business key activities of the Group. There is a risk that continuity plans, as well as the necessary revenue and profit could be impacted should insurances for damage to property and business any of the Group’s facilities become damaged. interruption.
Reputation The Group is heavily reliant on its reputation The Group operates a robust system of controls for quality, reliability, consistency and service. and processes that underpins the provision of Should its reputation for any of these be products and services to customers. The Group damaged as a result of a failure by the Group also benefits from an in-house Quality function, and/or adverse publicity, this could have a which monitors a range of operational performance negative impact on the Group’s revenues. indicators to drive continuous improvement, prevent errors and ensure any issues are resolved as quickly as possible. The performance levels of businesses providing services on behalf of the Group are also regularly reviewed.
Changes Changes in laws or legislation affecting markets Tariff pricing and the prospect of more products in which the Group operates could adversely being subject to pricing regulation, particularly solid in legislation, affect revenue and trading profit, and ensuring dose medication, has been a feature of the industry drug tariff and compliance could lead to further costs. The for some time due to an on-going drive by the UK’s prescription decision by the UK to leave the European Union in National Health Service (‘NHS’) to reduce costs. June 2016 may also have legislative and regulatory The Group’s strategy of licensing products and pricing practice implications that are as yet unknown as the terms achieving scale with a view to driving down the of the UK’s exit remain under negotiation. cost to the NHS is aligned to overcoming these challenges, and the business is nevertheless used to adopting strategies to mitigate the impact of legislative changes.
Loss of key The Group is reliant on the technical and industry The Group has a competitive remuneration expertise of key individuals. Loss of these package that is reflective of market conditions employees individuals could impact on the Group’s ability for key roles and is constantly under review as to deliver on the potential of the product pipeline. conditions change. The Group also operates a long-term incentive plan for key employees.
Cash flow Some contracts, particularly in the homecare The Group implements a contract approval process, business, often require the Group to acquire consisting of financial modelling of estimated in high-value high-value drugs in advance of selling them on. revenues, costs and cash requirements and contracts This places great importance on ensuring that a thorough legal review. Risks can be identified and payment terms are set in the context of the mitigated at an early stage by ensuring all contracts Group’s cash flow constraints to manage the and tenders follow this process pre-signing. risk to working capital.
Quantum Pharma Plc Annual Report and Accounts 2017 24 Strategic report
Corporate social responsibility Being a responsible business
The Group aims to create Group values break down internal barriers by listening to Work with professionalism and learning from one another. Be persistent a sense of shared identity and Continually consider the needs of customers, and determined and work hard to make a to define the standards it employees and the greater organisation, difference to achieve results, and celebrate expects from current and future maintaining and increasing skills and sharing in success. expertise and experience. Lead by example, employees through its Group acting in a way that exemplifies what our Employee engagement survey values framework. The Group is customers expect from us and what we The Group values are reflected in the results of expect from each other. a recent independent employee engagement strongly committed to ensuring survey. Results of the survey showed: that employees understand how Work together important their contribution is Foster a supportive and inclusive culture in 81% 84% which strong working relationships are built. agree that they enjoy agree that they have to the success of the business, working here. good relationships with which ensures they are engaged Value and promote trust their management team. Promote open communications, setting and motivated to drive the an example through honesty, fairness 90% 80% Group forward. and consistency. agree that they are agree that the Group is suitably trained to do committed to customer Be accountable their job. satisfaction. Take responsibility for one’s actions, admit mistakes and do what is right. Focus on Employee benefits finding solutions and achieving results, rather The Group pays employees competitive than making excuses or placing blame. salaries with a range of additional benefits. Integrity, consideration and respect Employees are encouraged to become Demonstrate a commitment to integrity and shareholders in the Group through participation ethics acting in the best interests of customers, in the annual Save-As-You-Earn scheme. employees and the Group. Respect and value all individuals for their diverse backgrounds, All permanent employees are offered entry experience, ideas and contributions. Listen to into the Group’s pension scheme in line with others for understanding and treat others with the requirements of auto-enrolment legislation impartiality and dignity. Be open and honest and have access to eye care vouchers to and treat others with respect. assist with the cost of vision tests and prescription glasses. Committed to customers Make quality customer service a top priority, All UK-based employees have access deliver on commitments to them and take to a 24-hour helpline provided by Health responsibility for improving customer service. Assured, a confidential support service designed to help them deal with personal Be positive with a ‘can do’ attitude or professional problems. Promote a positive, energising, optimistic and fun environment where there is a “can-do” Employees also benefit from membership attitude and drive to get the job done. Work of an online employee discount across organisational boundaries/levels and shopping subscription.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 25
Investors in people Data protection Whistleblowing Quantum Pharmaceutical Limited (‘QPL’), The Group takes data protection seriously. The Group recognises the importance of a business within the Specials division, first Customer data is handled sensitively and an honest and open culture, enabling all achieved the Investors in People standard securely in a way that complies with relevant employees to raise concerns of malpractice in March 2011. QPL was reassessed in legislation. Policies relating to data protection or impropriety without fear of disciplinary action March 2015 and successfully maintained the are also regularly reviewed. being taken against them as a result of the standard. This demonstrates the Group’s disclosure. The Group has a whistleblowing commitment to realising the potential of its Anti-bribery and corruption policy in place to cover both the whistle blower people and recognises the importance the The Group has an anti-bribery and corruption and the organisation, by showing a step-by-step Group places on learning and development. policy that prohibits the offering, giving, seeking process for raising and dealing with issues. or acceptance of any bribe in any form by any Training person, company or third-party acting in order The purpose of training across the Group to gain an advantage in an unethical way. is to equip people with the necessary skills, knowledge and attitudes to meet the Modern slavery business’ needs. By investing in people The Group is committed to improving its Craig Swinhoe through training, the Group ensures it practices to combat slavery and human Company Secretary harnesses their full potential and focuses trafficking, recognising that this is a real, yet 2 May 2017 their energies on the needs of the hidden issue, in our society. Slavery and human organisation, while fulfilling their need for trafficking will not be tolerated in the business personal development and job satisfaction. or supply chain. The Group is committed to acting ethically and with integrity in all business In addition to in-house training, the Group has dealings. Effective systems and controls are links with local colleges and external training being implemented and enforced to identify providers. The Group plans to maximise the and combat this issue wherever it may exist. opportunities offered by the Apprenticeship Levy, which came into effect in April 2017. Equality and diversity The Group is committed to equality in Employee gender split Environment, health and safety employment; no one receives less favourable When it comes to promoting positive working treatment on the grounds of gender, gender conditions on-site and in the community, the reassignment, nationality, national origin, Group works to exceed regulatory and legal marital status, colour, race, ethnic origin, requirements. The Group has an on-going creed or disability. commitment to the preservation of the environment, reducing waste and taking The Group is committed to equal opportunities a responsible approach to recycling. policy and, as such, all employees hold responsibility for promoting an inclusive working Each year, the Group aims to improve the way environment where colleagues are treated with it consumes energy, manages transportation dignity and respect. The principles of equality and protects its local community. The Group are applied in recruitment, training, staff aims to use energy efficient equipment and development, appraisal, pay, terms and motion-sensor lighting where possible. It also conditions of employment, allocation of work, Male 43% has a paper reduction policy and remains alert promotion, dismissal, work/life balance and Female 57% to new ways to make sites greener. The Group grievance and disciplinary procedure. is as dedicated to health and safety as it is to quality and efficiency.
Quantum Pharma Plc Annual Report and Accounts 2017 26 Strategic report
The 2017 Strategic report, from pages 1 to 27, has been reviewed and approved by the Board of Directors on 2 May 2017.
Quantum Pharma Plc Annual Report and Accounts 2017 Strategic report 27
Quantum Pharma Plc Annual Report and Accounts 2017 28 Directors’ report
DIRECTORS’ REPORT Introduction from the Chairman 29 Board of Directors 30 Senior executives 32 Corporate governance statement 34 Directors’ report 37 Directors’ remuneration report 41
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 29
Introduction from the Chairman
“The Board values corporate governance highly and believes that it is integral to the delivery of the Group’s strategy, to the generation of shareholder value and to the safeguarding of the long-term interests of its stakeholders.”
As an AIM company, Quantum Pharma Plc is not required to comply with the UK Corporate Governance Code. However, the Board recognise the principles set out in the Quoted Companies Alliance’s Corporate Governance Code and seeks to apply them as far as we consider appropriate and practicable for a group of Quantum Pharma Plc’s size and nature.
Similarly, as an AIM company, Quantum Pharma Plc is not required to prepare or publish a report on Directors’ remuneration. The Board, however, wish to provide information and transparency on Directors’ remuneration and reward. As a result of developing our policy in line with best practice, we have included a summary statement in this report.
Ian Johnson Non-executive Chairman 2 May 2017
Quantum Pharma Plc Annual Report and Accounts 2017 30 Directors’ report
Board of Directors
The Board is responsible for Ian Johnson Dr John Brown the strategic direction and Non-executive Chairman Non-executive Director oversight of the Company and the Group. The Group A chartered biologist and a member of the Dr John Brown was appointed Non-executive is operated on a day-to-day Royal Society of Biology and the Institute of Director in October 2016. Directors, Ian was appointed Non-executive An experienced Non-executive Director who basis by the two Executive Chairman in October 2016. has extensive experience in the life sciences Directors of the Company and Ian is an experienced Director in the and healthcare sectors, John is Chairman nine other Senior executives. healthcare and life science sector. He was of Synpromics Ltd and the Cell and Gene founder and Chief Executive Officer of Therapy Catapult and a Director of Electrical Biotrace International plc until its sale to 3M Geodesics Inc. in 2006 and is currently Executive Chairman His board experience includes his roles as of Bioquell PLC. Chairman of Kyowa Kirin International, Touch Ian has also served on the boards of various Bionics Ltd, BTG plc, and AxisShield plc, and public and private companies in strategic as a Director of Vectura Group plc. consultancy and business development capacities including Cyprotex plc, Celsis International, Evans Analytical Group, MyCelx Technologies Corporation and AOI Medical Inc.
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 31
Christopher Mills Chris Rigg Gerard Murray Non-executive Director Chief Executive Officer Chief Financial Officer
Christopher is an experienced Non-executive Chris brings with him a track record of A chartered accountant who qualified with Director and was appointed to the Board in delivering results in environments of change Arthur Andersen, Gerard was appointed Chief October 2016. having previously been Managing Director Financial Officer in January 2017. He joined of eaga plc’s solar business, where he led a the Group from Ardent Hire Solutions Limited, Christopher founded Harwood Capital £300m fundraise to support its development, a private equity backed plant hire business. Management Limited in 2011, a successor and Chief Executive Officer of Northern to its former parent company J O Hambro Gerard brings with him significant experience Recruitment Group Limited. Capital Management Limited, which he of listed companies having been Chief co-founded in 1993. Chris has also had a number of senior Financial Officer of Reg Vardy plc for ten years financial positions including Corporate Finance and Northgate plc for five years. Both of these He is Chief Executive of North Atlantic Smaller Director at Deloitte, Group Corporate Finance companies experienced considerable growth Companies Investment Trust plc, a Director Director at eaga plc and head of large and change during the periods that Gerard and Investment Manager of Oryx International corporate lending at Barclays Bank in the served on their respective boards. More Growth Fund Limited and Chief Executive North East of England. recently Gerard gained sector experience as Officer of Harwood Capital LLP. He is also Group Finance Director of Immunodiagnostic a Non-executive Director of several AIM- System Holdings PLC in 2012 before joining listed companies. Benfield Motor Group, a family-owned motor Christopher was a Director of Invesco MIM, retailer, which was sold to Lookers plc in 2015. where he was head of North American investments and venture capital and of Samuel Montagu International.
Quantum Pharma Plc Annual Report and Accounts 2017 32 Directors’ report
Senior executives – Group Directors
Craig Swinhoe Brian Fisher David Sanson Stephen Martin Group Strategic Chief Commercial Group Quality Group Product Projects Director Officer Director Development and Company Director Secretary
Craig is a member of the Brian was appointed David is a Quality Stephen, who first joined Plc management team Chief Commercial Officer professional and EU the Group as Managing involved in strategic in November 2016 making Qualified Person, with Director of Colonis, planning and management him responsible for over 30 years’ experience oversees the development across the Group. He high-level external in the pharmaceutical and of licensed and regulated works with the CEO to relationships and biotechnology industry. pharmaceutical products, develop, communicate international opportunities. David ensures the Group’s to meet the needs of and execute the Group He previously held the manufacturing activities patients in niche areas. strategy. He leads on position of Joint Managing comply with the standards Much of Stephen’s career strategic projects including Director of the Specials laid down by the UK and has focused on developing, integration, acquisitions, division. With over 18 European regulators. introducing and marketing disposals of non-core years of experience in the David directs the Group medicines, medical assets and rationalisation. pharmaceutical sector on regulatory developments, devices and nutritional As a corporate lawyer by specialising in the supply as well as providing products, capitalising on background with more chain and commercial direction on technical opportunities and needs than 15 years’ experience disciplines, Brian has capabilities and often overlooked by larger in private practice he spent the last five years commercial growth. pharma organisations. oversees and is responsible transforming and leading David’s team of quality This involves an acute for the Group legal function. the Group’s commercial specialists ensures that understanding of the As Company Secretary strategy across community all medicinal products development and Craig is responsible for and hospital pharmacy, produced meet the marketing of both generic the Group’s AIM and local health economies and exacting quality standards and branded products, governance activities. primary and secondary laid down by both the along with the strategic Craig also oversees and is care. Brian and his teams Group and its regulators. insight needed to make responsible for corporate have developed and them successful. communications. secured the relationships and contracts that are important in maintaining the Group’s position as number one in the market.
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 33
Senior executives – Managing Directors
Andrew Matthews Andrew Trouton Scott Donald Angelos Karatzas Ian Pearce Quantum UL Medicines Colonis Pharma Lamda Medication Pharmaceutical Limited (‘ULM’) Limited (‘Colonis’) Laboratories SA Adherence division Limited (‘QPL’) (‘Lamda’)
Andrew brings 18 years’ Andrew joined ULM as Scott joined Colonis in Angelos was appointed Ian joined the Group in experience in pharma to Commercial Director in September 2016 as Head Managing Director of 2012 and was formerly the Group. As Managing 2011, progressing to of Sales and Marketing Lamda in October 2016 Head of Pharmacy at the Director, Andrew is Managing Director in 2013 and was promoted to having previously served UK’s largest homecare responsible for operations and leading the business Managing Director in as the Deputy Managing provider. A qualified and performance of the through a period of rapid January 2017. Scott is Director and head of pharmacist, his QPL and Aseptics and sustained growth. a very experienced sales formulation. He was background gives him business units in the Andrew has 28 years and marketing director instrumental in the setting the ideal perspective on Specials division. of experience in who demonstrates strong up of Lamda and its the role of pharmacy and Having worked at a pharmaceutical marketing, strategic thinking and subsequent development. the care profession in the senior operational level country management leadership skills, both of Angelos brings an in drive towards improved within some of the largest and leadership across which have been refined depth knowledge of the adherence. Ian is leading global pharmaceutical a number of FTSE, during a very successful development process and the development of companies, Andrew is NASDAQ-listed and broad career. Prior to understanding of Lamda innovative homecare able to deploy his companies and private joining the Group, Scott operations to the role. services, as well as extensive technical SMEs. At ULM, Andrew was General Manager at His appointment will telemedicine technologies knowledge to design guides a team of experts Vifor Fresenius Medical further strengthen the that enable the monitoring and continuously improve through the complex Care Renal Pharma and positive relationships he of patient adherence by internal processes to regulatory pathways and UK Sales and Marketing has developed with all clinicians, allowing ensure the Group’s service sales processes that Director at Shire of Lamda’s suppliers intervention to optimise remains compliant, reliable impact the manufacture Pharmaceuticals UK. and clients. health outcomes. and competitive. and supply of unlicensed medicines to the NHS.
Quantum Pharma Plc Annual Report and Accounts 2017 34 Directors’ report
Corporate governance statement
As an AIM company, Quantum Pharma Plc is not required to comply with the UK Corporate Governance Code. The Board, however, believes in the importance of corporate governance and recognises the principles set out in the Quoted Companies Alliance’s Corporate Governance Code (‘the Code’).
Although this Code is not compulsory for companies whose shares are listed on AIM, the Board seeks to apply the recommendations set out in the Code as far as it considers appropriate and practicable for a Group of this size and nature.
The Company was incorporated on 17 October 2014 and its shares were admitted to trading on AIM on 11 December 2014.
The Board The Board comprises five Directors, two of whom are Executive Directors and three of whom are Non-executive Directors, each bringing a different set of experiences and backgrounds. Dr John Brown is considered to be ‘independent’ under the criteria identified in the Code and he is the Senior Independent Director.
The Board is committed to setting out the vision and strategy of the Company and the Group and to ensuring that this is effectively communicated, internally and externally, as recommended by the principles set out in the Code.
The Board meets regularly to consider strategy, performance and the framework of internal controls. Strategic matters are reserved for decision by the Board and these matters are set out in a written statement, adopted by the Board. The Board is responsible for formulating, implementing and developing strategy, setting annual budgets, reviewing the performance and prospects of the Group, approving major capital expenditure and for risk management. The Non-executive Directors’ focus, in particular, on ensuring that strategic matters are carefully assessed and implemented.
To enable the Board to discharge its duties, all Directors receive appropriate and timely information as expected under the principles set out in the Code and all Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. In addition, the Directors are able to obtain independent professional advice in the furtherance of their duties, if necessary, at the Company’s expense.
The Board met formally nine times during the financial year ended 31 January 2017 in person and in addition met by telephone, as required, during the financial year. Details of the attendance by each Director at Board and committee meetings are set out below:
Remuneration Nomination Board meetings Audit Committee Committee Committee Director Eligible to attend Attended attendance attendance attendance John Clarke 1 6 5 1 5 3 Sheila Kelly 1 6 6 1 5 3 Andrew Scaife 2 4 3 n/a n/a 1 Martin Such 3 1 1 n/a n/a n/a Ian Johnson 4 3 3 1 3 2 Dr John Brown 4 3 3 1 3 2 Christopher Mills 4 3 3 1 3 2 Chris Rigg 5 7 7 n/a n/a 1 Gerard Murray 6 n/a n/a n/a n/a n/a
1. John Clarke and Sheila Kelly resigned from the Board on 19 October 2016 and were no longer eligible to attend Board or committee meetings. 2. Andrew Scaife resigned from the Board on 12 July 2016 and was no longer eligible to attend Board or committee meetings. 3. Martin Such resigned from the Board on 7 March 2016 and was no longer eligible to attend Board or committee meetings. 4. Ian Johnson, Dr John Brown and Christopher Mills were each appointed to the Board on 19 October 2016. 5. Chris Rigg was appointed to the Board on 8 March 2016. 6. Gerard Murray was appointed to the Board on 23 January 2017.
The Directors have a duty to avoid situations in which they have or can have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company. The Board requires each Director to declare to the Board the nature and extent of any direct or indirect interest in a proposed transaction or arrangement with the Company, and the Company Secretary maintains a register of Directors’ other interests. The Board has power to authorise any potentially conflicting interests that are disclosed by a Director. Directors are required to notify the Company Secretary when any potential conflict of interest arises.
Board evaluation The Nomination Committee is convened to identify and nominate candidates to fill Board vacancies as and when they arise and considers the composition of the Board and whether the Board has the necessary skills and expertise to drive forward the strategy of the Group. The Directors believe that it is important to have a balanced Board. The Company’s Board consists of two Executive Directors and three Non-executive Directors. As noted above, the Board has one Non-executive Director who is considered to be ‘independent’, in line with the recommendations of the Code.
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 35
Board committees Certain duties of the Board are delegated to committees:
Audit Committee The Audit Committee has primary responsibility for monitoring the quality of internal controls, ensuring that the financial performance of the Company is properly measured and reported on, and reviewing reports from the Company’s Auditors relating to the Company’s accounting and internal controls, in all cases having due regard to the interests of shareholders. The Audit Committee comprises the Non-executive Directors of the Company. At the start of the financial year the Audit Committee comprised John Clarke (as Chairman) and Sheila Kelly. After the changes to the Board on 19 October 2016, the Audit Committee comprises Dr John Brown as Chairman, Christopher Mills and Ian Johnson. The Audit Committee met twice during the financial year ended 31 January 2017.
Nomination Committee The Nomination Committee is convened to identify and nominate candidates to fill Board vacancies as and when they arise (for the approval by the Board). At the start of the financial year the Nomination Committee comprised Sheila Kelly (as Chairman), John Clarke and Andrew Scaife and on 28 July 2016 John Clarke was appointed as Chairman. Chris Rigg replaced Andrew Scaife on the Nomination Committee on 29 July 2016. After the changes to the Board on 19 October 2016, the Nomination Committee comprises Ian Johnson as Chairman, Christopher Mills, Dr John Brown and Chris Rigg. The Nomination Committee met five times during the financial year ended 31 January 2017.
Remuneration Committee The Remuneration Committee reviews the performance of the Executive Directors and determines their terms and conditions of service, including their remuneration and the grant of share awards, having due regard to the interests of shareholders. The Remuneration Committee is responsible for formulating the remuneration policy, with the overall aim of ensuring that remuneration packages motivate and incentivise, recognise and reward performance, are aligned with the long-term success of the Group and drive value creation for shareholders, in line with good corporate governance and risk management.
The Remuneration Committee comprises the Non-executive Directors. At the start of the financial year the Remuneration Committee comprised John Clarke (as Chairman) and Sheila Kelly. On 28 July 2016 Sheila Kelly was appointed as Chairman. After the changes to the Board on 19 October 2016, the Remuneration Committee comprises Dr John Brown as Chairman, Christopher Mills and Ian Johnson. The Remuneration Committee met eight times during the financial year ended 31 January 2017.
Internal control The Board is committed to managing and communicating risk and implementing internal controls and regards the management of risk as an essential business practice, as highlighted by principles set out in the Code. The principal risks and uncertainties of the Group are set out on pages 22 and 23 of this Annual Report.
The Board has established and maintains the Group’s system of internal control. The Board is responsible for assessing and reviewing its effectiveness. The Directors have set out below some of the key features of the Group’s internal control procedures.
The Group maintains a consolidated corporate risk register, which is reviewed and updated quarterly. Each potential material risk across the Group is assessed against the likelihood of occurrence and the impact on the business, should the risk be realised.
The Group has a disaster recovery and business continuity plan, which is reviewed regularly. Where any weaknesses are identified, an action plan is prepared to address the issue and is then implemented. In addition, the Group is actively seeking to attain the ISO22301 Business Continuity Management standard.
Each year, the Board approves the annual budget. Key risk areas are identified, reviewed and monitored. Performance is monitored against budget, relevant action is taken throughout the year and updated forecasts are prepared, as appropriate.
Capital and development expenditure is regulated by a budgetary process and authorisation levels. For expenditure beyond specified levels, detailed written proposals have to be submitted to the Board for approval. Reviews are carried out after the purchase is complete. The Board requires management to explain any major deviations from authorised capital processes and to seek further sanction from the Board.
In order to address certain areas of key risk and uncertainty, the Group’s contract proposals (whether with customers or suppliers) are governed by an approval process prior to signature. In addition to budgetary and profitability checks and balances, each proposed contract is reviewed from a legal perspective prior to being approved for signature.
Investor relations The Group encourages communications with all shareholders and regards this as important, in line with the recommendations of the principles set out in the Code. There is regular dialogue with institutional shareholders and presentations are held after the Group’s announcements of half year and full year results. Presentations are also made to analysts at those times to present the Group’s results. This assists with the promotion of knowledge of the Group in the investment marketplace and with shareholders. This also helps the Directors to understand the needs and expectations of shareholders. All presentations are made available on the Group’s corporate website.
The Directors use the Annual Report and Accounts, and the Annual General Meeting as opportunities to engage with private and institutional investors. The Board believes that the Annual General Meeting offers an excellent opportunity to communicate directly with shareholders.
Quantum Pharma Plc Annual Report and Accounts 2017 36 Directors’ report
Corporate governance statement continued
Stakeholder and social responsibilities The Board believes that good corporate governance encompasses assessing the Company’s impact on and contribution to society, its community and the environment. The Board recognises its responsibilities to shareholders and also to other stakeholders, such as employees, customers and suppliers and to the patients who ultimately benefit from its products.
The Group has a corporate social responsibility strategy and details of its activities in this area are set out on pages 24 and 25 of this Annual Report.
This statement was approved by the Board and signed by order of the Board.
Craig Swinhoe Company Secretary 2 May 2017
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 37
Directors’ report
The Directors present their report and the consolidated financial statements and Auditor’s report for the Company and the Group for the financial year ended 31 January 2017.
Principal activities The principal activity of the Company is to act as the parent company for the Group. The Company’s registered number is 09269818.
The Group is a service-led, niche pharmaceutical developer, manufacturer and supplier to the retail pharmacy, pharmaceutical wholesale, hospital and homecare markets. It operates through three divisions incorporating eight business units across six sites in the UK and one site in Greece, offering a portfolio of innovative and synergistic products and services. The Group has a strong core in its market-leading Specials division and has diversified into product development with a focus on unlicensed-to-licensed development.
Further details about the principal activities of the Group are set out in the Strategic report starting on page 1.
Business review and future developments A review of the Group’s business and performance and its future development is given in the Chairman’s report, the Chief Executive Officer’s review and the Chief Financial Officer’s review in the Strategic report. The Board’s strategy is to develop the Group and deliver shareholder value through focused growth within its existing businesses in the UK and internationally.
Key performance indicators The Group’s key performance indicators are set out on pages 20 and 21 of the Strategic report.
Principal risks and uncertainties The principal risks and uncertainties for the Group are set out on pages 22 and 23 of the Strategic report. These are maintained by the senior executive team and any changes are reported to the Board.
Results and dividend The results for the financial year are set out on page 46 of the financial statements and highlighted in the Strategic report.
The Directors have not recommended a dividend for the financial year.
Directors The Directors of the Company throughout the financial year were:
Role Resignation date Appointment date John Clarke Non-executive Chairman 19 October 2016 n/a Andrew Scaife Chief Executive Officer 29 July 2016 n/a Martin Such Chief Financial Officer 7 March 2016 n/a Sheila Kelly Non-executive Director 19 October 2016 n/a Ian Johnson Non-executive Chairman n/a 19 October 2016 Dr John Brown Non-executive Director n/a 19 October 2016 Christopher Mills Non-executive Director n/a 19 October 2016 Chris Rigg Chief Executive Officer n/a 8 March 2016 Gerard Murray Chief Financial Officer n/a 23 January 2017
Further details about the Directors of the Company are shown on page 30 and 31.
The appointment of Directors of the Company is governed by its Articles of Association and the Companies Act 2006. Directors are subject to retirement by rotation and may offer themselves for re-election in accordance with the Articles of Association. At the Annual General Meeting of the Company, to be held on 6 July 2017, each of the Directors will be retiring and offering themselves for re-election in line with best practice.
Quantum Pharma Plc Annual Report and Accounts 2017 38 Directors’ report
Directors’ report continued
Directors’ interests The interests of the Directors who served during the financial year ended 31 January 2017 over the ordinary share capital of the Company are as follows:
Number of options Number of ordinary shares over ordinary shares as as at 31 January 2017 at 31 January 2017 (or at the date of resignation) (or at the date of resignation) 1 Ian Johnson 58,824 0 Dr John Brown 73,529 0 Christopher Mills 2 0 0 Chris Rigg 162,059 6,446,281 Gerard Murray 200,000 1,100,000 John Clarke 0 0 Sheila Kelly 0 0 Andrew Scaife 3 3,342,3033 1,501,500 Martin Such 3 943,9163 793,888
1 Details of the share options are included in the Directors’ remuneration report. 2 Christopher Mills is the Chief Executive Officer of Harwood Capital LLP, which holds 25,000,000 ordinary shares in the Company. He is also Chief Executive of North Atlantic Smaller Companies Investment Trust plc and Director of Oryx International Growth Fund Limited (see significant shareholdings below). 3 The interests of Andrew Scaife and Martin Such in the ordinary shares set out above include their beneficial interest in 3,342,303 and 943,916 ordinary shares respectively held by the employee benefit trust established by the Company, of which Sanne Fiduciary Services Limited is the sole trustee.
The position of any Directors who resigned during the financial year are shown as at the date of their resignation.
There has been no change in the interests of the current Directors set out above, between 31 January 2017 and the date of this report.
Significant shareholdings As at 31 March 2017, shareholders holding more than 3% of the share capital of the Company were:
Number of ordinary Percentage of Name shares held ordinary shares Legal & General Investment Management 25,469,135 15.06% Harwood Capital 1 25,000,000 14.78% Schroder Investment Management 14,630,383 8.65% Fidelity International 10,448,405 6.18% Aviva Investors 8,354,328 4.94% Cavendish Asset Management 7,010,305 4.15% Henderson Global Investors 6,602,092 3.90% Milton Asset Management 5,551,297 3.28% Brian George Kennedy 5,398,134 3.19% Slater Investments 5,290,477 3.13%
1 Harwood Capital’s shareholding of 25,000,000 ordinary shares includes 10,000,000 ordinary shares in which North Atlantic Smaller Companies Investment Trust plc is interested and 15,000,000 ordinary shares in which Oryx International Growth Fund Limited is interested of which 5,000,000 are registered in the name of Securities Services Nominees Limited.
Other than a notification on 2 May 2017 that Slater Investments reduced their shareholding to 2.47%, the Company has not been informed of any changes to the above share interests between 31 March 2017 and the date of this report.
Directors’ indemnity The Company has made qualifying third-party indemnity provisions for the benefit of its Directors. As permitted by the Company’s Articles of Association, indemnities for each Director of the Company were granted on the date of their appointments and remain in force at the date of this report.
Employees The Group is committed to offering equal opportunities in recruitment, development and retention of employees. The Group places significant value on the role and involvement of its employees and recognises that their contribution is key to the success of the Group. The Executive Directors and Senior executives engage with employees to seek their views and provide regular updates on key developments and strategy. Employees are encouraged to offer suggestions and views, and to raise queries with the Executive Directors and senior executives. Employees are encouraged to contribute to and share in the Group’s success through share ownership and the Group’s Save-As-You-Earn share scheme.
The Group gives full consideration to applications for employment from disabled people where the candidate’s aptitude and abilities are consistent with adequately meeting the requirements of the job. Where existing employees become disabled, it is the Group’s policy to provide continuing employment, wherever practicable, in the same or a suitable alternative position, and to provide appropriate training to enable their employment to continue. The Group aims to provide opportunities to disabled employees for training, career development and promotion on the same basis as other employees.
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 39
Political and charitable donations During the year ended 31 January 2017, the Group made no political donations and made charitable donations of £12,000 (2016: £9,000) to local and national charities. No significant donations were made to any single charity.
Related party transactions No related party transactions have taken place in the financial year ended 31 January 2017.
Financial instruments Information about the use of financial instruments by the Group and its subsidiary undertakings is given in Note 28 to the financial statements on pages 72 to 74.
Research and development Information about research and development activity and expenditure is included in the Chief Financial Officer’s review and in the key performance indicators set out on page 21.
Events after the reporting date No significant events have occurred since year end.
Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the Group and the Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare the Group and the Company financial statements for each financial year. As required by the AIM Rules of the London Stock Exchange, they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the Company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) including FRS 101 Reduced Disclosure Framework.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of their profit or loss for that period. In preparing each of the Group and the Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Statement of Directors regarding disclosure of information to the Auditor Each of the Directors, whose names and functions are listed in the Directors’ report, confirms that: • so far as each of the Directors are aware, there is no relevant audit information of which the Group’s Auditor is unaware; and • the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Group’s Auditor is aware of that information.
This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006.
Going concern The financial position of the Group is described in the Chief Financial Officer’s review. The Board has considered the applicability of the going concern basis in the preparation of the financial statements.
The Group has considerable financial resources and financing facilities and has prepared detailed business plans for a period of 36 months that model headroom on the agreed financial covenants. The Directors are satisfied that, after sensitising the business plans for reasonably possible downside scenarios, there remains adequate headroom above the covenants that are in place.
The Directors believe that the Group is well-placed to manage its business risks successfully and therefore 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 consolidated financial statements.
Quantum Pharma Plc Annual Report and Accounts 2017 40 Directors’ report
Directors’ report continued
Independent Auditor KPMG LLP has expressed its willingness to continue in office as Auditor and a resolution to reappoint them will be proposed at the forthcoming Annual General Meeting.
Annual General Meeting (‘AGM’) The Company’s AGM will be held at Time Central, 32 Gallowgate, Newcastle upon Tyne, NE1 4BF on 6 July 2017 at 1pm. The notice convening the AGM and an explanatory note of the resolutions to be proposed at the AGM are contained in a separate circular to shareholders.
This report was approved by the Board and signed by order of the Board.
Craig Swinhoe Company Secretary 2 May 2017
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 41
Directors’ remuneration report
As an AIM company, Quantum Pharma Plc is not required to prepare or publish a report on Directors’ remuneration. However, the Board wish to provide information to shareholders and to provide transparency as to Directors’ remuneration and reward and so they have prepared this summary statement, setting out details of the Company’s remuneration policy and of the remuneration paid to Directors who served during the financial year ended 31 January 2017.
Remuneration Committee The Remuneration Committee comprises the Company’s Non-executive Directors. At the start of the financial year the Remuneration Committee comprised John Clarke (as Chairman) and Sheila Kelly. On 28 July 2016 Sheila Kelly was appointed as Chairman. Since 19 October 2016, the Remuneration Committee comprises Dr John Brown as Chairman, Christopher Mills and Ian Johnson. The Remuneration Committee met eight times during the financial year ended 31 January 2017.
The Remuneration Committee sets salary levels for the Executive Directors to attract and motivate high-calibre leaders in the business and to recognise their skills, experience, expertise and their contribution to the performance of the Group.
Fees for Non-executive Directors are determined by the Board to recognise their time commitment and contribution.
Remuneration policy The Group’s remuneration policy was prepared and is maintained to provide a framework for the Remuneration Committee in discharging its duties to review and determine salaries, bonuses and share awards for the Executive Directors. There are three main principles of the remuneration policy: 1. to design remuneration packages that attract high-calibre, highly-motivated executives and to retain and motivate those executives through fair and competitive rewards; 2. to focus on remuneration being closely aligned to achievement of long-term goals, stretching performance targets, creating a performance- focused ethos, while avoiding incentives that would reward excessive risk-taking; and 3. to align Directors’ remuneration with Company strategy and sustainable success of the Group in the interests of shareholders.
The overall aim of the remuneration policy is to ensure that remuneration packages motivate and incentivise, recognise and reward performance, are aligned with the long-term success of the Group and drive value creation for shareholders, in line with good corporate governance and risk management.
The Remuneration Committee takes into consideration a number of key elements in order to provide an overall executive remuneration package, including:
1. Salary The basic salaries for the financial year ended 31 January 2017 for the Executive Directors were:
Executive Director Role Basic salary (per annum) Andrew Scaife Chief Executive Office (‘CEO’) £230,000 Martin Such Chief Financial Officer (‘CFO’) £160,000 Chris Rigg CFO 1 £170,000 CFO and Acting CEO 2 £230,000 CEO and CFO and then CEO 3 £260,000 Gerard Murray CFO 4 £175,000
1 Chris Rigg replaced Martin Such as CFO on 8 March 2016. 2 Chris Rigg replaced Andrew Scaife as Acting CEO and continued in his role as CFO on 1 August 2016. 3 Chris Rigg was appointed permanent CEO on 19 October 2016, but also continued in his role as CFO until 23 January 2017. 4 Gerard Murray was appointed as CFO on 23 January 2017.
2. Pension contributions The Remuneration Committee has determined that Executive Directors receive a pension contribution from the Company of 10% of basic salary.
3. Performance-related bonus and long term incentives The Remuneration Committee considers that performance-related elements of packages should give the Executive Directors the potential to receive additional annual benefits but only if the business has outperformed on key performance metrics and this accords with the general remuneration policy of rewarding performance. The Remuneration Committee has established short-term and long-term performance-based elements of remuneration consisting of cash bonuses and share awards. a. Short-term The Remuneration Committee assesses and determines the payment of an annual cash bonus, if any, to the Executive Directors each financial year based on the achievement of the overall financial results of the Group and individual performance.
Quantum Pharma Plc Annual Report and Accounts 2017 42 Directors’ report
Directors’ remuneration report continued
Remuneration policy continued b. Long-term The Company has a Long-Term Incentive Plan (‘LTIP’), which is designed to ensure that a proportion of remuneration is linked to stretching performance targets and is given by means of shares in the capital of Quantum Pharma Plc. The Remuneration Committee takes independent advice in setting such targets.
The Company also allows employees to participate in the growth and success of the Group through a Save-as-You-Earn share scheme (‘SAYE’) to encourage participation and performance.
Remuneration The remuneration of the Directors who served during the financial year ended 31 January 2017 was as follows:
Basic Performance Compensation Pension salary Fees bonuses for loss of office contributions Benefits Total Name £’000 £’000 £’000 £’000 £’000 £’000 £’000 John Clarke 1 – 45 – – – – 45 Sheila Kelly 2 – 23 – – – – 23 Ian Johnson 3 – 17 – – – – 17 Christopher Mills 4 – 11 – – – – 11 Dr John Brown 4 – 11 – – – – 11 Andrew Scaife 5 210 – – 230 23 10 473 Martin Such 6 13 – – 160 16 8 197 Chris Rigg 7 190 – 125 – 19 8 342 Gerard Murray 8 5 – – – – – 5 TOTAL 418 107 125 390 58 26 1,124
1 John Clarke resigned from the Board as Non-executive Chairman on 19 October 2016. His fees were £60,000 per annum. The amount above includes payments of one months’ notice. 2 Sheila Kelly resigned from the Board as Non-executive Director on 19 October 2016. Her fees were £30,000 per annum. The amount above includes payments of one months’ notice. 3 Ian Johnson was appointed to the Board as Chairman on 19 October 2016. His fees are £60,000 per annum. 4 Christopher Mills and Dr John Brown were both appointed to the Board on 19 October 2016. Their fees are £40,000 per annum each. 5 Andrew Scaife resigned from the Board on 29 July 2016 and was placed on gardening leave on that date. The amounts above include notice/termination payments paid and accrued during the financial year from the date of resignation. 6 Martin Such resigned from the Board on 7 March 2016 and was placed on gardening leave on that date, The amounts above include notice/termination payments paid and accrued during the financial year from the date of resignation. 7 Prior to his appointment to the Board, initially as CFO, Chris Rigg was a member of the senior executive team as Group Strategic Director. The amounts above exclude the payments made to him in that role. His basic salary for the CEO role is £260,000 per annum. 8 Gerard Murray was appointed CFO on 23 January 2017. His basic salary for the role is £175,000 per annum.
For the financial year ended 31 January 2017, Chris Rigg received a bonus of £125,000 in recognition of his performance in his dual role of CFO and CEO, in particular in managing the working capital and cash position of the business and his strategic review of the Group. No other Directors received any performance-related bonuses as performance criteria were not met.
The benefit amounts referred to above include items such as company car or car allowance, medical and life assurance cover premiums.
Directors’ share incentives The Executive Directors who served during the financial year ended 31 January 2017 held the following options over the ordinary shares of the Company:
Exercise Number of Number of Number of price options options options Name Plan Date of grant (pence) Exercisable from Expiry date lapsed waived active Andrew Scaife LTIP 11 December 2014 100.0 1 July 2018 11 December 2024 1,501,500 – – Martin Such LTIP 11 December 2014 100.0 1 July 2018 11 December 2024 780,000 – – SAYE 15 July 2015 129.6 1 September 2018 1 March 2019 13,888 – – Chris Rigg LTIP 10 March 2016 100.0 1 July 2018 11 December 2024 – 250,000 – LTIP 18 July 2016 nil 18 July 2019 18 July 2026 – – 446,281 LTIP 10 November 2016 30.0 See below 9 November 2026 – – 6,000,000 Gerard Murray LTIP 23 January 2017 30.0 See below 9 November 2026 – – 1,100,000
The options over 1,501,500 ordinary shares were granted to Andrew Scaife on 11 December 2014 under the Company’s LTIP at an exercise price of 100.0 pence per share. The options lapsed on his notice of resignation on 12 July 2016.
The options over 780,000 ordinary shares were granted to Martin Such on 11 December 2014 under the Company’s LTIP at an exercise price of 100.0 pence per share. The options lapsed on his resignation from the Board on 7 March 2016.
The options over 13,888 ordinary shares were granted to Martin Such on 15 July 2015 under the Company’s SAYE share scheme at an exercise price of 129.6 pence per share and an exercise date of no earlier than 1 September 2018. The options lapsed on his resignation from the Board on 7 March 2016.
Quantum Pharma Plc Annual Report and Accounts 2017 Directors’ report 43
The options over 250,000 ordinary shares were granted to Chris Rigg on 10 March 2016 under the Company’s LTIP at an exercise price of 100.0 pence per share. The options are subject to performance targets measured over three financial years ending on 31 January 2018. The options were waived by him on 10 November 2016.
The options over 446,281 ordinary shares were granted to Chris Rigg on 18 July 2016 under the Company’s LTIP at an exercise price of nil pence per share. The options are subject to performance targets measured over three financial years ending on 31 January 2019 with one third of the options capable of vesting each financial year. The options are exercisable on the later of 18 July 2019 and the date when the Remuneration Committee determines the extent to which the performance targets have been achieved. The performance targets for the options were revised by the Remuneration Committee on 3 October 2016 to align with revised market expectations. The options will remain exercisable until the 10th anniversary of grant.
The options over 6,000,000 ordinary shares were granted to Chris Rigg on 10 November 2016 under the Company’s LTIP at an exercise price of 30.0 pence per share. The options shall vest and become exercisable at an exercise price of 30.0 pence, either on the mid-market closing share price being greater than 140.0 pence for an average of 90 days or on a change of control. The options shall lapse if the target has not been achieved on or before 31 December 2021 and the exercise period runs from the vesting date until 9 November 2026.
The options over 1,100,000 ordinary shares were granted to Gerard Murray on 23 January 2017 under the Company’s LTIP at an exercise price of 30.0 pence per share. The options shall vest and become exercisable at an exercise price of 30.0 pence, either on the mid-market closing share price being greater than 140.0 pence for an average of 90 days or on a change of control. The options shall lapse if the target has not been achieved on or before 31 December 2021 and the exercise period runs from the vesting date until 9 November 2026.
Directors’ service contracts and letters of appointment Subject to below, the service agreements of the Executive Directors may be terminated by either the Company or the Director on 12 months’ prior written notice and contain provisions for early termination, without notice, in certain circumstances including if the Director is disqualified or ceases to act as a Director (without consent) or commits any serious breach of any provisions of the service agreement. Each Executive Director is subject to restrictive covenants for 12 months’ from termination of his service agreement.
On his appointment as Chief Executive Officer, the Company agreed an initial mutual lock in period with Chris Rigg whereby neither party can serve the 12 months written notice to terminate employment on or before 31 December 2017.
The Non-executive Directors are appointed, subject to the Articles of Association of the Company, for an initial term of three years unless terminated earlier by the Company or by the Non-executive Director giving not less than one month’s written notice to the other. Non-executive Directors are paid fees and are entitled to be reimbursed for expenses properly incurred in the performance of their duties. They have no right to any further benefits. The appointment of Non-executive Directors may be terminated, with immediate effect, if the Director is in material breach of the terms of his/her appointment and are subject to restrictions after termination of his appointment.
This report was approved by the Board and signed by order of the Board.
Dr John Brown Chairman of the Remuneration Committee 2 May 2017
Quantum Pharma Plc Annual Report and Accounts 2017 44 Financial statements
FINANCIAL STATEMENTS Independent Auditor’s report 45 Consolidated income statement 46 Consolidated statement of comprehensive income 46 Consolidated balance sheet 47 Consolidated statement of changes in equity 48 Consolidated cash flow statement 49 Notes forming part of the financial statements 50 Company balance sheet 76 Company statement of changes in equity 77 Notes forming part of the Company statements 78
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 45
Independent Auditor’s report to the members of Quantum Pharma Plc
We have audited the financial statements of Quantum Pharma Plc for the year ended 31 January 2017 set out on pages 46 to 84. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice) including FRS101 Reduced Disclosure Framework.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s 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 Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor As explained more fully in the Directors’ responsibilities statement set out on page 39, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 January 2017 and of the Group’s loss for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic report and the Directors’ report for the financial year is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic report and the Directors’ report: • we have not identified material misstatements in those reports; and • in our opinion, those reports have been prepared in accordance with the Companies Act 2006.
Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanation we require for our audit.
Nick Plumb Senior Statutory Auditor for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Quayside House 110 Quayside Newcastle Upon Tyne NE1 3DX
2 May 2017
Quantum Pharma Plc Annual Report and Accounts 2017 46 Financial statements
Consolidated income statement for year ended 31 January 2017
2017 2016 Note £000 £000 Continuing operations Revenue 1,3 88,770 69,227 Cost of sales (62,846) (43,352) Gross profit 25,924 25,875 Other operating income 4 16 204 Distribution expenses (2,600) (2,571) Administrative expenses (33,186) (16,019)
Operating (loss) profit 5,6,7 (9,846) 7,48 9 Financial expense 8 (1,150) (902) Net financing expense (1,150) (902) Share of profit of equity-accounted investees, net of tax 15 145 106 (Loss) profit before tax (10,851) 6,693 Taxation 11 1,790 (780) (Loss) profit for the year from continuing operations (9,061) 5,913 Discontinued operations Loss for the year from discontinued operations 9 (13,705) (317) (Loss) profit for the year (22,766) 5,596 Basic and diluted earnings per share attributed to equity shareholders of the Company Basic (p) 10 (16.9) 4.5 Diluted (p) 10 (16.9) 4.3 Basic (p) – continuing operations only 10 (6.7) 4.7 Diluted (p) – continuing operations only 10 (6.7) 4.5 Basic (p) – discontinued operations only 10 (10.2) (0.2) Diluted (p) – discontinued operations only 10 (10.2) (0.2)
Consolidated statement of comprehensive income for year ended 31 January 2017
2017 2016 £000 £000 (Loss) profit for the year (22,766) 5,596 Other comprehensive income Items that are or may be recycled subsequently into profit or loss Foreign exchange translation differences 74 (3) Other comprehensive income (loss) for the year, net of income tax 74 (3) Total comprehensive (loss) income for the year (22,692) 5,593 Attributable to: Equity holders of the parent (22,692) 5,593
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 47
Consolidated balance sheet at 31 January 2017
2017 2016 Note £000 £000 Non-current assets Property, plant and equipment 13 4,211 5,967 Intangible assets 14 59,493 78,432 Investments 15 – 105 63,704 84,504 Current assets Inventories 17 3,985 4,887 Tax receivable 228 307 Trade and other receivables 18 14,965 13,410 Cash and cash equivalents 19 7,941 4,240 27,119 22,844 Total assets 90,823 107,3 48 Current liabilities Other interest-bearing loans and borrowings 20 (2,880) ( 7,8 8 0) Trade and other payables 21 (22,433) (18,943) Provisions 24 (572) (1,355) (25,885) (28,178) Non-current liabilities Other interest-bearing loans and borrowings 20 (18,080) (20,959) Other payables 21 – (19) Provisions 24 – (439) Deferred tax liabilities 25 (244) (2,244) (18,324) (23,661) Total liabilities (44,209) (51,839)
Net assets 3 46,614 55,509 Equity attributable to equity holders of the parent Share capital 26 16,912 12,500 Share premium 27 74,799 64,940 Consolidation reserve 27 (9,752) (9,752) Translation reserve 27 116 42 Other reserve 27 (21,726) (21,726) ESOP own share reserve 27 (484) (484) Merger reserve 27 8,742 8,742 Retained earnings 27 (21,993) 1,247 Total equity 46,614 55,509
These financial statements were approved by the Board of Directors on 2 May 2017 and were signed on its behalf by:
GT Murray Director
Company registered number: 09269818
Quantum Pharma Plc Annual Report and Accounts 2017 48 Financial statements
Consolidated statement of changes in equity
ESOP Share Share Consolidation Translation Other own share Merger Retained Total capital premium reserve reserve reserve reserve reserve earnings equity £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 February 2016 12,500 64,940 (9,752) 42 (21,726) (484) 8,742 1,247 55,509 Total comprehensive income for the year Loss for the year – – – – – – – (22,766) (22,766) Other comprehensive income – – – 74 – – – – 74 Total comprehensive income for the year – – – 74 – – – (22,766) (22,692) Transactions with owners, recorded directly in equity Issue of ordinary shares 4,412 10,588 – – – – – – 15,000 Issue costs charged against share premium – (729) – – – – – – (729) Contributions by and distributions to owners – – – – – – – (1,250) (1,250) Equity-settled share based payment transactions – – – – – – – 776 776 Total contributions by and distributions to owners 4,412 9,859 – – – – – (474) 13,797 Total transactions with owners 4,412 9,859 – – – – – (474) 13,797 Balance at 31 January 2017 16,912 74,799 (9,752) 116 (21,726) (484) 8,742 (21,993) 46,614
ESOP Share Share Consolidation Translation Other own share Merger Retained Total capital premium reserve reserve reserve reserve reserve earnings equity £000 £000 £000 £000 £000 £000 £000 £000 £000 Balance at 1 February 2015 12,500 64,940 (9,752) 45 (21,726) (484) 8,742 (3,545) 50,720 Total comprehensive income for the year Profit for the year – – – – – – – 5,596 5,596 Other comprehensive loss – – – (3) – – – – (3) Total comprehensive income for the year – – – (3) – – – 5,596 5,593 Transactions with owners, recorded directly in equity Contributions by and distributions to owners – – – – – – – (937) (937) Equity-settled share based payment transactions – – – – – – – 133 133 Total contributions by and distributions to owners – – – – – – – (804) (804) Total transactions with owners – – – – – – – (804) (804) Balance at 31 January 2016 12,500 64,940 (9,752) 42 (21,726) (484) 8,742 1,247 55,509
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 49
Consolidated cash flow statement for year ended 31 January 2017
2017 2016 Note £000 £000 Cash flows from operating activities (Loss) profit for the year from continuing operations (9,061) 5,913 Adjustments for: Depreciation, amortisation and impairment 12,956 1,631 Financial expense 1,150 902 Share of profit of equity-accounted investees (145) (106) Equity settled share-based payment expenses 776 133 Taxation (1,790) 780 3,886 9,253 Increase in trade and other receivables (1,739) (920) Decrease (increase) in inventories 651 (575) Increase in trade and other payables 3,647 1,241 Increase (decrease) in provisions 44 (501) 6,489 8,498 Interest paid (929) (720) Tax received 546 83 Net cash inflow from continuing operating activities 6,106 7,8 61 Net cash outflow from operating activities in discontinued operations (2,222) (884) Net cash inflow from operating activities 3,884 6,977 Cash flows from investing activities Acquisition of property, plant and equipment 13 (719) (1,845) Acquisition of subsidiaries, net of cash acquired – (3,285) Acquisition of investment – (105) Capitalised development expenditure 14 (4,035) (6,355) Acquisition of other intangible assets 14 (212) (287) Net cash outflow from investing activities in continuing operations (4,966) (11,877) Net cash outflow from investing activities in discontinued operations (238) (9,075) Net cash outflow from investing activities (5,204) (20,952) Cash flows from financing activities Proceeds from the issue of share capital (net of expenses) 26 14,271 – Proceeds from new loans 20 – 29,520 Repayment of borrowings (8,000) (15,754) Dividends paid (1,250) (937) Net cash inflow from financing activities in continuing operations 5,021 12,829 Net cash outflow from financing activities in discontinued operations – (487) Net cash inflow from financing activities 5,021 12,342 Net increase (decrease) in cash and cash equivalents 3,701 (1,633) Cash and cash equivalents at beginning of year 4,240 5,873
Cash and cash equivalents at year end 19 7,941 4,240
Quantum Pharma Plc Annual Report and Accounts 2017 50 Financial statements
Notes forming part of the financial statements
1 Accounting policies Quantum Pharma Plc (the ‘Company’) is a company incorporated and domiciled in the UK.
The Group financial statements consolidate those of the Company and its subsidiary undertakings (together referred to as the ‘Group’) and equity account the Group’s interest in associates and joint ventures. The parent company financial statements present information about the Company as a separate entity and not about its Group.
The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’). The Company prepares its parent company financial statements in accordance with FRS 101; these are presented on pages 76 to 84.
1.1 Significant accounting policies The accounting policies set out below have, unless otherwise stated, been applied consistently to both years presented in these consolidated financial statements.
1.2 Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments classified as fair value through the profit or loss or as available-for-sale, biological assets and investment property and liabilities for cash-settled share-based payments. Non-current assets and disposal groups held for sale are stated at the lower of previous carrying amount and fair value less costs to sell.
The financial statements are prepared on the historical cost basis except that derivative financial instruments and contingent consideration on business acquisitions are stated at their fair value.
1.3 Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic report on pages 1 to 27. The financial position of the Group is described in the Chief Financial Officer’s review on pages 14 to 16. In addition, Note 28 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and its exposure to credit risk and liquidity risk.
The Group has considerable financial resources and financing facilities and has prepared detailed business plans for a period of 36 months that model headroom on the agreed financial covenants. The Directors are satisfied that, after sensitising the business plans for reasonably possible downside scenarios, there remains adequate headroom above the covenants that are in place.
The Directors believe the Group is well placed to manage its business risks successfully and therefore 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 consolidated financial statements.
1.4 Basis of consolidation Subsidiary undertakings Subsidiary undertakings are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights that are currently exercisable. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiary undertakings are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary undertaking are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. Any deficit balance is transferred to provisions.
Change in subsidiary undertakings ownership and loss of control Changes in the Group’s interest in a subsidiary undertaking that do not result in a loss of control are accounted for as equity transactions.
Where the Group loses control of a subsidiary undertaking, the assets and liabilities are derecognised along with any related non-controlling interest (NCI) and other components of equity. Any resulting gain or loss is recognised in the consolidated income statement. Any interest retained in the former subsidiary undertaking is measured at fair value when control is lost.
Joint arrangements A joint arrangement is an arrangement over which the Group and one or more third parties have joint control. These joint arrangement are in turn classified as: • joint ventures whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities; and • joint operations whereby the Group has rights to the assets and obligations for the liabilities relating to the arrangement.
Associates Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20% and 50% of the voting power of another entity.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 51
1 Accounting policies continued Application of the equity method to associates and joint ventures Associates and joint ventures are accounted for using the equity method (equity accounted investees) and are initially recognised at cost. The Group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When the Group’s share of losses exceeds its interest in an equity accounted investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of an investee.
Joint operations Where the Group is a party to a joint operation, the consolidated financial statements include the Group’s share of the joint operations assets and liabilities, as well as the Group’s share of the entity’s profit or loss and other comprehensive income, on a line-by-line basis.
Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Unrealised gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
1.5 Business combinations Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the acquisition method. Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group.
Acquisitions on or after 1 February 2011 (IFRS transition date) For acquisitions on or after 1 February 2011, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus • the fair value of any existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed.
When the excess is negative, a bargain purchase gain is recognised immediately in the consolidated income statement.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in the consolidated income statement. Where contingent consideration is linked to continued employment it is classified as an employment cost and recognised in the consolidated income statement over the relevant period.
On a transaction-by-transaction basis, the Group elects to measure non-controlling interests, which have both present ownership interests and are entitled to a proportionate share of net assets of the acquiree in the event of liquidation, at its proportionate interest in the recognised amount of the identifiable net assets of the acquiree at the acquisition date.
Acquisitions prior to 1 February 2011 (IFRS transition date) IFRS 1 grants certain exemptions from the full requirements of Adopted IFRSs in the transition period. The Group elected not to restate business combinations that took place prior to transition date. In respect of acquisitions prior to 1 February 2011, goodwill is included at transition date on the basis of its deemed cost, which represents the amount recorded under UK GAAP which was broadly comparable save that only separable intangibles were recognised and goodwill was amortised.
1.6 Acquisitions and disposals of non-controlling interests Acquisitions and disposals of non-controlling interests that do not result in a change of control are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Any difference between the price paid or received and the amount by which non-controlling interests are adjusted is recognised directly in equity and attributed to the owners of the parent.
1.7 Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
The assets and liabilities of foreign operations are translated to the Group’s presentational currency (Sterling) at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of this operation are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations are reported as an item of other comprehensive income and accumulated in the translation reserve.
Quantum Pharma Plc Annual Report and Accounts 2017 52 Financial statements
Notes forming part of the financial statements continued
1 Accounting policies continued 1.8 Classification of financial instruments issued by the Group Following the adoption of IAS 32, financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions: (a) they include no contractual obligations upon the Company (or Group as the case may be) to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company (or Group); and (b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.
Where a financial instrument that contains both equity and financial liability components exists these components are separated and accounted for individually under the above policy.
1.9 Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Investments in debt and equity securities Other investments in debt and equity securities held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity (in the fair value reserve), except for impairment losses and, in the case of monetary items such as debt securities, foreign exchange gains and losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in the consolidated income statement. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss.
Loans Loans to joint ventures are stated at amortised cost less impairment. Financial instruments held for trading are stated at fair value, with any resultant gain or loss recognised in profit or loss.
Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost using the effective interest method.
1.10 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses. Lease payments are accounted for as described below.
Depreciation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Freehold buildings 25 years Leasehold property improvements term of lease Plant and equipment 5 years Fixtures and fittings 5 years
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 53
1 Accounting policies continued 1.11 Intangible assets and goodwill Goodwill Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the investee.
Research and development Expenditure on research activities is recognised in the consolidated income statement as an expense as incurred.
Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and the Group intends, has the technical ability and has sufficient resources to complete development, future economic benefits are probable and if the Group can measure reliably the expenditure attributable to the intangible asset during its development. Development activities involve a plan or design for the production of new or substantially improved products or processes. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads and capitalised borrowing costs. Other development expenditure is recognised in the consolidated income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and less accumulated impairment losses.
Other intangible assets Expenditure on internally generated goodwill and brands is recognised in the consolidated income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and less accumulated impairment losses.
Amortisation Amortisation is charged to the consolidated income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance sheet date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: Customer relationship 10 years Patents and trademarks 5 – 10 years Capitalised development costs to be determined on an individual basis for each medicine developed Software development 3 years
1.12 Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity.
1.13 Impairment excluding inventories and deferred tax assets Financial assets (including receivables) A financial asset not carried at fair value is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.
An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the consolidated income statement.
Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time.
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the ‘cash-generating unit’). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units, or (‘CGU’). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination.
Quantum Pharma Plc Annual Report and Accounts 2017 54 Financial statements
Notes forming part of the financial statements continued
1 Accounting policies continued An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in the consolidated income statement. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.
An impairment loss, in respect of assets other than goodwill, is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
1.14 Employee benefits Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Share-based payment transactions The share option programme allows certain employees to acquire shares of the Company. The grant date fair value of share-based payment awards granted is recognised as an employee expense with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using the appropriate option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
1.15 Post retirement benefits The Group makes contributions to employee’s personal pension schemes in line with UK auto-enrolment legislation. The amount charged to the consolidated income statement represents the contributions payable to the schemes in respect of the accounting period.
1.16 Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
1.17 Dividends Final dividends are recognised in the Group’s financial statements as a liability in the period in which the dividends are approved by shareholders such that the Company is obliged to pay the dividend. Interim dividends are recognised in the period in which they are paid.
1.18 Revenue Revenue represents the total amount receivable for goods, net of discounts and excluding value added tax, sold in the ordinary course of business, and arises from activities in the United Kingdom.
Revenue is recognised as follows:
Sale of goods Revenue from the sale of goods is recognised net of value added tax and sales related discounts at the point of despatch.
Prescription income Revenue from the fulfilment of medical prescriptions to patients is recognised net of value added tax at the point of fulfilment of the prescription.
Out-licensing The Group’s out-licensing agreements include performance obligations. Revenue is recognised when the performance obligations have been met.
Royalty income Revenue from royalty agreements is recognised, net of value added tax, on an accruals basis in line with amounts receivable as a result of the respective ‘asset use’.
Development contract income Revenue from development contracts is recognised based on stage of completion with reference to contract costs incurred.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 55
1 Accounting policies continued 1.19 Expenses Operating lease payments Payments made under operating leases are recognised in the consolidated income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the consolidated income statement as an integral part of the total lease expense.
Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Financing income and expenses Financing expenses comprise interest payable, finance charges on shares classified as liabilities and finance leases recognised in profit or loss using the effective interest method, unwinding of the discount on provisions, and net foreign exchange losses that are recognised in the consolidated income statement (see foreign currency accounting policy). Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that takes a substantial time to be prepared for use, are capitalised as part of the cost of that asset. Financing income comprise interest receivable on funds invested, dividend income, and net foreign exchange gains.
Interest income and interest payable is recognised in the consolidated income statement as it accrues, using the effective interest method. Dividend income is recognised in the consolidated income statement on the date the entity’s right to receive payments is established. Foreign currency gains and losses are reported on a net basis.
1.20 Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the consolidated income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
1.21 Non-current assets held for sale and discontinued operations A non-current asset or a group of assets containing a non-current asset (a disposal group) is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year.
On initial classification as held for sale, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to profit or loss. The same applies to gains and losses on subsequent remeasurement although gains are not recognised in excess of any cumulative impairment loss. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets and investment property, which continue to be measured in accordance with the Group’s accounting policies. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated.
A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary undertaking acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued from the start of the comparative period.
1.22 IFRS not yet applied The following new and amended standards, adopted in the current financial year, had no significant impact on the financial statements. • Clarification of acceptable methods of depreciation (Amendments to IAS 16 and IAS 38). • Accounting for acquisitions of interest in joint operations (Amendments to IFRS11). • Annual Improvements to IFRSs 2012-2014 cycle. • Equity methods in separate financial statements (Amendments to IAS 27). • Disclosure Initiative (Amendments to IAS 1).
Quantum Pharma Plc Annual Report and Accounts 2017 56 Financial statements
Notes forming part of the financial statements continued
1 Accounting policies continued The Directors considered the impact on the Group of EU endorsed, new and revised accounting standards, interpretations or amendments. The following new and revised accounting standards are currently endorsed but effective for periods beginning on or after 1 January 2017; • IFRS 15 Revenue from contracts; and • IFRS 9 Financial instruments.
IFRS 15 introduces principles to recognise revenue by allocation to the transaction price to performance obligations and is effective for accounting periods commencing on or after 1 January 2018. The Group is assessing the impact of the amendments although anticipates that it will not have a material impact on the financial statements.
IFRS 9 will supersede IAS 39 and is effective for accounting periods commencing on or after 1 January 2018. The Group is assessing the impact on the classification and measurement of financial instruments but no material impact is expected.
The future impact on the financial statements of new standards and amendments awaiting EU endorsement is currently being assessed. New standards awaiting EU endorsement include IFRS 16 ‘Leases’ which is effective for annual periods beginning on or after 1 January 2019. The standard replaces IAS 17 and will require entities to apply a single lessee accounting model, with lessees recognising right of use assets and lease liabilities on balance sheet for all applicable leases. The Group is assessing the impact of the amendments although does not anticipate it will have a material impact on the financial statements.
2 Acquisition of subsidiary undertakings Acquisitions in the prior year Lamda In April 2015 the Group acquired the entire share capital of Lamda Laboratories SA, Lamda Pharma SA and Lamda UK Limited (‘Lamda’) for consideration, settled in cash of £3,416,000 (€4,700,000). Deferred consideration of £3,700,000 (€5,000,000) was payable in two equal instalments 12 and 24 months after the date of completion. The amounts payable as deferred consideration were contingent on the continued employment of Mr G Liolios.
The arrangement to pay the deferred consideration was accounted for separate to the business combination, as remuneration, as the payments were contingent on the continued employment of Mr Liolios. The £3,700,000 is being charged evenly over the 24 month performance period, resulting in a current year charge of £1,977,000 (2016: £1,461,000).
Expenses totalling £382,000 relating to the acquisition were charged to the prior year consolidated income statement in accordance with IFRS 3.
Lamda provide a fully outsourced research and development service to companies looking to license medical products from its modern development laboratories near Athens, Greece.
The resulting goodwill totalling £2,731,000 was capitalised and is subject to an annual impairment review by management. Goodwill is attributed to Lamda’s knowledge and expertise in the research and development of products and the synergies provided to the rest of the Group.
The fair values of the net assets acquired in respect of Lamda, and consideration payable, were as follows:
Fair value £000 Non-current assets Property, plant and equipment 792 Current assets Inventories 803 Receivables 382 Cash 133 Total assets 2,110 Total liabilities (1,425) Net assets 685 Goodwill 2,731 Purchase consideration 3,416 Satisfied by: Cash 3,416
In the period from acquisition to 31 January 2016, Lamda contributed a net operating profit of £363,000, before a £1,461,000 charge for deferred consideration, as noted above, resulting in an overall net operating loss of £1,098,000.
If the acquisition had occurred on 1 February 2015, Group revenue, for the year to 31 January 2016, would have been an estimated £70,458,000 and profit after tax would have been an estimated £5,559,000.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 57
2 Acquisition of subsidiary undertakings continued NuPharm In July 2015 the Group acquired the entire share capital of NuPharm Group Limited and its wholly owned trading subsidiary undertaking NuPharm Laboratories Limited (‘NuPharm’) for consideration (including expenses), settled in cash of £8,837,000 and contingent consideration of up to £4,000,000 payable 24 months from the date of acquisition.
The contingent consideration was subject to certain performance criteria being achieved. The amount payable ranged from £nil to a maximum of £4,000,000. At acquisition the Directors estimated those contingent amounts at a fair value of £250,000 (Note 24).
Expenses totalling £372,000 relating to the acquisition were charged to the prior year consolidated income statement in accordance with IFRS 3 and have subsequently been included within discontinued operations.
NuPharm was a UK-based, outsourced manufacturer for batch-made specials and niche licensed pharmaceutical products. In addition it had product development expertise and was a clinical trials product manufacturer.
During the current year due to the underperformance and losses incurred since acquisition, a decision was taken to close NuPharm. As this represents a separate major line of business this has been treated as a discontinued operation (Note 9). The goodwill and customer relationships capitalised on acquisition of £9,609,000 and £2,787,000 respectively have been impaired to nil as a result (Note 14).
The fair values of the net assets acquired in respect of the NuPharm, and consideration payable, were as follows:
Fair value £000 Non-current assets Property, plant and equipment 392 Customer relationships 2,787 Current assets Inventories 171 Receivables 361 Cash 7 Total assets 3,718 Liabilities Payables (3,738) Deferred tax in relation to intangibles (502) Total liabilities (4,240) Net liabilities (522) Goodwill 9,609 Purchase consideration 9,087 Satisfied by: Cash 8,837 Contingent consideration 250
In the period from acquisition to 31 January 2016, NuPharm contributed a net operating loss of £14,000.
If the acquisition had occurred on 1 February 2015, Group revenue for the year to 31 January 2016, would have been an estimated £71,006,000 and profit after tax would have been an estimated £5,282,000.
3 Segmental reporting The following analysis by segment is presented in accordance with IFRS 8 on the basis of those segments whose operating results are regularly reviewed by the Board (the Chief Operating Decision Maker as defined by IFRS 8) to assess performance and make strategic decisions about allocation of resources.
The sectors distinguished as operating segments are Specials, Niche Pharmaceuticals and Medication Adherence. A short description of these sectors is as follows: • Specials – manufacture, source and supply special medicines to pharmacies, pharmaceutical wholesalers, hospitals (NHS and private) and other specials suppliers throughout the UK and overseas. • Niche Pharmaceuticals (Niche) – develop and supply niche pharmaceuticals, provide development and regulatory services and out-license products and dossiers to third parties in the UK and overseas. • Medication Adherence (MA) – provide products and services designed to enhance adherence to medication regimes.
Quantum Pharma Plc Annual Report and Accounts 2017 58 Financial statements
Notes forming part of the financial statements continued
3 Segmental reporting continued These operating segments have separate management teams and offer different products and services and are considered as reportable segments. The segment results, as reported to the Board, are calculated under the principles of IFRS. Performance is measured on the basis of adjusted EBITDA which comprises the segment result before non cash items (amortisation, depreciation and share based payments) and other 3 items that are excluded when the Board assess performance. A reconciliation between adjusted EBITDA and profit (loss) before tax is included in the tables below.
The results shown below are from continuing operations only.
Specials Niche MA Total 31 January 2017 £000 £000 £000 £000 Result and reconciliation to loss before tax Total revenue 62,477 7,862 25,496 95,835 Intersegmental (4,910) (2,077) (78) (7,065) Revenue 57,567 5,785 25,418 88,770 Segment adjusted EBITDA 10,067 1,434 (208) 11,293 Group cost centres (1,164) Group adjusted EBITDA 10,129 Intangible amortisation and impairment (11,195) Depreciation and impairment (1,656) Impairment of investment (Note 15) (105) Board restructuring (1,085) Deferred consideration accounted for as remuneration (Lamda) (Note 2) (1,977) Share based payments (Note 23) (776) Niche reorganisation (2,666) Non-recurring costs (515) Operating loss (9,846) Financial expense (1,150) Share of profit of jointly controlled entities 145 Loss before tax from continuing operations (10,851) Net assets Segment assets 93,035 16,678 8,671 118,384 Segment liabilities (56,801) (24,427) (23,460) (104,688) Segment net assets (liabilities) 36,234 (7,749) (14,789) 13,696 Unallocated net assets 32,918 Total net assets 46,614 Depreciation, amortisation and impairment 1,654 8,319 2,983 12,956 Capital expenditure 121 464 184 769 Capitalised development, patent and software costs 233 3,685 329 4,247
Unallocated net assets include cash and cash equivalents (£1,588,000), trade and other payables (£1,081,000), bank term loans (£20,960,000) and net intra-group loan receivables (£53,371,000).
Specials Niche MA Total 31 January 2016 £000 £000 £000 £000 Result and reconciliation to profit before tax Total revenue 58,770 6,480 11,508 76,758 Intersegmental (5,142) (2,226) (163) ( 7,531) Revenue 53,628 4,254 11,345 69,227 Segment adjusted EBITDA 10,723 2,127 405 13,255 Group cost centres (757) Group adjusted EBITDA 12,498 Intangible amortisation and impairment (723) Depreciation (908) Deal costs (625) Deferred consideration accounted for as remuneration (Lamda) (Note 2) (1,461) Share based payments (Note 23) (133) Divestment of care home operation (796) Non-recurring costs (363) Operating profit 7,48 9 Financial expense (902) Share of profit of jointly controlled entities 106 Profit before taxation from continuing operations 6,693
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 59
3 Segmental reporting continued
Specials Niche MA Total £000 £000 £000 £000 Net assets Segment assets 107,70 8 18,543 9,847 136,098 Segment liabilities (56,378) (16,473) (18,648) (91,499) Segment net assets (liabilities) 51,330 2,070 (8,801) 44,599 Unallocated net assets 10,910 Total net assets 55,509 Depreciation, amortisation and impairment 902 329 400 1,631 Capital expenditure 1,157 392 296 1,845 Capitalised development, patent and software costs 232 5,615 795 6,642
Unallocated net assets, includes trade and other payables (£400,000), bank term loan (£28,839,000) and net intra-group loan receivables (£40,149,000).
In both years revenue is generated almost entirely in the UK. In the year ended 31 January 2017 one (2016: one) customer accounted for 23% (2016: 24%) of Group revenue.
4 Other operating income
2017 2016 £000 £000 Other income 16 204
5 Expenses and Auditor’s remuneration (Loss) profit for the year from continuing operations is stated after charging:
2017 2016 £000 £000 Depreciation of owned property, plant and equipment 1,151 908 Impairment of property, plant and equipment 505 – Amortisation of intangible assets 1,792 643 Impairment of intangible assets 9,403 80 Impairment of investment 105 – Payments under operating leases 873 722 Acquisition related costs – 625
Auditor’s remuneration:
2017 2016 £000 £000 Audit of these financial statements 15 12 Audit of financial statements of subsidiary undertakings 70 78 Other services entered into by or on behalf of the Group 139 319 224 409
Amounts paid to the Company’s Auditor and its associates in respect of services to the Company, other than the audit of the Company’s financial statements, have not been disclosed as the information is required instead to be disclosed on a consolidated basis.
Quantum Pharma Plc Annual Report and Accounts 2017 60 Financial statements
Notes forming part of the financial statements continued
6 Staff numbers and costs The average number of persons employed by the Group in continuing and discontinued operations (including Directors) during the year, analysed by category, was as follows:
2017 2016 Staff numbers Sales and commercial 37 35 Management and administration 180 152 Production 237 233 454 420
2017 2016 £000 £000 Staff costs Aggregate payroll costs of these persons: Wages and salaries 14,679 11,426 Social security costs 1,295 1,008 Contributions to defined contribution plans (Note 22) 422 423 Share based payments (Note 23) 776 133 Deferred consideration accounted for as remuneration (Lamda) (Note 2) 1,977 1,461 19,149 14,451
7 Remuneration of Directors
2017 Compensation Salary/ Car for loss of Benefit Pension fees allowance Bonus office in kind contributions Total £000 £000 £000 £000 £000 £000 £000 AJ Scaife 210 9 – 230 1 23 473 MJ Such 13 7 – 160 1 16 197 J Clarke 45 – – – – – 45 S Kelly 23 – – – – – 23 C Rigg 190 7 125 – 1 19 342 GT Murray 5 – – – – – 5 I Johnson 17 – – – – – 17 C Mills 11 – – – – – 11 J Brown 11 – – – – – 11 525 23 125 390 3 58 1,124
2016 Salary/ Car Benefit Pension fees allowance Bonus in kind contributions Total £000 £000 £000 £000 £000 £000 AJ Scaife 230 9 – 1 23 263 MJ Such 160 7 – 1 16 184 J Clarke 60 – – – – 60 S Kelly 30 – – – – 30 480 16 – 2 39 537
Directors’ emoluments include emoluments due to the Directors of the Company.
The aggregate of emoluments of the highest paid Director for the year to 31 January 2017 was £450,000 (2016: £240,000) and Company pension contributions of £23,000 (2016: £23,000) were made to a money purchase scheme on his behalf. The number of Directors in respect of whose services, shares were received or receivable under long-term incentive schemes was 2 (2016: 2). Retirement benefits are accruing to 4 Directors (2016: 2).
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 61
7 Remuneration of Directors continued No Directors exercised share options in the current or prior year.
Directors who held share options at 31 January 2017 were as follows:
2017 2016 Plan Number Number AJ Scaife LTIP 2014 – 1,501,500 MJ Such LTIP 2014 – 780,000 MJ Such SAYE 2015 – 13,888 C Rigg LTIP 2016 Plan 1 446,281 – C Rigg LTIP 2016 Plan 2 6,000,000 – GT Murray LTIP 2016 Plan 3 1,100,000 –
All share options at 31 January 2017 are over the Company’s ordinary shares of 10p each.
8 Financial expense Recognised in the consolidated income statement
2017 2016 £000 £000 Total interest expense on financial liabilities 1,150 902 Total financial expense 1,150 902
Total interest expense includes £103,000 in relation to a one-off amendment fee in the current year and an exceptional write off of capitalised debt issue costs in the prior year £143,000.
9 Discontinued operations The Group’s discontinued operation, NuPharm Laboratories Limited, made a loss of £13,700,000 (2016: £300,000) after tax during the year. These losses have been classified as discontinued in the current year, with prior year restatement, as NuPharm Laboratories Limited represents a separate major line of business.
2017 2016 £000 £000 Revenue 1,303 763 Cost of sales (2,126) (402) Gross (loss) profit (823) 361 Other operating income 70 – Distribution expenses (31) (23) Administrative expenses (543) (642) Intangible amortisation (209) (138) Impairment of goodwill and other intangibles (12,049) – Depreciation (200) (83) Impairment of tangible fixed assets (590) – Operating loss (14,375) (525) Financial expense (7) (3) Loss before tax from discontinued operation (14,382) (528) Taxation Current tax credit 136 186 Deferred tax credit 541 25 Loss for the year from discontinued operations (13,705) (317)
2017 2016 £000 £000 The major classes of assets and liabilities directly attributable to the discontinued operation are: Non-current assets – 12,810 Inventories – 251 Trade and other receivables 25 208 Cash and cash equivalents 5 35 Trade and other payables (377) (637) Provisions (459) (1,605) Tax liabilities – (599)
Quantum Pharma Plc Annual Report and Accounts 2017 62 Financial statements
Notes forming part of the financial statements continued
10 Earnings per share
Continuing Total Continuing Total operations Group operations Group 2017 2017 2016 2016 £000 £000 £000 £000 (Loss) profit attributable to equity shareholders of the parent (9,061) (22,766) 5,913 5,596
2017 2016 Number Number (‘000) (‘000) Basic weighted average number of shares 134,764 125,000 Dilutive potential ordinary shares – 6,117 Diluted weighted average number of shares 134,764 131,117
Pence Pence Basic (loss) earnings per share (16.9) 4.5 Diluted (loss) earnings per share (16.9) 4.3 Basic (loss) earnings per share – continuing operations (6.7) 4.7 Diluted (loss) earnings per share – continuing operations (6.7) 4.5 Basic loss per share – discontinued operations (10.2) (0.2) Diluted loss per share – discontinued operations (10.2) (0.2)
Basic weighted average number of shares includes those shares in the EBT to which the beneficiaries are unconditionally entitled.
The dilutive potential shares relate to the share options (Note 23). There were no potentially dilutive shares or other instrument that have been excluded from diluted EPS because they are antidilutive.
Adjusted EPS
2017 2016 £000 £000 (Loss) profit after tax (9,061) 5,913 Add: Impairment of intangible assets 9,403 – Impairment of investment 105 – Board restructuring 1,085 – Deal costs – 625 Deferred consideration accounted for as remuneration (Lamda) (Note 2) 1,977 1,461 Share based payments (Note 23) 776 133 Divestment of care home operation – 796 Niche reorganisation 2,666 – Non-recurring costs 515 363 Finance costs (Note 8) 103 143 Less: tax associated with adjustments (874) (325) Adjusted profit after tax 6,695 9,109
The adjusted EPS, based on the adjusted earnings above for the year from continuing operations and weighted average number of shares in issue of 134,764,000 (2016: 125,000,000) is 5.0 pence (2016: 7.3 pence).
The adjusted diluted earnings per share based on the adjusted earnings from continuing operations above and a weighted average number of shares of 134,764,000 (2016: 131,117,000) is 5.0 pence (2016: 6.9 pence).
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 63
11 Taxation Recognised in the consolidated income statement
2017 2016 £000 £000 Current tax 198 285 Adjustments for prior years (529) (216) Current tax (credit) expense (331) 69 Deferred tax Origination and reversal of temporary differences (1,996) 416 Adjustment for prior years 529 294 Reduction in tax rate 8 1 Deferred tax (credit) expense (1,459) 711 Total tax (credit) expense (1,790) 780
A reduction in the UK corporation tax rate from 21% to 20% (effective from 1 April 2015) was substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2015, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Group’s future current tax charge accordingly. The deferred tax liability at 31 January 2017 has been calculated based on these rates.
Reconciliation of effective tax rate
2017 2016 £000 £000 (Loss) profit for the year from continuing operations (9,061) 5,913 Total tax (credit) expense (1,790) 780 (Loss) profit before taxation (10,851) 6,693 Tax using the UK corporation tax rate of 20% (2016: 20.16%) (2,170) 1,349 Non-deductible expenses 1,193 423 Reduction in tax rate on deferred tax balances 8 – Research and development relief (1,424) (1,005) Prior year adjustments current tax (529) (216) Prior year adjustments deferred tax 529 294 Unrelieved tax losses carried forward 853 79 Utilisation of tax losses brought forward (56) – Other (194) (144) Total tax (credit) expense from continuing operations (1,790) 780
12 Dividends paid and proposed
2017 2016 £000 £000 Declared and paid during the year Final dividend in respect of year ended 31 January 2015 of 0.25p per share – 312 Interim dividend in respect of year ended 31 January 2016 of 0.5p per share – 625 Final dividend in respect of year ended 31 January 2016 of 1.0p per share 1,250 – 1,250 937
Quantum Pharma Plc Annual Report and Accounts 2017 64 Financial statements
Notes forming part of the financial statements continued
13 Property, plant and equipment
Land & Leasehold Plant & Fixtures & buildings improvements equipment fittings Total £000 £000 £000 £000 £000 Cost At 1 February 2015 1,710 72 1,941 2,726 6,449 Arising on acquisition – – 1,184 – 1,184 Additions 35 16 873 1,166 2,090 At 31 January 2016 1,745 88 3,998 3,892 9,723 At 1 February 2016 1,745 88 3,998 3,892 9,723 Additions – 4 822 181 1,007 Disposals – (3) (23) (302) (328) Reclassified as intangible assets – – – (519) (519) At 31 January 2017 1,745 89 4,797 3,252 9,883 Depreciation and impairment At 1 February 2015 262 34 1,291 1,178 2,765 Charge for year 55 11 351 574 991 At 31 January 2016 317 45 1,642 1,752 3,756 At 1 February 2016 317 45 1,642 1,752 3,756 Charge for year 55 18 497 781 1,351 Impairment – 4 726 365 1,095 Disposals – (2) (22) (254) (278) Reclassified as intangible assets – – – (252) (252) At 31 January 2017 372 65 2,843 2,392 5,672 Net book value At 31 January 2016 1,428 43 2,356 2,140 5,967 At 31 January 2017 1,373 24 1,954 860 4,211
14 Intangible assets
Software Development Patents & Customer development costs trade-marks relationship Goodwill Total £000 £000 £000 £000 £000 £000 Cost Balance at 1 February 2015 42 5,363 252 1,728 60,319 67,70 4 Internal developments – 6,355 – – – 6,355 External purchases 240 – 47 – – 287 Acquisition through business combinations – – – 2,787 12,340 15,127 Balance at 31 January 2016 282 11,718 299 4,515 72,659 89,473 Balance at 1 February 2016 282 11,718 299 4,515 72,659 89,473 Internal developments – 4,035 – – – 4,035 External purchases 72 – 140 – – 212 Reclassified from tangible assets 519 – – – – 519 Transfers (142) 142 – – – – Balance at 31 January 2017 731 15,895 439 4,515 72,659 94,239 Amortisation and impairment Balance at 1 February 2015 – 128 74 519 9,459 10,180 Amortisation for the year 2 441 26 312 – 781 Impairment – 80 – – – 80 Balance at 31 January 2016 2 649 100 831 9,459 11,041 Balance at 1 February 2016 2 649 100 831 9,459 11,041 Amortisation for the year 46 1,544 29 382 – 2,001 Impairment – 7,910 249 2,439 10,854 21,452 Reclassified from tangible assets 252 – – – – 252 Balance at 31 January 2017 300 10,103 378 3,652 20,313 34,746 Net book value At 31 January 2016 280 11,069 199 3,684 63,200 78,432 At 31 January 2017 431 5,792 61 863 52,346 59,493
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 65
14 Intangible assets continued Impairment and amortisation The impairment and amortisation charges are recognised in the following line items in the consolidated income statement:
Impairment Amortisation 2017 2016 2017 2016 £000 £000 £000 £000 Administrative expenses 9,403 80 1,792 781 Discontinued operations 12,049 – 209 – 21,452 80 2,001 781
An impairment charge of £21,452,000 (2016: £80,000) has been recognised in the year arising from the decisions to discontinue NuPharm operations £12,049,000 (2016: £nil), not progress the development of certain medicines £7,210,000 (2016: £80,000), and the write down of goodwill and other intangible assets in respect of Protomed Limited £2,193,000 (2016: £nil) due to uncertainty over the levels of future profits.
Impairment testing Goodwill and indefinite life intangible assets considered significant in comparison to the Group’s total carrying amount of such assets have been allocated to cash generating units or groups of cash generating units as follows:
2017 2016 Goodwill £000 £000 Quantum Pharmaceutical Limited 37,703 37,70 3 U L Medicines Limited 9,647 9,647 Colonis Pharma Limited and Lamda 3,155 3,155 Total Medication Management Services Limited (‘TOMMS’) 1,841 1,841 Protomed Limited – 1,245 NuPharm Group Limited – 9,609 52,346 63,200
The recoverable amount of the goodwill allocated to the above cash generating units has been calculated with reference to their value in use. The key assumptions of this calculation are shown below:
2017 2016 Period on which management approved forecasts are based 3 years 3 years Growth rate applied beyond approved forecast period 0% 0% Discount rate 8-10% 10%
Management have assumed 0% growth beyond the forecast period. The forecast period is based on a three year business model approved by the Board. The key assumption in those forecasts is revenue. Forecasts for the more established businesses are based on historical growth trends. For the less mature businesses, forecast revenues are based on management’s assessment of market trends and the impact of the Group’s growth initiatives. In respect of Colonis Pharma Limited and Lamda, forecast revenue is based on estimated revenues for each product in development, which in turn is based on estimated market size and the Group’s likely market share.
The recoverable amount of these cash generating units has been calculated with reference to their value in use. Management have used a pre-tax discount rate ranging from 8% to 10% that reflects current market assessments for the time value of money and the risks associated with the CGU. A discount rate of 8% has been applied to the core mature business units within the Group, namely Quantum Pharmaceutical Limited and UL Medicines Limited, with a 10% discount rate applied to the less mature business units and revenue streams, namely TOMMS and Colonis Pharma Limited and Lamda. A further analysis would be done if this suggested that the impairment assessment was sensitive to the discount rate. Management has performed sensitivity analysis on all the impairment calculations by increasing the pre-tax discount rate by 5% to 13% and 15% respectively and sensitising revenue by 5% and no impairment would arise in any period.
Quantum Pharma Plc Annual Report and Accounts 2017 66 Financial statements
Notes forming part of the financial statements continued
15 Fixed asset investments
Interest in Investment joint venture Total £000 £000 £000 At 1 February 2015 – – – Retained profits – 106 106 Addition in year 105 – 105 Exchange differences – 2 2 Transfer to provision for liabilities – (108) (108) At 31 January 2016 105 – 105 At 1 February 2016 105 – 105 Retained profits – 145 145 Exchange differences – (25) (25) Transfer to provision for liabilities – (120) (120) Impairment (105) – (105) At 31 January 2017 – – –
In September 2015 the Group acquired 8.5% of the share capital of Mevia AB, a company registered in Sweden providing intelligent telehealth solutions, for consideration (excluding expenses) of SEK 1.3m (£105,000).
An impairment charge of £105,000 (2016: £nil) in the year is included within administrative expenses.
16 Investments in subsidiaries and jointly controlled entities The undertakings in which the Group’s interest at the year end is 20% or more are as follows:
Class of Country of incorporation shares 2017 2016 & registered office Principal activity held % % Subsidiary undertakings Quantum Pharma 2014 Limited United Kingdom* Holding company Ordinary 100 100 Quantum Pharma Group Limited1 United Kingdom* Holding company Ordinary 100 100 Quantum Pharmaceutical Limited2 United Kingdom* Manufacture & supply of unlicensed pharmaceutical Ordinary 100 100 products Quantum Specials Limited United Kingdom* Dormant Ordinary 100 100 Pern Consumer Products Limited4 United Kingdom* Supply & distribution of body care products Ordinary 100 100 Quantum Specials Trustee Limited United Kingdom* Corporate Trustee Ordinary 100 100 Total Medication Management United Kingdom** Supply of prescription drugs to the home care Ordinary 100 100 Services Limited4 sector UL Medicines Limited4 United Kingdom* Supply & distribution of unlicensed medicines Ordinary 100 100 Colonis Pharma Limited4 United Kingdom* Development & commercialisation of Ordinary 100 100 pharmaceuticals and related products Protomed Limited4 United Kingdom* Supply of Biodose MDS system to pharmacies Ordinary 100 100 Pharmacy Prime Limited3 United Kingdom* Dormant Ordinary 100 100 Protohealth Limited3 United Kingdom* Dormant Ordinary 100 100 Lamda Pharma Limited2 United Kingdom* Holding company Ordinary 100 100 Lamda UK Limited6 United Kingdom* Development of pharmaceutical & related products Ordinary 100 100 Lamda Laboratories SA6 Greece+ Development of pharmaceutical & related products Ordinary 100 100 Lamda Pharma SA6 Greece+ Development of pharmaceutical & related products Ordinary 100 100 NuPharm Group Limited2 United Kingdom* Holding company Ordinary 100 100 NuPharm Laboratories Limited2 United Kingdom* Batch manufacture of unlicensed pharmaceutical Ordinary 100 100 products Joint ventures QM Specials Limited5 Republic of Supply and distribution of special medical Ordinary 50 50 Ireland++ preparations
1. held as a subsidiary of Quantum Pharma 2014 Limited. Registered office is: 2. held as a subsidiary of Quantum Pharma Group Limited. * Quantum House, Hobson Industrial Estate, Burnopfield, Co Durham, NE16 6EA. 3. held as a subsidiary of Protomed Limited. ** Unit 3, Ardane Park, Phoenix Avenue, Green Lane Industrial Estate, Featherstone, 4. held as a subsidiary of Quantum Pharmaceutical Limited. WF7 6EP. 5. held as a joint venture of Quantum Pharmaceutical Limited. + 59 Ioannou, Metaxa Str., 19400 Koropi, Greece. 6. held as a subsidiary of Lamda Pharma Limited. ++ Mayfield Business Park, Lismore, Co Waterford, Republic of Ireland.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 67
16 Investments in subsidiaries and jointly controlled entities continued Quantum Specials Trustee Limited is the corporate trustee for an employee benefit trust established to facilitate employee share ownership in the Company.
Summary aggregated financial information on jointly controlled entities – 100%:
2017 2016 £000 £000 Current assets 525 488 Long-term assets 19 19 Current liabilities (89) (207) Long-term liabilities (593) (678) Income 1,844 1,611 Expenses (1,555) (1,399)
17 Inventories
2017 2016 £000 £000 Raw materials and consumables 849 784 Finished goods and goods for resale 3,136 4,103 3,985 4,887
Raw materials, consumables and changes in finished goods and work in progress recognised as cost of sales in the year amounted to £54,782,000 (2016: £36,463,000). The write down of stocks to net realisable value amounted to £1,001,000 (2016: £247,000).
18 Trade and other receivables
2017 2016 £000 £000 Trade receivables 12,183 11,240 Other receivables 1,072 1,418 Prepayments 1,710 752 14,965 13,410 Non-current – – Current 14,965 13,410 14,965 13,410
Included within trade and other receivables is £nil (2016: £nil) expected to be recovered in more than 12 months.
19 Cash and cash equivalents
2017 2016 £000 £000 Cash and cash equivalents per balance sheet 7,941 4,240 Bank overdrafts – – Cash and cash equivalents per cash flow statements 7,941 4,240
Quantum Pharma Plc Annual Report and Accounts 2017 68 Financial statements
Notes forming part of the financial statements continued
20 Other interest-bearing loans and borrowings The contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost, are set out below.
The Group’s borrowings together with their principal terms, were as follows:
2017 2016 £000 £000 Non-current liabilities Interest-bearing loans and borrowings 18,080 20,959 Current liabilities Interest-bearing loans and borrowings 2,880 7,8 8 0 20,960 28,839
Terms and debt repayment schedule
Face value Carrying Face value Carrying 2017 amount 2017 2016 amount 2016 Currency Nominal interest rate Date of maturity £000 £000 £000 £000 Bank term loans GBP LIBOR + margin 10 July 2019 21,250 20,960 24,250 23,839 Revolving credit facility GBP LIBOR + margin 10 July 2019 – – 5,000 5,000 21,250 20,960 29,250 28,839
During the year ended 31 January 2016 the Group refinanced its debt, securing a new bank term loan of £25,000,000 and a revolving credit facility of £10,000,000.
Arrangement fees associated with the new facilities were £480,000.
The bank term loan bears interest at LIBOR plus a variable margin (1.0% to 2.75%) which is dependent upon the leverage at the end of each quarter and is repayable in quarterly instalments from January 2016.
The revolving credit facility, of which £nil (2016: £5,000,000) was drawn at 31 January, also bears interest at LIBOR plus a variable margin (1.0% to 2.75%) for any amounts drawn on the facility. Any unutilised amounts of the facility attract a fee of 40% of the applicable margin for the availability period.
At the reporting date the Group’s borrowings, comprised the bank term loan and revolving credit facility and include issue costs of £290,000 (2016: £411,000). The issue costs of each instrument, together with the interest expense, are allocated to the consolidated income statement over the term of the respective facilities at a constant rate based on the original value of each instrument. The term loan and the revolving credit facility are secured by a fixed and floating charge over the Group’s assets.
Analysis of debt:
2017 2016 £000 £000 Debt can be analysed as falling due: In one year or less, or on demand 2,880 7,8 8 0 Between one and two years 2,880 2,880 Between two and five years 15,200 18,079 20,960 28,839
21 Trade and other payables
2017 2016 £000 £000 Current Trade payables 13,622 10,589 Non-trade payables and accrued expenses 7,190 6,893 Deferred consideration 1,621 1,461 22,433 18,943 Non-current Non-trade payables and accrued expenses – 19
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 69
22 Employee benefits Defined contribution plans The Group does not operate any pension scheme but administers contributions to a stakeholder pension scheme for its employees and makes contributions to the personal pension schemes of certain employees. The pension cost charge for the year represents contributions payable by the Group to the stakeholder and personal pension schemes and amounted to £422,000 (2016: £423,000).
There were £33,000 outstanding contributions at 31 January 2017 (2016: £112,000).
23 Employee share schemes The Group has established various Save-As-You-Earn share option schemes (‘SAYE’) and executive Long-Term Incentive Plans (‘LTIP’).
The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares:
Number of Share scheme Date of grant Employees entitled options granted Vesting conditions Contracted life LTIP (2014) 11 December 2014 Executive Directors & senior 6,072,650 3 years service & 3 year 3.0 years management EBITDA target LTIP (2015) 8 February 2015 Executive Directors & senior 100,000 3 years service & 3 year 3.0 years management EBITDA target SAYE (2015) 15 July 2015 All employees with over 927,371 3 years service 3.1 years 6 months service LTIP (2016) Plan 1 18 July 2016 Executive Directors & senior 2,218,055 3 years service & 3 year 3.0 years management adjusted EBITDA target SAYE (2016) 13 July 2016 All employees 2,260,221 3 years service 3.0 years LTIP (2016) Plan 2 10 November 2016 Executive Directors & senior 10,400,000 Continued service & share 5.1 years management price targets LTIP (2016) Plan 3 23 January 2017 Executive Directors & senior 1,575,000 Continued service & share 4.9 years management price targets
The number of options and weighted average exercise price of share options are as follows:
LTIPs
2017 2016 Weighted Weighted average average exercise price Number of exercise price Number of £ options £ options Outstanding at beginning of year 1.00 6,172,650 1.00 6,072,650 Granted during the year 0.30 14,193,055 1.00 100,000 Lapsed during the year (0.89) (6,368,012) – – Exercised during the year – – – – Outstanding at the end of the year 0.29 13,997,693 1.00 6,172,650 Exercisable at the end of the year – – – –
The options outstanding at 31 January 2017 have an exercise price in the range of £nil to £1.0 and have a weighted average contractual life of 4.7 years.
SAYE schemes
2017 2016 Weighted Weighted average average exercise price Number of exercise price Number of £ options £ options Outstanding at beginning of year 1.30 927,371 – – Granted during the year 0.55 2,260,221 1.30 927,371 Lapsed during the year (1.09) (1,244,797) – – Exercised during the year – – – – Outstanding at the end of the year 0.56 1,942,795 1.30 927,371 Exercisable at the end of the year – – – –
The options outstanding at 31 January 2017 have an exercise price in the range of £0.55 to £1.30 and have a weighted average contractual life of 3 years.
Quantum Pharma Plc Annual Report and Accounts 2017 70 Financial statements
Notes forming part of the financial statements continued
23 Employee share schemes continued The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted.
Where the vesting conditions are linked to the Company’s share price the estimate of the fair value of the services received is measured based on the Monte Carlo simulation model. The fair value of all other options has been measured based on the Black-Scholes model.
LTIP SAYE 2014 2015 2016 2015 2016 Plan 1 Plan 2 Plan 3 Fair value at grant date £0.26 £0.26 £0.62 £0.14 £0.18 £0.54 £0.23 Exercise price £1.00 £1.00 £nil £0.30 £0.30 £1.29 £0.55 Share price £1.00 £1.00 £0.67 £0.42 £0.47 £1.57 £0.66 Expected volatility 41% 41% 53% 53% 53% 38% 50% Option life (year) 3.0 3.0 3.0 5.1 4.9 3.1 3.1 Dividend yield 1.25% 1.25% 2.34% 2.38% 2.14% 0.18% 2.36% Risk free rate 0.89% 0.89% 0.68% 0.68% 0.68% 1.09% 0.15%
The expected volatility is based on the median volatility of health care constituents of the FTSE AIM.
The costs charged to the consolidated income statement relating to share based payments were as follows:
2017 2016 £000 £000 LTIPs 305 45 SAYE schemes 471 88 776 133
24 Provisions
Closure Rectification Contingent Onerous Losses in costs works consideration leases joint venture Total £000 £000 £000 £000 £000 £000 Cost Balance at 1 February 2015 – – – 13 297 310 On acquisition – 2,258 250 – – 2,508 Provisions used during the year – (903) – (13) (108) (1,024) Balance at 31 January 2016 – 1,355 250 – 189 1,794 Balance at 1 February 2016 – 1,355 250 – 189 1,794 Provision made during the year 459 – – 44 – 503 Provisions used during the year – (894) – – (120) (1,014) Provision released during the year – (461) (250) – – (711) Balance at 31 January 2017 459 – – 44 69 572
Included within provisions is £nil (2016: £439,000) expected to be settled in more than 12 months.
Closure costs The provision is management’s best estimate of costs to complete the orderly closure of NuPharm Laboratories Limited, which was placed into administration on 26 April 2017.
Rectification works This provision was management’s best estimate of the further costs expected to be incurred in respect of the rectification work required as a result of NuPharm Laboratories Limited being in MHRA special measures at acquisition.
The provision was partially utilised within the prior and current years, with the remaining amount released to the consolidated income statement, through discontinued operations, due to NuPharm Laboratories being discontinued.
Contingent consideration In July 2015 the Group acquired the entire share capital of NuPharm Group Limited for consideration of £8,837,000 settled in cash and contingent consideration of up to £4,000,000 payable in July 2017. The provision was based on the estimated fair value of the contingent consideration at acquisition. The provision has been released to the consolidated income statement as no payment will be made, and the release is included within discontinued operations.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 71
24 Provisions continued Onerous leases The provision relates to costs in respect of the vacation of properties and in particular the onerous lease costs and other commitments associated with the vacation of a property.
Losses in joint venture The Group’s joint venture, QM Specials Limited, has net liabilities of £138,000 (2016: £378,000). A provision has been made in respect of the Group’s deemed obligation to fund its share of these losses.
25 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities 2017 2016 2017 2016 £000 £000 £000 £000 Property, plant and equipment – – (160) (341) Intangible assets – – (864) (2,696) Tax loss carried forward 725 663 – – Other 55 130 – – Tax assets (liabilities) 780 793 (1,024) (3,037)
Movement in deferred tax during the year
1 February Recognised 31 January 2016 in income 2017 £000 £000 £000 Property, plant and equipment (341) 181 (160) Intangible assets (2,696) 1,832 (864) Tax loss carried forward 663 62 725 Other 130 (75) 55 (2,244) 2,000 (244)
Movement in deferred tax during the prior year
Recognised 1 February Recognised on 31 January 2015 in income acquisition 2016 £000 £000 £000 £000 Property, plant and equipment (284) 5 (62) (341) Intangible assets (1,121) (1,073) (502) (2,696) Provisions 21 (21) – – Tax loss carried forward 294 369 – 663 Other 121 9 – 130 (969) (711) (564) (2,244)
The Group also has unrecognised deferred tax assets of £1,162,851 (2016: £867,433) principally relating to tax losses carried forward.
26 Share capital
2017 2016 £000 £000 169,117,640 ordinary shares of 10p each (2016: 124,999,993 of 10p each) 16,912 12,500
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
During the year the Company issued 44,117,647 ordinary shares for consideration (net of expenses) of £14,271,000. Of this amount £4,412,000 was credited to share capital and £9,859,000 to share premium account.
Quantum Pharma Plc Annual Report and Accounts 2017 72 Financial statements
Notes forming part of the financial statements continued
27 Reserves The following describes the nature and purpose of each reserve within equity:
Reserve Description and purpose Share premium Amount subscribed for share capital in excess of nominal value.
Consolidation reserve Arises as a result of the reverse acquisition concept in IFRS 3 when Quantum Pharma Plc became the parent of the Group. The consolidation reserve of £9,752,000 represents (i) the difference between the reserves of Quantum Pharma Plc and those of the former parent and (ii) the premium payable on acquisition by a subsidiary, of preference shares arising in the pre-IPO restructure.
Merger reserve When Quantum Pharma Group Limited (‘QPG’) acquired the entire issued share capital of Quantum Pharmaceutical Limited, the Company took advantage of the merger relief provisions of the Companies Act 2006 and has not recorded any premium arising on the issue of these shares. A merger reserve of £8,742,000 was created in the Group financial statements which represents the difference between the fair value and the nominal value of the consideration shares issued by QPG.
Translation reserve Gains (losses) arising on retranslating the net assets of overseas operations into Sterling.
Other reserve Other reserve relates to any premium arising on acquisition of non-controlling interests where there has been no change of control.
ESOP own share reserve Shares purchased and held to satisfy share options.
Retained earnings All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.
Own shares held by ESOP At the reporting date 4,249,219 (2016: 4,840,165) ordinary shares of £0.10 each, were held by a Company sponsored Employee Benefit Trust (the ‘Trust’). The arrangements for distributing shares to employees by the Trust are at the discretion of the trustees. Based on the Directors’ best estimate, the market value of the shares held by the Trust at the reporting date was approximately £2,039,625 (2016: £3,605,923). At the year end 4,249,219 ordinary shares are under option to employees.
28 Financial instruments Financial risk management The Group’s activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including foreign currency risk and interest rate risk). a) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers.
The maximum exposure to credit risk at the reporting date for trade receivables was:
2017 2016 £000 £000 Trade receivables 12,183 11,240
The ageing of the trade receivables at the reporting date was:
2017 2016 Gross Impairment Gross Impairment £000 £000 £000 £000 Not past due 9,687 – 8,666 – Past due 0-30 days 2,480 (566) 2,229 – Past due 31-120 days 582 (129) 295 – More than 120 days 663 (534) 220 (170) Total 13,412 (1,229) 11,410 (170)
Management assesses the necessity for impairment on a specific item by item basis and incorporate, amongst other criteria, their knowledge and understanding of the business along with the age of the item. No other receivables are past due in any of the reporting years above.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 73
28 Financial instruments continued The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
2017 2016 £000 £000 Balance at beginning of year 170 85 Impairment loss recognised 1,059 85 Amounts deemed irrecoverable – – Balance at end of year 1,229 170
The allowance account for trade receivables is used to record impairment losses unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly. b) Liquidity risk The Group’s policy on liquidity risk has been to maintain sufficient cash balances to provide flexibility in the management of the Group’s liquidity.
The following are the contractual maturities of financial liabilities, including estimated interest payments.
2017 Carrying Contractual 1 year 1-2 2-5 amount cash flows or less years years £000 £000 £000 £000 £000 Non-derivative financial liabilities Interest bearing loans 20,960 22,929 3,772 3,657 15,500 Trade payables 13,622 13,622 13,622 – – 34,582 36,551 17,394 3,657 15,500
2016 Carrying Contractual 1 year 1 to 2 2 to 5 amount cash flows or less years years £000 £000 £000 £000 £000 Non-derivative financial liabilities Interest bearing loans 28,839 31,148 8,656 3,571 18,921 Trade payables 10,589 10,589 10,589 – – 39,428 41,737 19,245 3,571 18,921 c) Market risk – Foreign currency risk The Group’s exposure to foreign currency risk is as follows. This is based on the carrying amount for monetary financial instruments except derivatives when it is based on notional amounts.
Euro US Dollar Other Total £000 £000 £000 £000 Cash and cash equivalents 659 – – 659 Trade and other receivables 896 – – 896 Trade and other payables (3,722) (138) (28) (3,888) Foreign currency risk – 31 January 2017 (2,167) (138) (28) (2,333) Cash and cash equivalents 347 – – 347 Trade and other receivables 953 – – 953 Trade and other payables (3,147) (367) (42) (3,556) Foreign currency risk – 31 January 2016 (1,847) (367) (42) (2,256)
Trade and other payables includes £1,621,000 (2016: £1,461,000) of deferred consideration payable. d) Market risk – Interest rate risk At the balance sheet dates the interest rate profile of the Group’s interest-bearing financial instruments was:
2017 2016 £000 £000 Variable rate instruments Bank term loans 20,960 23,839 Revolving credit facility – 5,000 20,960 28,839
Quantum Pharma Plc Annual Report and Accounts 2017 74 Financial statements
Notes forming part of the financial statements continued
28 Financial instruments continued A change of 1 basis point in the interest rates at the balance sheet date would have increased (decreased) equity and profit (loss) before tax by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to financial instrument exposures existing at that date.
This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effects of financial instruments with variable interest rates. The analysis is performed on the same basis for the prior year.
2017 2016 £000 £000 Equity Decrease (3) (2) Loss Increase (3) – Profit Decrease – (2) e) Fair values of financial instruments Non-current asset investments The fair value of investments is based on management’s assessment of share value where the investment is not a traded security.
Trade and other payables and receivables The fair value of these items are considered to be their carrying value as the impact of discounting future cash flows has been assessed as not material.
Cash and cash equivalents The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date.
Long-term and short-term borrowings The fair value of bank loans and other loans is based on the terms the Group has agreed for its variable rate debt.
Short-term deposits The fair value of short term deposits is considered to be the carrying value as the balances are held in floating rate accounts where the interest rate is reset to market rates.
Fair value hierarchy The following hierarchy classifies each class of financial asset or liability depending on the valuation technique applied in determining its fair value:
Level 1: The fair value is calculated based on quoted prices traded in active markets for identical assets or liabilities.
Level 2: The fair value is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows utilising applicable year end yield curves. The fair value of forward foreign exchange and commodity contracts is determined using quoted forward exchange rates and commodity prices at the reported date and yield curves derived from quoted interest rates matching the maturities of the forward contracts.
Level 3: The fair value is based on inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The investment in unlisted shares is a Level 3 fair value estimate based on the information management have received on the Company’s performance.
There have been no transfers between categories in the current or prior years.
The fair values of all financial instruments, in the current and prior years, approximate to their carrying values. Whilst the Group has previously had some fixed rate debt the rate was consistent with that on the Group’s variable rate debt. f) Capital management The Group defines capital as equity (as set out on the consolidated balance sheet) and interest bearing borrowings (Note 20). The Group’s capital management objectives are to provide sufficient funds to support the continued growth of the Group and to provide a return to shareholders. There are no external capital requirements but the bank term loan and revolving credit facility are subject to covenants, consistent with normal business practice, in respect of leverage and debt service cover.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 75
29 Operating leases Non-cancellable operating lease rentals are payable as follows:
2017 2016 £000 £000 Less than one year 656 741 Between one and five years 1,237 1,902 More than five years 4,029 4,900 5,922 7,54 3
30 Commitments Capital commitments at the end of the financial year, for which no provision has been made, are as follows:
2017 2016 £000 £000 Contracted – –
31 Contingencies This Company is party to a composite guarantee with the Group’s lenders whereby the Company is liable, jointly and severally with other members of the Group, with the exception of Lamda (Note 2), in respect of borrowings within the Group.
The Group’s bankers and other lenders also have in place a debenture over the Group’s assets in support of borrowings within the Group which amounted to £21,250,000 (2016: £29,250,000) at the balance sheet date, excluding the unamortised amount of associated loan issue costs.
32 Related parties The Group has a related party relationship with its subsidiary undertakings, jointly controlled entities and its Directors.
Subsidiary undertakings Transactions between the Company’s subsidiary undertakings, which are related parties, have been eliminated on consolidation and are therefore not disclosed.
Directors There are no amounts due from Directors in the current or prior year.
Details of Director’s share options, emoluments, pension benefits and other non-cash benefits are detailed in Note 7.
Other related party transactions i) QM Specials Limited is a joint venture in which the Group has a 50% interest. During the year the Company received loan repayments of £115,000 (2016: £70,000) from QM Specials Limited. The total amount outstanding at the balance sheet date amounted to £310,000 (2016: £425,000) and is included in other debtors. ii) During the year the Group made sales to QM Specials Limited totalling £477,000 (2016: £511,000). The outstanding receivable amount at the reporting date amounted to £35,000 (2016: £138,000).
Key management personnel remuneration Key management personnel are considered to be the current Board of Directors and Senior executives.
The total remuneration for key management personnel is £1,923,000 (2016: £1,770,000), comprising short term benefits of £nil (2016: £nil), post employment benefits of £113,000 (2016: £135,000) and share based payments of £295,000 (2016: £26,000).
33 Accounting estimates and judgements Impairment of goodwill and other intangibles Determining whether goodwill and other intangibles are impaired required an estimation of the value in use of the cash-generating units to which goodwill and other intangible assets have been allocated. The value in use calculation required estimation of future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate present value. Details of CGU’s as well as further information about the assumptions made are disclosed in Note 14.
Capitalisation of development expenditure Determining whether expenditure meets the IFRS criteria for capitalisation requires judgement as to whether the products are technically and commercially feasible and an estimation of the future economic benefits to arise from the products. The Group has a ‘New Product Development’ Committee (NPD) which meets monthly. The NPD committee assesses the technical feasibility of the product pipeline based on scientific and market data presented by its in house experts. Following confirmation of technical feasibility the key judgement is in respect of the estimated commercial returns from the developments, which requires estimates of potential market size, market share and product profitability. Capitalisation of development expenditure occurs from the point of approval. All initial research of a product is expensed to the consolidated income statement as incurred.
Quantum Pharma Plc Annual Report and Accounts 2017 76 Financial statements
Company balance sheet at 31 January 2017
2017 2016 Note £000 £000 Non-current assets Investments 3 735 85 Deferred tax assets 4 7 – 742 85 Current assets Trade and other receivables 5 123,283 121,149 Cash and cash equivalents 6 1,565 34 124,848 121,183 Total assets 125,590 121,268 Current liabilities Other interest-bearing loans and borrowings 8 (2,880) ( 7,8 8 0) Trade and other payables 7 (738) (172) (3,618) (8,052) Non-current liabilities Other interest-bearing loans and borrowings 8 (18,080) (20,959) Total liabilities (21,698) (29,011) Net assets 103,892 92,257 Capital and reserves Share capital 9 16,912 12,500 Share premium 10 74,799 64,940 ESOP own share reserve 10 (484) (484) Retained earnings 10 12,665 15,301 Total equity 103,892 92,257
These financial statements were approved by the Board of Directors on 2 May 2017 and were signed on its behalf by:
GT Murray Director
Company registered number: 09269818
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 77
Company statement of changes in equity
ESOP Share Share own share Retained Total capital premium reserve earnings equity £000 £000 £000 £000 £000 Balance at 1 February 2016 12,500 64,940 (484) 15,301 92,257 Total comprehensive income for the year Loss for the year – – – (2,162) (2,162) Other comprehensive income – – – – – Total comprehensive income for the year – – – (2,162) (2,162) Transactions with owners, recorded directly in equity Issue of shares 4,412 10,588 – – 15,000 Costs charged against share premium – (729) – – (729) Equity-settled share based payment transactions – – – 776 776 Dividends – – – (1,250) (1,250) Total contributions by and distributions to owners 4,412 9,859 – (474) 13,797 Balance at 31 January 2017 16,912 74,799 (484) 12,665 103,892
ESOP Share Share own share Retained Total capital premium reserve earnings equity £000 £000 £000 £000 £000 Balance at 1 February 2015 12,500 64,940 (484) 16,804 93,760 Total comprehensive income for the year Loss for the year – – – (569) (569) Other comprehensive income – – – – – Total comprehensive income for the year – – – (569) (569) Transactions with owners, recorded directly in equity Equity-settled share based payment transactions – – – 3 3 Dividends – – – (937) (937) Total contributions by and distributions to owners – – – (934) (934) Balance at 31 January 2016 12,500 64,940 (484) 15,301 92,257
Quantum Pharma Plc Annual Report and Accounts 2017 78 Financial statements
Notes forming part of the Company statements
1 Accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Company’s financial statements, except as noted below.
1.1 Basis of preparation These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’). The amendments to FRS 101 (2014 15 Cycle) issued in July 2015 and effective immediately have been applied.
In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.
Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own income statement.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures; • a cash flow statement and related notes; • disclosures in respect of transactions with wholly owned subsidiaries; • disclosures in respect of capital management; • the effects of new but not yet effective IFRSs; • disclosures in respect of the compensation of key management personnel; and • disclosures of transactions with a management entity that provides key management personnel services to the Company.
As the consolidated financial statements include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures: • certain disclosures required by IFRS 13 Fair Value Measurement and the disclosures required by IFRS 7 Financial Instrument Disclosures.
1.2 Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments classified as fair value through the profit or loss or as available-for-sale, biological assets investment property and liabilities for cash-settled share-based payments. Non-current assets and disposal groups held for sale are stated at the lower of previous carrying amount and fair value less costs to sell.
1.3 Foreign currency Transactions in foreign currencies are translated to the Company’s functional currencies at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. Foreign exchange differences arising on translation are recognised in the income statement.
1.4 Leases Operating lease payments Payments (excluding costs for services and insurance) made under operating leases are recognised in the profit and loss account on a straight- line basis over the term of the lease. Lease incentives received are recognised in the profit and loss account as an integral part of the total lease expense.
Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents are charged as expenses in the periods in which they are incurred.
1.5 Employee benefits Defined contribution plans A defined contribution plan is a post-employment benefit plan under which the company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the profit and loss account in the periods during which services are rendered by employees.
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 79
1 Accounting policies continued Share based payments The share option programme allows certain employees to acquire shares of the Company. The grant date fair value of share-based payment awards granted is recognised as an employee expense with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.
Where the Company grants options over its own shares to the employees of its subsidiaries it recognises, in its individual financial statements, an increase in the cost of investment in its subsidiaries equivalent to the equity-settled share-based payment charge recognised in its consolidated financial statements with the corresponding credit being recognised directly in equity. Amounts recharged to the subsidiary are recognised as a reduction in the cost of investment in subsidiary. If the amount recharged exceeds the increase in the cost of investment the excess is recognised as a dividend. When the cost of investment in subsidiary has been reduced to nil, the excess is recognised as a dividend.
Where the Company’s parent grants rights to its equity instruments to the Group’s or the Company’s employees, which are accounted for as equity-settled in the consolidated accounts of the parent, the Group or the Company as the case may be account for these share-based payments as equity-settled. Amounts recharged by the parent are recognised as a recharge liability with a corresponding debit to equity.
1.6 Classification of financial instruments issued by the Company Following the adoption of IAS 32, financial instruments issued by the Company are treated as equity (i.e. forming part of shareholders’ funds) only to the extent that they meet the following two conditions: a) they include no contractual obligations upon the Company to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Company; and b) where the instrument will or may be settled in the Company’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Company’s own equity instruments or is a derivative that will be settled by the Company’s exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Company’s own shares, the amounts presented in these financial statements for called up share capital and share premium account exclude amounts in relation to those shares.
1.7 Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Trade and other receivables Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Trade and other payables Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Loans Loans to joint ventures are stated at amortised cost less impairment. Financial instruments held for trading are stated at fair value, with any resultant gain or loss recognised in profit or loss.
Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose only of the cash flow statement.
Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses.
1.8 Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Quantum Pharma Plc Annual Report and Accounts 2017 80 Financial statements
Notes forming part of the Company statements continued
1 Accounting policies continued Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
2 Dividends
2017 2016 £000 £000 Declared and paid during the year Final dividend in respect of year ended 31 January 2016 of 0.25p per share – 312 Interim dividend in respect of year ended 31 January 2016 of 0.5p per share – 625 Final dividend in respect of year ended 31 January 2016 of 1.0p per share 1,250 – 1,250 937
3 Investments
Shares in Group undertaking £000 Cost At beginning of year 85 Capital contributions arising on share based payments 650 At end of year 735
The undertakings in which the Company’s interest at the year end is 20% or more are as follows:
Country of incorporation 2017 2016 & registered office Principal activity Class of shares held % % Subsidiary undertakings Quantum Pharma 2014 Limited United Kingdom* Holding company Ordinary 100 100
Registered address: *Quantum House, Hobson Industrial Estate, Burnopfield, Co Durham, NE16 6EA.
4 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities 2017 2016 2017 2016 £000 £000 £000 £000 Other 7 – – – Tax assets 7 – – –
Movement in deferred tax during the year
1 February Recognised 31 January 2016 in income 2017 £000 £000 £000 Other – 7 7
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 81
5 Trade and other receivables
2017 2016 £000 £000 Amounts due from Group undertakings 123,196 121,062 Prepayments 87 87 123,283 121,149
6 Cash and cash equivalents
2017 2016 £000 £000 Cash and cash equivalents per balance sheet 1,565 34 Bank overdrafts – – Cash and cash equivalents per cash flow statements 1,565 34
7 Trade and other payables
2017 2016 £000 £000 Trade payables 174 138 Non-trade payables and accrued expenses 564 34 738 172
8 Other interest-bearing loans and borrowings This note provides information about the contractual terms of the Company’s interest-bearing loans and borrowings, which are measured at amortised cost.
The Company’s borrowings together with their principal terms, were as follows:
2017 2016 £000 £000 Non-current liabilities Interest-bearing loans and borrowings 18,080 20,959 Current liabilities Interest bearing loans and borrowings 2,880 7,8 8 0 20,960 28,839
Terms and debt repayment schedule
Face value Carrying amount Face value Carrying amount 2017 2017 2016 2016 Currency Nominal interest rate Date of maturity £000 £000 £000 £000 Bank term loans GBP LIBOR + margin 10 July 2019 21,250 20,960 24,250 23,839 Revolving credit facility GBP LIBOR + margin 10 July 2019 – – 5,000 5,000 21,250 20,960 29,250 28,839
During the year ended 31 January 2016 the Company refinanced its debt, securing a new bank term loan of £25,000,000 and a revolving credit facility of £10,000,000.
Arrangement fees associated with the new facilities were £480,000.
Quantum Pharma Plc Annual Report and Accounts 2017 82 Financial statements
Notes forming part of the Company statements continued
8 Other interest-bearing loans and borrowings continued The bank term loan bears interest at LIBOR plus a variable margin (1.0% to 2.75%) which is dependent upon the leverage at the end of each quarter and is repayable in quarterly instalments from January 2016.
The revolving credit facility, of which £nil (2016: £5,000,000) was drawn at 31 January, also bears interest at LIBOR plus a variable margin (1.0% to 2.75%) for any amounts drawn on the facility. Any unutilised amounts of the facility attract a fee of 40% of the applicable margin for the availability period.
At the reporting date the Company’s borrowings, comprised the bank term loan and revolving credit facility and include issue costs of £290,000 (2016: £411,000). The issue costs of each instrument, together with the interest expense, are allocated to the consolidated income statement over the term of the respective facilities at a constant rate based on the original value of each instrument. The term loan and the revolving credit facility are secured by a fixed and floating charge over the Company’s assets.
Analysis of debt:
2017 2016 £000 £000 Debt can be analysed as falling due: In one year or less, or on demand 2,880 7,8 8 0 Between one and two years 2,880 2,880 Between two and five years 15,200 18,079 20,960 28,839
9 Called up share capital
2017 2016 £000 £000 169,117,640 ordinary shares of 10p each (2016: 124,999,993 of 10p each) 16,912 12,500
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.
During the year the Company issued 44,117,647 ordinary shares for consideration, net of expenses, of £14,271,000. Of this amount £4,412,000 was credited to share capital and £9,859,000 to share premium account.
10 Reserves The following describes the nature and purpose of each reserve within equity:
Reserve Description and purpose Share premium Amount subscribed for share capital in excess of nominal value.
ESOP own share reserve Shares purchased and held to satisfy share options.
Retained earnings All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.
Own shares held by ESOP At the reporting sheet date 4,249,219 (2016: 4,840,165) ordinary shares of £0.10 each, were held by a Company sponsored Employee Benefit Trust (the ‘Trust’). The arrangements for distributing shares to employees by the trust are at the discretion of the trustees. Based on the directors’ best estimate, the market value of the shares held by the trust at the reporting date was approximately £2,039,625 (2016: £3,605,923). At the year end 4,249,219 ordinary shares are under option to employees.
11 Contingent liabilities This Company is party to a composite guarantee with the Group’s lenders whereby the Company is liable, jointly and severally with other members of the Group, with the exception of Lamda, in respect of borrowings within the Group.
The Group’s bankers and other lenders also have in place a debenture over the Company’s assets in support of borrowings within the Group which amounted to £21,250,000 (2016: £29,250,000) at the balance sheet date, excluding the unamortised amount of associated loan issue costs.
12 Pension scheme The Company does not operate any pension scheme but administers contributions to a stakeholder pension scheme for its employees and makes contributions to the personal pension schemes of certain employees. The pension cost charge for the year represents contributions payable by the Company to the stakeholder and personal pension schemes and amounted to £58,000 (2016: £39,000). There were £nil outstanding contributions at the end of the financial period (2016: £1,900).
Quantum Pharma Plc Annual Report and Accounts 2017 Financial statements 83
13 Employee share schemes The Group has established a Save-As-You-Earn share option scheme (‘SAYE’) and an Executive Long-Term Incentive Plan (‘LTIP’).
The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares:
Number of shares Share scheme Date of grant Employees entitled granted Vesting conditions Contracted life LTIP (2014) 11 December 2014 Executive Directors & senior 6,072,650 3 year service & 3 year 3.0 years management EBITDA target
LTIP (2015) 8 February 2015 Executive Directors & senior 100,000 3 year service & 3 year 3.0 years management EBITDA target
SAYE (2015) 15 July 2015 All employees with over 6 months 927,371 3 year service 3.1 years service
LTIP (2016) Plan 1 18 July 2016 Executive Directors & senior 2,218,055 3 year service & 3 year 3.0 years management adjusted EBITDA target
SAYE (2016) 13 July 2016 All employees 2,260,221 3 year service 3.0 years
LTIP (2016) Plan 2 10 November 2016 Executive Directors & senior 10,400,000 Continued service & share 5.1 years management price targets
LTIP (2016) Plan 3 23 January 2017 Executive Directors & senior 1,575,000 Continued service & share 4.9 years management price targets
The number and weighted average exercise price of share options is as follows:
LTIPs
2017 2016 Weighted Weighted average average exercise price Number of exercise price Number of £ options £ options Outstanding at beginning of year 1.00 6,172,650 1.00 6,072,650 Granted during the year 0.30 14,193,055 1.00 100,000 Lapsed during the year (0.89) (6,368,012) – – Exercised during the year – – – – Outstanding at the end of the year 0.29 13,997,693 1.00 6,172,650 Exercisable at the end of the year – – – –
The options outstanding at 31 January 2017 have an exercise price in the range of £nil to £1.00 and have a weighted average contractual life of 4.7 years.
SAYE schemes
2017 2016 Weighted Weighted average average exercise price Number of exercise price Number of £ options £ options Outstanding at beginning of year 1.30 927,371 – – Granted during the year 0.55 2,260,221 1.30 927,371 Lapsed during the year (1.09) (1,244,797) – – Exercised during the year – – – – Outstanding at the end of the year 0.56 1,942,795 1.30 927,371 Exercisable at the end of the year – – – –
The options outstanding at 31 January 2017 have an exercise price in the range of £0.55 to £1.30 and have a weighted average contractual life of 3 years.
Quantum Pharma Plc Annual Report and Accounts 2017 84 Financial statements
Notes forming part of the Company statements continued
13 Employee share schemes continued The fair value of services received in return for share options granted is measured by reference to the fair value of share options granted.
Where the vesting conditions are linked to the Company’s share price the estimate of the fair value of the services received is measured based on the Monte Carlo simulation model. The fair value of all other options has been measured based on the Black-Scholes model.
LTIP SAYE 2014 2015 2016 2015 2016 Plan 1 Plan 2 Plan 3 Fair value at grant date £0.26 £0.26 £0.62 £0.14 £0.18 £0.54 £0.23 Exercise price £1.00 £1.00 £nil £0.30 £0.30 £1.29 £0.55 Share price £1.00 £1.00 £0.67 £0.42 £0.47 £1.57 £0.66 Expected volatility 41% 41% 53% 53% 53% 38% 50% Option life (year) 3.0 3.0 3.0 5.1 4.9 3.1 3.1 Dividend yield 1.25% 1.25% 2.34% 2.38% 2.14% 0.18% 2.36% Risk free rate 0.89% 0.89% 0.68% 0.68% 0.68% 1.09% 0.15%
The expected volatility is based on the median volatility of healthcare constituents of the FTSE AIM.
The costs charged to the income statement relating to share based payments were as follows:
2017 2016 £000 £000 LTIPs 305 45 SAYE schemes 471 88 776 133
14 Ultimate controlling party The Company’s shares are listed on the Alternative Investment Market (‘AIM’) and are widely held. There is no one controlling party or group of related parties who have control of the Group.
Quantum Pharma Plc Annual Report and Accounts 2017 Company details
Quantum Pharma Plc is a public limited company, incorporated and registered in England and Wales with company number 09269818. Its shares were admitted to trading on AIM on the London Stock Exchange on 11 December 2014.
Officers Professional advisors
Directors Auditor Registrars Ian Johnson KPMG LLP Capita Asset Services Dr John Brown Quayside House The Registry Christopher Mills 110 Quayside 34 Beckenham Road Chris Rigg Newcastle upon Tyne Beckenham Gerard Murray NE1 3DX Kent BR3 4TU Company Secretary Nominated adviser Craig Swinhoe and broker Solicitors N+1 Singer Muckle LLP Registered office Earl Grey House Time Central Quantum House 75-85 Grey Street 32 Gallowgate Hobson Industrial Estate Newcastle upon Tyne Newcastle upon Tyne Burnopfield NE1 6EF NE1 4BF County Durham NE16 6EA and Financial media and investor relations 1 Bartholomew Lane Buchanan London 107 Cheapside EC2N 2AX London EC2V 6DN
Up-to-date information can be found on our website www.quantumpharmagroup.com Plc Pharma Quantum Annual Report and Accounts 2017 Accounts and Report Annual
Quantum Pharma Plc Head Office Quantum House Hobson Industrial Estate Burnopfield County Durham NE16 6EA
Tel: +44 (0) 1207 279400 General: [email protected] Corporate and IR: [email protected] quantumpharmagroup.com