EKF Diagnostics Holdings plc

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

Half Yearly Report

EKF Diagnostics Holdings plc (AIM: EKF), the point-of-care, central laboratory, and molecular diagnostics business, announces its unaudited interim results for the six months ended 30 June 2015.

Financial Highlights

·     Revenue up marginally to £16.78m (H1 2014: £16.77m)

·     Adjusted EBITDA* is £0.73m (H1 2014: £2.22m)

·     Gross margin on Point-of-Care business up to 52% (H1 2014: 49%)

·     Cash at 30 June 2015 was £2.08m (31 Dec 2014: £8.35m), net debt of £5.18m (31 Dec 2014: net cash £2.10m) after deferred consideration payments of £1.43m

* Before exceptional items and share based payments

Operational Highlights

·     Strongest tender pipeline to date with a number to be decided in H2, including significant Middle East win

·     Underlying growth across most Point-of-Care product lines

·     Year-on-year revenue growth from diabetes products expected to be substantial

·     SensPoint analyser due for full launch in early 2016

·     Significant progress in sTNFR development

·     PointMan expected to complete CE Marking process in H2

·     PKU on course to launch in Q1 2016

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

"The Company expects to see the benefits of revenues from tender orders in H2, including those which were delayed from H1. We will look to update the market with details of our Middle East tender win once we are able to do so."

Enquiries:

CHAIRMAN'S STATEMENT

Dear Fellow Shareholder,

In my statement in the Annual Report and Accounts for the year to 31 December 2014 I outlined our key goals for this year in some detail. This is our first opportunity to report against these goals and I am pleased to report good progress, although as expected immediate translation into improved business performance has been limited as the additional resources brought into the business need to be bedded in before we see positive results from them.

Strategic Review

On 2 April 2015 EKF announced that the Board of Directors had initiated a strategic review headed by a Committee of the Non-Executive Directors of EKF. 

The Committee is conscious of the desire by a number of key shareholders that the value that has been created by the Board of EKF should be realised in part or in full, and have concluded that this should be the Directors' primary aim.

It was announced on 24 August 2015 that the Company has received a highly preliminary approach from Jinjing (Group) Co., Ltd ("Jinjing") regarding a possible offer for the entire issued and to be issued share capital of the Company, and two non-binding preliminary proposals (one of which has subsequently been withdrawn) from third parties of $110 million to $125 million, on a cash free debt free basis, for our Point-of-Care business, which excludes the Clinical Chemistry and Molecular Diagnostics businesses.  

In the event that the interest shown does not lead to a realisation event in the short-term, then it is the Board's intention to firstly invite Mr Ron Zwanziger onto the Board as Chairman, at which point I would become Deputy Chairman, and then secondly to spin-off the Molecular Diagnostics business (including biomarkers) into a separate vehicle focussed on personalised medicine, a process which will be led by myself.

In the absence of a realisation event in the short-term the Directors believe that this route represents the best way forward as it will enable Shareholders to benefit from: 

a) the Point-of-Care business (being both the Point-of-Care division and the Central Laboratory division), having a clear focus, with its earnings profile undiluted by the current investment (and related losses) associated with the Molecular Diagnostics division. The Directors believe that a number of growth opportunities, which the Company currently cannot realise, will become achievable with Mr Zwanziger as Chairman. This will ensure that EKF's growth trajectory can be accelerated. 

b) the Molecular Diagnostics division (including biomarkers) having a singular focus not impacted by the other activities in the Group and which, with the necessary investment, will increase the value currently attributable to this business.

Strategy and operations

The core strategy of the business continues to be the development of a global IVD business in Point-of-Care and Molecular Diagnostics. To achieve expected growth, the Directors recognise that EKF needs to invest significantly in these new products and platforms, namely sTNFR, PrecisionPath, PointMan^TM and a Phenylalanine monitoring system.

Tender wins

EKF relies heavily on tender wins for revenue generation, the timing of which can be very uncertain and outside of our control. In 2014, tender wins represented over 20% of our full year revenues, which was broadly split 40%/60% across H1 and H2 respectively. During H1 2015, tender wins only accounted for around £0.5m, mainly due to the delay of certain tenders into H2. EKF has developed the strongest tender pipeline it has ever had and a number of these tenders will be decided in H2. To that end we have secured a significant tender in the Middle East to deliver a number of our diabetes products in 2015 and 2016. Exact quantities are still to be confirmed.

Molecular business impact

The two core molecular platforms that EKF continues to concentrate its resources on are PrecisionPath and PointMan. At an adjusted EBITDA level, the Group has funded losses of £1m in the Molecular business in H1 2015 (H1 2014: £0.1m).

Point-of-Care

Our Point-of-Care business has four business units: Hemoglobin; Diabetes; Maternal and Women's Health; and Central Laboratory. The Point-of-Care business continues to perform well, with underlying growth being seen across most product lines. The integration of the Quotient products into our Barleben facility has been very successful and by the end of 2015 we expect that year-on-year revenue growth for our diabetes product range will be substantial. Particularly pleasing is the positive effect this has made at a gross margin level; whilst the overall gross margin (which incorporates the lower margin molecular business) is 45% for the first half of the year (H1 2014: 47%), the Point-of-Care business shows a gross margin of around 52% for H1 2015 (H1 2014: 49%); this is likely to improve slightly going forward as we continue to seek operational efficiencies throughout the Group.

The 2015 goals identified for this business and the progress since December are as follows:

An experienced team has been put together for each business unit through a mixture of external recruitment and internal transfer, each Business Unit Director being supported by global sales and product specialists who are supporting our existing regional sales teams.

Molecular

The Molecular business has two units, Diagnostics, which is product based and primarily PointMan, and Genomics, which is service based and includes PrecisionPath.

sTNFR

During the period we have made significant progress in establishing sTNFR as the most efficacious biomarker for predicting the progression of diabetic patients to end stage kidney disease. We have been genuinely excited by not only our own data generated in conjunction with our partner, the Joslin Diabetes Center, but also by the quality of the engagement with several top-tier pharmaceutical companies who are promoting and/or developing novel therapies in this area, such as SGLT-2 inhibitors. Our aim is to position sTNFR as a routine test for risk stratification and as a complementary diagnostic for new therapies. The establishment and acceptance of such a biomarker takes time as further data will need to be independently generated to support clinical utility and completion of pivotal trials for these new therapies. We believe that we will ultimately be capable of generating long term value by aligning ourselves with those therapeutic companies who see the commercial benefit that our diagnostic can bring to their revenue line. Our discussions to date provide us with significant confidence and the challenge remains in terms of the time factor both with our putative partners and consequently in setting expectations externally with our shareholder base and other stakeholders.

PrecisionPath

Whilst we have encountered issues with Selah, we have continued to invest in PrecisionPath, a Next-Generation Sequencing ("NGS") test for patients with metastatic cancer. We have announced a partnership with Greenville Health System ("GHS") and the launch of our PrecisionPath Colon cancer test at a cost of $975 and a turnaround time of less than seven days per reportable test. This has, in turn, led to discussions with private insurers to establish a reimbursement level. The relationship with GHS, and consequent verification of the patient benefit from a quick turnaround at a very competitive price per test has resulted in the reimbursement review progressing well; we expect to hear some positive news in this regard in the not too distant future. 

PointMan

Following some technical issues earlier in the year, we are now finalising the verification and validation process for the PointMan amplification technology with the intention of completing the CE Marking process in H2. In addition the partnerships with ANGLE, Gilupi and MGH continue to progress. The exquisite sensitivity of the PointMan technology enables us to detect three copies of a mutant gene in a standard blood draw, which will lead to a reduction in repeat tissue biopsies for cancer patients globally.

PKU

We are on course to launch our Point-of-Care Phenylalanine ("Phe") monitoring system for Phenylketonuria (PKU) in Q1 2016. PKU is an inherited genetic condition which requires treatment and monitoring from birth with either a special diet or pharmaceutical drugs. EKF has developed a monitoring system which will enable patients to easily test their Phe levels which will lead to increased compliance, thereby helping them to manage their condition more effectively. We are in late stage discussions with a major food manufacturer with a view to licence the PKU system for use by patients alongside their dietary therapies. We believe this to be a more effective way of creating value than aligning ourselves with a pharmaceutical company as our diagnostic may result in less therapeutic intervention and we perceive that it is unlikely that any regulatory authority will make our test mandatory despite the patient benefits.

The estimated size of the global PKU market is in excess of €400 million, and we believe that monitoring alone would account for around €5m of this annually. Easy and accessible monitoring of the condition will enhance the management of PKU and is thus viewed as a real benefit to healthcare professionals, dieticians and patients alike.

The 2015 goals identified for this business and the progress since December are as follows:

Management changes

In addition to the appointment of new Directors for each of the business units in the Point-of-Care business, EKF has brought in additional experienced management to handle our R & D project management, and our Quality and Regulatory functions.

Financial review

Revenue

Revenue for the period was £16.78m (H1 2014: £16.77m), a marginal increase. Excluding the effect of certain tender business in Mexico that occurred in 2014, but has not repeated in 2015, revenue has increased by 22.7%. Further adjusting for the effect of revenue achieved by DiaSpect Medical, Separation Technology Inc., and Selah Genomics in the period before their acquisition by EKF, organic revenue has increased by 10.4%.

Gross profit

Gross profit is £7.55m (H1 2014: £7.91m). Gross profit as a percentage of revenue is 45% (H1 2014: 47%), largely as a result of the structurally lower margins on the Selah business; margins on the Point-of-Care business were 52%, a marked improvement on last year (H1 2014: 49%), mainly due to the Quo products having been transferred to the more efficient German facility.

Administrative expenses

Administrative expenses have decreased by 86%; the main cause of the decrease is an exceptional profit made on the write-back of the Selah deferred consideration. The Exceptional items also includes an exceptional bad debt provision in Selah of £0.9m which is associated with the previously reported DME reimbursement issues. Net underlying administrative costs have actually increased, predominantly as a result of the acquisitions in the later part of H1 2014, but also due to added investment in sales resources, the benefit of which should be seen in H2 2015 and beyond. In addition to the research and development costs included in Administrative expenses of £0.13m, a further £2.6m of development expenditure has been capitalised (H1 2014: £1.1m).

The charge for depreciation of fixed assets and for the amortisation of intangibles is £3.13m (H1 2014: £2.33m).

Operating profit and adjusted earnings before interest tax and depreciation

The Group has made an operating profit of £6.33m (H1 2014: loss of £1.87m) for the reasons outlined above. We consider a more meaningful measure of underlying performance to be adjusted EBITDA which for H1 2015 was £0.73m (H1 2014: £2.22m). This excludes the effects of share-based payments of £0.11m (H1 2014: £0.27m) and exceptional gains of £8.84m (H1 2014: exceptional loss of £1.49m).

Finance costs

Finance costs have increased to £1.24m (H1 2014: £0.60m). The increase is largely a result of the unwinding of discounts on deferred consideration.

Tax

There is a tax credit of £0.15m (H1 2014: charge of £0.16m). The credit is largely the result of the reduction of the deferred tax liabilities associated with intangible asset amortisation. The effect of the tax warranty claim has been fully defined following negotiations between the Group's German subsidiary, its tax advisers, and the German tax authorities, with no further adjustment being required, and the first payment of the tax assessed has been paid.

Balance sheet

Property, plant and equipment

We have invested £1.18m (H1 2014: £0.90m) in property plant and equipment. The major project is an additional building at the Barleben site in order to increase the capacity and efficiency of instrumentation assembly.

Intangible assets

The value of intangible fixed assets is £90.68m (31 December 2014: £93.52m). The reduction is mainly as a result of exchange rate movements. An amount of £2.6m has been capitalised, being largely development expenditure for major projects such as PKU, sTNFR, and PointMan.

Deferred consideration

The initial Selah purchase agreement was drafted to accommodate a reduction in deferred consideration payments if certain performance targets were not met; the lower than anticipated sales from Selah are now expected to result in the year two earn-out payment of $17.5m not being payable to the vendors of Selah Genomics.  As a result, the remaining provision for deferred consideration relating to Selah has been written back and this benefit is reflected in the H1 figures.

The deferred consideration payable to the vendors of DiaSpect Medical was renegotiated down to £1.4m and this was paid in January 2015.

Cash and working capital

The unaudited cash position at 30 June 2015 was £2.1m (31 Dec 2014: £8.3m), and the net debt position was £5.0m (31 Dec 2014: net cash £2.1m). Cash flow has been impacted by slow payments from our Mexican distributors who have themselves suffered from slow payments by the Mexican government during their election process. The net debt position is expected to improve in the second half of the year following tender wins and with continuing payments being made by our Mexican debtors. As announced previously, a one off £1.4m cash payment was made in January 2015 as a settlement for the total deferred cash consideration due in relation to the acquisition of DiaSpect Medical AB. No further deferred cash consideration payments are expected to be paid by EKF in H2 2015.

Cash used in operations in H1 2015 is £2.09m (H1 2014: £3.32m). Trade debtors at period end remain high mainly as a result of sales to Mexico made during 2014. While certain amounts have been collected during the period, payment of some of these outstanding amounts has continued to be delayed because of slow payments to the relevant distributors by the Mexican Government.

Outlook

The immediate outlook is dominated by the process of evaluating the number of options in front of the Board:

·     An offer for the Point-of-Care business excluding Clinical Chemistry and the Molecular businesses;

·     An offer for the Company as a whole; and

·     Splitting the Point-of-Care and the Clinical Chemistry businesses from the Molecular business under the Chairmanship of Ron Zwanziger and myself respectively.

Without doubt the whole process that we have undertaken in recognising the broad wishes of Shareholders for change has impacted our business in terms of management focus, overall cohesiveness and additional costs.

We are currently undergoing a process of due diligence from external parties and once we are in a position to communicate with Shareholders we will do so as soon as possible.

In the meantime we have a number of key operational goals for the final quarter and beyond:

·     Growing the core underlying Point-of-Care business. The Company expects to see the benefits of revenues from tender orders in H2, including those which were delayed from H1. We will look to update the market with details of our Middle East tender win once we are able to do so. Mexico remains a key market for us and we are confident that if we can resolve the payment issues then we will secure substantially more business significantly beyond our 2014 revenues. A Kenyan tender for haemoglobin devices remains there to be executed but we need to secure satisfactory payment visibility.

·     Progressing sTNFR in a manner which will deliver further evidence of clinical utility, executing our strategy for regulatory submission and progressing further our discussions and collaborations with major pharmaceutical partners.

·     Promoting PrecisionPath and the relationship we have with GHS to demonstrate clinical utility and value. Our biggest single goal remains reimbursement and one in which we continue to strive to achieve and one we remain confident of achieving.

·     The delivery of a CE Marked PointMan product(s) and to secure key strategic partnerships beyond our existing relationships.

·     Deliver real value in the management of PKU with a partnership with a major food manufacturer.

I look forward to updating you on progress in the weeks and months ahead.

David Evans

Executive Chairman