BTG PLC Annual Financial Report (9705H)

TIDMBTG

RNS Number : 9705H

BTG PLC

13 June 2017

BTG plc

13 June 2017

ANNUAL REPORT AND ACCOUNTS 2017

In accordance with the Listing Rule 9.6.1, copies of the following documents have been submitted to the UK Listing Authority and will shortly be available for inspection via the National Storage Mechanism at http://www.morningstar.co.uk/uk/NSM

   --     A copy of the Company's Annual Report and Accounts for 2017 
   --     A Circular to shareholders incorporating the Notice of the 2017 Annual General Meeting 
   --     Form of proxy for the 2017 Annual General Meeting 

These documents have also been posted or otherwise made available to shareholders. The 2016/17 Annual Report and the Notice of Annual General Meeting 2017 have also been published on the Company's website at www.btgplc.com.

The Annual General Meeting will be held at 10.30 am on Thursday, 13 July 2017 at the offices of Stephenson Harwood LLP, 1 Finsbury Circus, London EC2M 7SH

In accordance with DTR 6.3.5, extracted below from the Annual Report and Accounts is a management report in full unedited text which contains a responsibility statement, a statement in the directors' report in respect of the strategic report and details of related party transactions. References to page numbers and notes in the extract refer to those in the Annual Report and Accounts 2017. A condensed set of financial statements were appended to BTG plc's preliminary results announcement issued on 16 May 2017.

Name of contact and telephone number for queries:

   Andy Burrows                                        020 7575 1741 

Vice President, Corporate and Investor Relations

BTG plc

   Stuart Hunt                                             020 7575 1582 

Investor Relations Manager

BTG plc

UNEDITED EXTRACT FROM ANNUAL REPORT AND ACCOUNTS 2017

The directors include the following statements:

1. Statement of directors' responsibilities in respect of the annual report 2017 and the financial statements

The directors are responsible for preparing the Annual Report 2017 and the Group and parent company financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent company financial statements on the same basis.

Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the directors are required to:

   --     select suitable accounting policies and then apply them consistently; 
   --     make judgements and estimates that are reasonable and prudent; 
   --     state whether they have been prepared in accordance with IFRSs as adopted by the EU; and 

-- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company's transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the directors in respect of the annual financial report

We confirm that to the best of our knowledge:

-- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole; and

-- the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

2. STATEMENT IN THE DIRECTORS' REPORT IN RESPECT OF THE STRATEGIC REPORT

The Group is required by the Companies Act 2006 to set out a fair and balanced review of the business, including the performance and development of the Group during the year and at the year end and a description of the principal risks it faces. This information is contained within the Strategic Report which can be found on pages 6 to 37 and incorporated into this report by reference:

-- The Chairman's Statement on page 6, the Chief Executive's review on pages 8 and 9 and the Industry Overview on page 10 provide details of the Group's principal activities and strategy, its performance during the year and its prospects for future development opportunities.

   --     Details of the principal risks facing the Group are set out on pages 68 to 70. 

-- Information relating to the environment, employees and stakeholders, health and safety, ethical considerations, charitable donations and policies regarding its employees is set out on pages 26 to 29.

This information is prepared solely to assist shareholders to assess the Group's overall strategy, the risks inherent in it and the potential for the strategy to succeed. The directors' report should not be relied on by any other person or for any other purpose.

Forward-looking statements contained in this report have been made by the directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the uncertainties, including economic and business risk factors, inherent in them.

3. PRINCIPAL RISKS

i. Market Access: Securing adequate reimbursement for BTG's products

BTG may not be able to sell its products profitably if reimbursement by third-party payers, including government and private health insurers, is limited or unavailable. The Group may be subject to price limits on reimbursement of products that are outside of its control, reducing sales volume or prices, negatively impacting Group revenues. This is particularly the case in the US where a significant proportion of the Group's revenues are derived, and in light of the potential US healthcare reforms, which may reduce the number of insured patients and require increased rebates or discounts to be provided. Third-party payers are increasingly attempting to contain healthcare costs through measures that are likely to impact the products that BTG is developing.

General mitigation strategy: Ensuring effective advocacy with payers based on accurate data and analysis to inform reimbursement decisions. Ensuring accurate and complete submissions. BTG is seeking to utilise its expanding expertise across the portfolio, both within and outside the US. R&D plans increasingly seek to create the data likely to be required to secure the desired level of reimbursement for the applicable products after commercial launch.

Change in 2016/17: The Company continues to strengthen its global market access (reimbursement) capabilities. While adequate levels of reimbursement for Varithena(R) can be secured, inadequate coverage and/or slow payment has slowed adoption and adversely impacted revenue growth.

Progress continues with the expectation CPT Codes for Varithena(R) will be secured from January 2018. A residual risk is the uncertainty regarding the value that will be set for these codes which will be determined during 2017/18 financial year.

Acceptable progress continues to secure appropriate reimbursement for other products across the portfolio.

A future focus will be on supporting appropriate reimbursement levels for the PneumRx(R) Coil both in EU and in US following approval.

Notwithstanding progress to date, in light of the ongoing specific challenges relating to Varithena(R) and the generally challenging external environment in the industry, the overall risk is assessed to have remained the same as last year.

ii. Obtaining/Maintaining product regulatory approvals

The pharmaceutical and device industries are highly regulated in relation to the development, approval, manufacturing and sale of products. The development of healthcare products has a high level of inherent risk and a high failure rate. An inability to meet existing or new regulations or regulatory guidance may result in delays or failures in bringing products to market, additional material costs of development or the imposition of restrictions on approval or the sale of a product or its manufacture or distribution, including the possible withdrawal of a product from the market.

Such events may adversely impact the Group's revenues and prospects.

General mitigation strategy: The Company has expert internal teams dedicated to ensuring compliance in each of these areas, defining regulatory strategies and supporting product approvals and maintenance of existing product licences.

The process is supported by the governance systems defined above and monthly monitoring of performance against goals and of changes in the regulatory landscape.

Change in 2016/17: In 2016 DC Bead(R) was successfully reclassified in the EU. A similar application has been made for DC Bead LUMI(TM), the outcome of which is awaited. This follows the successful launch of the sister product LC Bead LUMI(TM) in the US last year.

The PMA submission to seek US approval of the PneumRx(R) Coil, was made in February 2017.

The overall level of risk is deemed to have modestly reduced during the year. The regulatory affairs and clinical development teams were reorganised and strengthened during the year. The R&D team continues to be developed. The use of external resources such as contract clinical research organisations (CROs) are now also being more effectively leveraged.

iii. IP/Legal challenges

BTG may be subject to challenges relating to the validity of contracts or its patents or alleging infringement by BTG of intellectual property (IP) rights of others, which might result in cessation of BTG product sales, litigation and/or settlement costs and/or loss of earnings. BTG might elect to sue third parties for their infringement of BTG's IP in order to protect current or future product revenue streams. Litigation involves significant costs and uncertainties.

BTG may not be able to secure or maintain the necessary IP in relation to products sold, acquired or in development, limiting the potential to generate value from these products and investments. Patent expiries can adversely impact the Group's revenues due to a resultant increase in competition and price erosion.

General mitigation strategy: Maintenance of the IP and legal functions as core capabilities of the Group, supplemented by external expertise, which monitors third-party patent portfolios and patent applications and IP rights. Monitoring of BTG's satisfaction of its obligations under key contracts. Development and implementation of BTG patent filing, defence and enforcement strategies, pursuing litigation or settlement strategies where appropriate. Robust processes are in place to automate patent renewals; internal controls established to avoid disclosure of patentable material prior to filing patent applications and to protect valuable know-how.

Change in 2016/17: Zytiga(R) produces significant licensed revenues for BTG, and is subject to multiple challenges by manufacturers of generic versions in the US. The position has not changed since last year's Annual Report. Generic competition may enter the market as early as the 2018/19 financial year in the US and 2020/21 financial year in the EU when the ten-year post-approval data exclusivity period ends. In each case generic competition would substantially reduce the value of Zytiga(R) and the level of royalties received by BTG.

BTG is in a current dispute with Wellstat over the commercialisation of Vistogard(R). Wellstat are seeking damages and to terminate the commercialisation agreement under which BTG obtained rights to sell Vistogard in the US. A trial has been heard in the Court of Chancery of the State of Delaware but no judgement has yet been issued. The

Group estimate the likelihood of material outflow of funds or loss of rights to the asset to be possible, not probable, and therefore no liability has been recognised. It is currently not possible to make a reliable estimate of any amount that may be required to be paid in respect of the dispute.

The overall risk is assessed as unchanged compared with last year.

iv. Competition

BTG's products may face competition from products that have superior attributes, including better efficacy or side effect profiles, cost less to produce or be offered at a lower price than BTG's products.

There are currently no competitive products to CroFab(R), DigiFab(R), Voraxaze(R) or Vistogard(R) but Instituto Bioclon may launch a competitor product to CroFab(R) around

October 2018.

TheraSphere(R) competes with a product from Sirtex Medical Limited and LC Bead(c) and DC Bead(R) compete with products from Boston Scientific Corporation, Terumo and Merit Medical. Varithena(R) competes with other treatment modalities including heat ablation, vein stripping and physician-compounded sclerosing foam.

EKOS competes with other interventional clot treatment products from US companies like Boston Scientific.

There is a competitor to PneumRx in the form of the Pulmonx, Inc. valve. In Licensing, Zytiga(R) competes with a number of other treatments for prostate cancer including Xtandi(R) (enzalutamide) and is at risk of generic competition.

General mitigation strategy: BTG focuses on select opportunities addressing specialist segments where there are relatively high barriers to entry, for example, relating to the development and manufacturing processes, or the need to generate significant supportive clinical data to gain approval and commercial acceptance. We seek adequate reimbursement to differentiate our products by demonstrating, in clinical trials, safety and efficacy benefits, cost effectiveness or greater patient acceptance.

Change in 2016/17: The competitive environment remains a challenge particularly within the Interventional Oncology business but overall the level of risk is unchanged from last year. A key strategic goal for Interventional Oncology is to offer a wider range of products within the portfolio. The Galil Medical acquisition and launch of LUMI(TM) beads are key pillars of this strategy, which it is hoped will maintain BTG's lead position in the Interventional Oncology space. Zytiga(R) is at risk of further competition as noted.

It should be noted that Brexit and evolving healthcare policies in the US may have an effect on competition in the future, however, at this stage it is too early to predict any effects with any meaningful accuracy.

Overall, the risk is assessed as unchanged compared with last year.

v. Healthcare law compliance

Extensive laws and regulations relate to how BTG markets its products and interacts with its customers and payers. Failure to meet applicable requirements may result in criminal or civil proceedings against the Group, exclusion of sale of products in certain territories and material financial penalties or other sanctions against the Group (or their commercial partners, or their respective employees or directors).

Defending actual or alleged violations may require significant management time and financial commitment, even if not proven.

General mitigation strategy: A comprehensive compliance programme is in place as referred to above. Ongoing monitoring and auditing is undertaken to seek to ensure any material failures are identified where possible and remediated. The programme is continually reviewed and improved to reflect ongoing learnings and changes to the external environment.

The BTG compliance programme is a Company standard which is introduced to all acquisitions. The programme has been fully implemented by the latest additions to the BTG Group, PneumRx and Galil Medical.

Change in 2016/17: During 2016 BTG reached agreement with the US Department of Justice (DOJ) regarding actions by Biocompatibles and their associated distributors prior to acquisition dating back to 2003. The successful resolution of this action without the imposition by the DOJ of additional compliance controls is seen as evidence of the appropriateness of the BTG compliance programme. As a result the risk in this area has decreased somewhat.

Compliance however remains a key area of vigilance for BTG and complacency is not tolerated. Monitoring continues and all issues are thoroughly investigated and corrective actions tracked through to completion.

There can be no guarantee however that other investigations will not be instigated by the DOJ or other agencies in future. It is expected that legislative burdens in this area will increase in most jurisdictions and therefore programmes will need to be continually improved.

vi. Supply chain/continuity of supply

There are inherent risks to the BTG supply chain as the Company's products are typically high value, low volume manufacture. Diversifying the supply chain of such products (for example by establishing dual sources of supply) is not cost effective. BTG therefore relies on the following single sources of supply.

Wales for supply of manufactured antibodies and a single site in Farnham, UK, for the manufacture of the Beads and Varithena(R). Consequently there is the possibility of disruption to, or loss of supplies resulting from, technical issues, contamination or regulatory actions. BTG polyclonal antibody products rely on serum produced from our sheep flocks in Australia, which could be subject to disease outbreaks or fire.

BTG manufactures its EKOS products at a single site in Seattle, Washington, USA and the PneumRx(R) Coil at a single site in Santa Clara, California, USA, with the consequent possibilities from disruption to or loss of supply.

Galil Medical consumable items are manufactured at a site in Israel, with the control units manufactured at a site located in Arden Hills, Minnesota, USA.

For other products, namely Voraxaze(R) and TheraSphere(R), we continue to rely on third-party contractors for the supply of many key materials and services. These processes inherently carry risks of failure and loss of product are risks over which the Company has a lower degree of control.

General mitigation strategy: BTG has extensive quality, risk and business continuity management systems to ensure resilience of the supply chain. These management systems are applied equally to both the internal and external elements of supply chain.

Each supply chain is thoroughly assessed and stocks of raw materials, in process materials and finished products are maintained as a result of that risk assessment. Risk assessments are reviewed annually or when business predictions change. Adherence to the agreed stock levels are reviewed monthly through regular business review meetings.

The final mitigation is business interruption insurance, which is maintained at a level for each business to cover at least two years loss of business as result of catastrophic loss of supply.

Change in 2016/17: BTG sites and supply chain partners underwent seventeen inspections by external bodies such as FDA, MHRA and BSI within the 2017 financial year. No major or critical findings were received and corrective actions for all observations were completed or are on track to the timetables agreed with the authorities.

BTG changed its business interruption insurance provider in October 2016, as a result all key sites received an audit from the new provider. All corrective actions have been mutually agreed with the insurance provider, and are being implemented.

As a result of the acquisition of the Galil Medical business in June 2016, BTG purchased additional war and terrorism business interruption insurance specifically for the Israel site.

Standard business interruption insurance remains at two years for most key sites and business but has been maintained at three years for the Wales and Farnham sites.

Overall, the supply chain risk is considered to remain unchanged in comparison with last year.

4. RELATED PARTY TRANSACTIONS

The Company has a related-party relationship with its subsidiary undertakings and its directors.

In relation to the related party relationship identified on page 56 concerning Giles Kerr, payments made by BTG to Oxford University and Isis Innovations Ltd under the relevant licence agreements were GBP19,000 for the year ended 31 March 2017 (GBP24,000 during the year ended 31 March 2016). There are no amounts still outstanding and payable by BTG under these agreements as at 31 March 2017 (2017: nil).

Key management personnel are considered to be the directors and their remuneration is disclosed within the Remuneration Report on pages 72 to 97.

-ends-

This information is provided by RNS

The company news service from the London Stock Exchange

END

ACSFJMJTMBMBBPR

(END) Dow Jones Newswires

June 13, 2017 09:11 ET (13:11 GMT)