EKF Diagnostics Holdings plc

("EKF", the "Company" or the "Group")

Half Yearly Report

EKF Diagnostics Holdings plc (AIM: EKF), the point-of-care diagnostics business, announces its unaudited interim results for the six months ended 30 June 2014.

Financial Highlights

·     Revenue up 12.6% to £16.77m (H1 2013: £14.89m)

§ c. £1m negative effect of exchange rates

§ Underlying organic growth at constant currency rates of 3.4%

·     Adjusted EBITDA* up 4.7% to £2.22m (H1 2013: £2.12m)

·     Cash at 30 June 2014 was £11.12m (31 Dec 2013: £2.55m), net cash of £5.2m

§ after deferred consideration payments of £0.36m

§ after strategic investments of £0.90m

* Before exceptional items and share based payments

Operational Highlights

·     Point-of care product sales up 16% to £11.4m (H1 2013: £9.8m)

·     Order for 1,900 Biosen analysers from China worth c €4m over 2.5 years

·     Central Lab sales disproportionately impacted by exchange rates, but β-HB sales up 6% year-on-year

·     Three value adding acquisitions to make a considerable contribution to future growth

·     Technology transfer of Quo-Test and Quo-Lab to Barleben, Germany now completed

·     First revenues from Molecular Diagnostics division and portfolio of tests in development

Commenting on outlook, David Evans, Executive Chairman of EKF, said:

"Whilst trading conditions continue to be challenging, the general outlook for the second half is very positive, not only in terms of operational improvements and the long term strategic positioning of the Group, but also in terms of the further organic growth we anticipate and the first full six month contribution from our recent acquisitions.

"We remain confident of meeting market expectations for the full year. Our focus in the second half and beyond is on rebuilding shareholder value. Form is temporary but class is permanent and we believe we have a first class offering."

Enquiries:

CHAIRMAN'S STATEMENT

Dear Fellow Shareholder,

I am pleased to present the results for the first half of 2014, a period which has seen the Group make very significant strategic and operational progress, whilst facing some challenges and setbacks.

Unaudited revenues for the six months ended 30 June 2014 were 12.6% ahead of the same period last year at £16.77m (H1 2013: £14.89m), despite the negative impact of exchange rates of circa £1m during the period. Unaudited adjusted EBITDA for the period was £2.22m, a marginal increase on the previous year (H1 2013: £2.12m); excluding the effect of exchange rates, adjusted EBITDA would have shown a c. 20% improvement on the same period last year.

Strategy, acquisitions, and investments

The first half of the year was shaped by the completion of three value-adding acquisitions; Separation Technology, Inc. (STI), DiaSpect Medical AB (DiaSpect), and Selah Genomics, Inc. (Selah). These acquisitions materially enhance the Company's overall product offering and are expected to make a considerable contribution to the future growth of the business.

STI, which was acquired in March for $4.0m (£2.4m) in cash, is the manufacturer and supplier of a range of haematology and centrifuge instruments and their associated consumables. It is based in Sanford in Florida, USA, and previously formed part of a large US based life sciences company.

DiaSpect, acquired in April, has its head office in Sweden but its main operations are in Sailauf near Frankfurt in Germany. DiaSpect is the developer and supplier of a desktop and a handheld haematology instrument and their associated consumables. The instruments use reagentless cuvettes which give a faster result and are cheaper to produce than the standard cuvettes used by EKF's Hemo Control product which provides a competitive advantage in blood banks and emerging markets. DiaSpect was acquired for an initial sum of £16.0m, payable in cash and in shares, with up to a further £4.75m payable in cash depending on the achievement of a number of regulatory and performance milestones. 

The STI and DiaSpect products have been integrated into our haematology point-of-care product group alongside the Hemo Control (H2 in the USA), giving us the most comprehensive range of haematology analysers of any manufacturer. Our international sales team has been trained and we are already beginning to see sales for these new products come through our pre-acquisition existing sales channels.

Selah, which is based in Greenville, South Carolina, was also acquired in April. It is a supplier of contract molecular testing services, and now forms part of our molecular division. The initial consideration for the acquisition was $40m (£23.9m), of which $35.6m (£21.3m) was paid in shares. Further amounts are payable of up to $35m (£20.5m) in shares, contingent on the achievement of revenue targets.

During the period, EKF has also invested in Dx Economix Inc, a company which builds and implements market entry strategies for new or existing healthcare technology products. EKF will work closely with Dx Economix, strengthening a partnership that will create new market opportunities for the EKF products whilst offering both an economic benefit to the healthcare system as well as improved clinical benefit for the patient. EKF expects to start generating revenues from this relationship in early 2015. The initial investment is £0.75m. In addition we have invested £0.15m in a US based rapid diagnostics test company.

Operations

Point-of-care

EKF's range of Point-of-care products have performed well in the first half showing c. 16% sales growth on the previous comparable period (H1 2013: £9.8m) with further progress expected in the second half. As recently announced, the Company has gained an order for 1,900 glucose and lactate analysers (Biosen C-Line) to a new distribution partner in China, a deal worth approximately €4.0m (£3.2m) over a two and a half year period with potential for a further €2.0m (£1.6m) of consumable revenues.  Following regulatory approval in China and Japan for our TS haemoglobin instrument, the prospects for growth across Asia, and particularly China, are encouraging.  

The Company is also confident of securing tender wins in South America and in the area of WIC (Women, Infants and Children) health programmes before the end of the year. Furthermore, EKF expects contributions from new product launches scheduled for the second half, as well as benefits from the cross-selling of DiaSpect and STI products across the Group. 

In addition, the second half will see the first full period impact of the operational benefits from the transfer of production of Quo-Test and Quo-Lab instruments and reagents cartridges to the Barleben manufacturing site.

Central laboratory

The first half for clinical chemistry products was more challenging and reflects the increasingly mature nature of this market. Whilst overall sales were down 18% to £4.1m (H1 2013: £5.0m), sales of our β-HB liquid reagent continued to perform well, up c. 6% year-on-year. Given the concentration of sales in the US this division was disproportionately impacted by the sterling / dollar exchange rates and the first half was subject to some issues on timing on Enzyme orders and orders from our Asian distributors. Over the full year the Company expects this division to continue to make a strong contribution to cash flow and to generate additional revenues from three new products that will be launched before the year end.

Molecular diagnostics

In May, not long after the completion of the acquisition of Selah, we announced that Palmetto GBA, the local Medicare Administrative Contractor which covers Selah, was significantly reducing the reimbursement level for Selah's DME panel, which represents a small part of Selah's potential. This was disappointing news which naturally raised questions from our shareholders over the acquisition and the due diligence process. A rigorous due diligence process was carried out using finance and legal teams, who have worked on a number of acquisitions for EKF as well as other businesses connected to the Directors, commercial due diligence by our own in-house team and by an internationally renowned industry specialist.  Despite the reimbursement setback, the Directors believe that Selah will bring significant value to the Group through both the DME panel, the other products in its portfolio, and the potential synergies with the rest of our molecular business.

Despite the reduction in reimbursement levels for Selah's DME panel, EKF has benefitted from over £1.2m of sales from Selah in H1, the first material revenues recorded for the Molecular Diagnostics division. In addition, Selah has also recently launched a reimbursable Women's Health panel. The number of test samples is expected to increase in the second half, coming not only from the DME and Women's Health panels, but also from new products which the team has been working hard to deliver.  

As a result of the previously announced reduction in reimbursement of the DME panel, Selah did not achieve their first quarter gross revenue target, as indicated in the Agreement and Plan Merger document dated 20 March 2014, hence no earn-out merger consideration is payable with respect to the first quarter of the first earn-out year.

The second half will also see the first, if modest, contribution to revenues from our oncology biomarkers.  Significant progress has been made with PointMan and the detection of circulating tumour cells in whole blood. Following initial work with Swansea University, a successful collaboration with GILUPI in the area of lung and colorectal cancer marks a major step towards the routine and reliable detection of cancer cells in blood samples.

Board and management changes

In June we were very pleased to appoint Tito Bacarese-Hamilton as Chief Technical Officer. Tito was previously Vice President, R&D for New Products & Platforms at Lifescan Scotland Limited, part of Johnson & Johnson where he had global responsibility for the full-scale development and commercial launch of all new product platforms and was the main interface with manufacturing operations for the production of LifeScan's new, multi-product sensing platforms. We will benefit from his proven track record of developing innovative diagnostics technology into revenue-generating platforms.

Recently we have announced the appointment of two new Non-Executive Directors. David Toohey joined the corporate executive team of Inverness Medical (now Alere Inc) in 2001, taking a number of roles including VP New Products, President of Global Professional Diagnostics and President of International Business Operations. Doris-Ann Williams has been Chief Executive of the British In Vitro Diagnostics Association since October 2001 and has more than 30 years' experience working in the IVD sector. She has had a variety of experience, initially in R&D and subsequently in commercial roles including international responsibilities.

During the period Paul Foulger, Interim Finance Director, was appointed as Finance Director and Gordon Hall retired as a Director at the end of March. We thank Gordon for his service as a director and wishhim well for the future.

In addition to these board level changes we have strengthened our team through a number of appointments to our new sales and business development positions, including new regional managers in Europe and in Asia, and a Manager of Distribution. In China, we have set up a regional representative office, led by the General Manager Asia.

Financial review

Revenue

Revenue has increased by 12.6% to £16.77m (H1 2013: £14.89m) of which £2.44m came from new acquisitions. On a constant exchange rate basis, the turnover would have been over £1m higher. Sales in Russia have been affected both by the exchange rate and by budget constraints within the Russian health system. Underlying organic growth on a constant exchange rate was 3.4% with revenues excluding contributions from acquisitions of £15.4m (H1 2013: £14.89m).

Margins

We achieved gross margins of 47% (H1 2013: 51%). This is largely as a result of product mix as well as the business method used at Selah whereby 50% of revenues are passed to our marketing partner and treated as cost of sales. This results in a lower margin for this business than our traditional business.

Adjusted EBITDA (before exceptional items and share based payments)

The Group continues to consider that adjusted earnings before interest, tax, depreciation and amortisation (AEBITDA) is the most meaningful measure of profitability at this stage of the Group's development. AEBITDA has increased marginally to £2.22m (H1 2013: £2.12m). This was impacted by exchange rates and the continued investment in sales and business development infrastructure.

Profit before tax and loss after tax

The Group has made a loss before tax of £2.47m. This is largely as a result of exceptional items, mainly the write-off of costs associated with the acquisitions made during the period, and the costs of transferring the Quotient business to Germany, and of increased amortisation of intangibles.

Balance sheet

The cash position of the Company remains strong, with unaudited cash balances as at 30 June 2014 of £11.1m (31 December 2013: £2.6m), and a net cash position of £5.2m. This reflects the £26m raised in April through an oversubscribed Placing and Offer, the payment of the cash considerations for the recent acquisitions, and the final deferred consideration payment made in relation to the acquisition of Quotient Diagnostics.

Outlook

Whilst trading conditions continue to be challenging, the general outlook for the second half is very positive, not only in terms of operational improvements and the long term strategic positioning of the Group, but also in terms of the further organic growth we anticipate and the first full six month contribution from our recent acquisitions.

Operational improvements

From an operational point of view we expect to see a significant uplift in the second half as we reap the full benefits of the newly transferred Quo-Test manufacturing line, which is now up and running in Barleben, as well as the margin benefits brought by the newly installed automated manufacturing line for Quo-Lab cartridges. As a result the second half will see full and uninterrupted contributions from these manufacturing lines. On top of this we are committing to a further €2m investment in the manufacturing infrastructure in Barleben, which will help drive further margin improvements and increase the throughput capacity of our haemoglobin offering to meet the demands of our growing customer base.

As part of the Group's integration process we are looking to further rationalise our current infrastructure and, following the transfer of manufacturing to Barleben, we have opted to reduce our presence in Ireland. This, plus the recent streamlining of Quotient based in Walton-on-Thames, will bring long-term efficiency savings.

We have also completed the integration of our sales teams following the recent acquisitions with all sales staff now fully trained on the entire EKF portfolio and we expect to see more cross-selling of products across the Group.

Organic growth & full H2 contribution from acquisitions

Whilst we recorded organic growth of 3.4% in the first half, excluding the impact of currency movement, we expect to deliver further growth in the second half through contribution from a number of factors. As mentioned above we received an order for 1,900 Biosen glucose and lactate analysers; 400 of these instruments will be shipped in the second half with the expectation of consumable sales to follow. In addition, we have a number of key tenders that we expect to conclude before the year end, including further potential orders from South America and also from Africa.

As well as the prospects for growth across Asia following the DiaSpect regulatory approvals in China and Japan we are close to finalising two distribution agreements for Quo-Lab in Asia which will see an uplift in distributor stocking orders once these conclude.

The second half will also see the full contribution of revenues from our three most recent acquisitions. This will also include new revenue lines generated from the recently launched DME and our new Women's Health panels, as well as other new products that will be launched in H2.  

Long term strategic positioning of the Group

We have faced short-term headwinds following our recent acquisition of Selah. Those headwinds are being tacked through actions on the ground to replace the revenue shortfall and the panels mentioned above will contribute to this. Whilst the immediate-term revenue shortfall has undoubtedly had an impact on our market valuation, as well as a direct impact on the vendors' ability to meet their earn-out targets, the Directors believe that Selah adds considerable strategic value to the business in its own right as well as leveraging the PointMan technology through Selah. The combination of Selah and our PointMan technology will provide a very valuable offering for large pharmaceutical companies to find the best drug candidates in a much earlier phase of trial than before. PointMan has already proved its huge potential through our collaboration with GILUPI whereby our DNA enrichment capacity has shown that routine and reliable detection of cancer cells in blood is possible. We hope to be able to update shareholders on another significant collaboration which could see this goal become a reality. We are confident of the long-term strategic value of Selah and PointMan and we will focus on demonstrating this and converting this into results that deliver tangible shareholder value.

Given that focus, we are consciously not reviewing any acquisition opportunities in the short to medium term as we integrate our recent acquisitions and demonstrate that they are value accretive.

As I've said earlier, trading conditions in our markets continue to be challenging but I am confident that we can rise to that challenge and that the second half will show a considerable uplift from the first half due to the factors listed above. We have minimised the risk to the business of changing reimbursement rates in the US due to a widening of our portfolio of panels and like all companies trading in Russia we have no control over the deteriorating economic conditions but we are taking measures to minimise the effect on our business.

That said, we must look at EKF as a whole and we remain confident of meeting market expectations for the full year. Our focus in the second half and beyond is on rebuilding shareholder value. Form is temporary but class is permanent and we believe we have a first class offering.

David Evans

Executive Chairman

* Rounding adjustment