Biocompatibles is a leading medical technology company in the field of drug device combination products with an Oncology Products Division and a Licensing Division.
Our Business Model is to own the most valuable products in our portfolio and pipeline (Oncology Products) and to engage with partners where their scale and/or focus offers more effective execution (Licensing). In this context we have important relationships with some of the world’s most successful healthcare companies, ncluding AstraZeneca, Bayer, Eisai and Medtronic.
We have two principal product lines, Bead Products and BrachySciences, in the Oncology Products Division (68% of Group sales). Our Licensing Division has two components, CellMed and PC Licensing (32% of Group sales).
We aim to deliver products that are relatively easy for doctors to use; are safe for patients and have clear clinical benefits; and whose value is clear to the hospital administrator and to the ultimate payer.
We will aim to generate cash from transactions with licensing partners – recognising the high cost of new equity from our shareholders – and we will pay dividends and return capital to shareholders to ensure that we use our balance sheet efficiently.
We are pioneering the use of Drug-Eluting Beads for the treatment of cancer and are the de facto market leader. We also have promising programmes in Type II diabetes and stem cell derived therapies. Our task is to develop these leading technology positions into really attractive market positions or, at the right time, transition them into valuable licence agreements.
A central conviction underpinning Biocompatibles’ Oncology strategy is that the core approaches to cancer treatment, namely systemic drug administration and surgery, can and will be supplemented by much wider use of minimally-invasive local treatments for locally-dominant disease. The rationale behind locally-delivered therapy is to achieve a better side-effect profile and potentially improved survival. Both the Drug-Eluting Beads and the Radiation Seeds products of our Oncology Products Division are in this category of treatments.
The Vision
Our Vision for Biocompatibles remains the development of a high margin, high growth business based on a range of valuable drug device combination products.
The Vision of our flagship product line continues to be the creation and leadership of a market for Drug-Eluting Beads and the recognition of our products as a Gold Standard treatment for Hepatocellular Carcinoma and Metastatic colo-rectal cancer.
We are already achieving a number of the financial criteria (high gross margin and high sales growth). The successful conclusion of clinical trials due to report in 2010-12 would represent a substantial step towards the Vision – both for our flagship product line and for Biocompatibles as a whole.
Building Value
Biocompatibles’ financial profile is improving with the growth in sales and gross margin but the Group is not yet profitable. We address this situation by committing to the medium-term vision described above, along with annual goals that mark the route; by committing to financial guidance on the level of sales and cash consumption; and by committing to the exploration of opportunities for accelerating the delivery of value to shareholders. This approach was taken in 2002 with the sale of the cardiovascular stent and contact lens businesses, and the subsequent return to shareholders of £123m of capital, and with the payment in May 2009 of a maiden dividend funded out of royalty income received from technology out-licensed to Medtronic (the Royalty Dividend).
The Board expects to continue to pay the Royalty Dividend annually for as long as Medtronic sustains an appropriate level of sales of its Endeavor Drug-Eluting Stent, on which Biocompatibles earns a 1.5% royalty. The Board also intends that thereafter the Company would pay a dividend from profits, though, at this time, there can be no certainty that this transition can be achieved as planned.
The rationale for the Royalty Dividend is that it enables shareholders to benefit from the cash that is being received from our Licensing successes – while the cash position of the Company still remains adequate for its investment requirements.
Acquisition and Business Development Activity
The Board monitors a short list of acquisition and in-licensing opportunities; and in November we announced the acquisition of the inventory and intellectual property assets of Astron Clinica Limited (“Astron”) (in administration) for £0.2m. Astron’s products are non-invasive skin lesion visualisation, diagnostic and data storage systems that are sold to General Practitioners, Dermatologists and Cancer Screening Clinics and broaden the portfolio of Biocompatibles’ Oncology Products Division.
We are pleased that Dr Symon Cotton, the principal inventor of the Astron intellectual property, has joined the Company. We now have a third colleague who has made the transition from entrepreneur to key member of the Biocompatibles management team, following Dr Peter Geigle in CellMed and Gary Lamoureux in BrachySciences. We are keen to sustain an environment where entrepreneurs can be inventive and experienced colleagues in operations can help their ideas become clinical and commercial successes.
We continue actively to review acquisitions and in-licensing opportunities that would strengthen the Company’s competitive position and accelerate progress to profitability. We require a high quality commercial proposition and experienced and realistic management.
Corporate Governance
The Directors place a high priority on maintaining high standards of corporate governance and rigorous management systems, and the Company complies with the Combined Code on Corporate Governance. Biocompatibles’ quality management system incorporates a number of relevant provisions from the Code (and the Turnbull Guidance), including those relating to risk management and internal control. The internal control risk review ensures that, as the Group and its technology evolves, its approach to risk keeps pace. Continued accreditation to the ISO 9001-2000 quality
standard represents independent verification of the Company’s compliance with some of the key elements of best corporate governance practice.
Management of Risk
The Biocompatibles’ share price is more volatile than the average share on the London stock market, not least because the Company is part of a volatile sector – of small/mid size healthcare technology companies. Nevertheless, the Directors continue to take the view that our investors are aware of this “sector risk” and that they are looking for the exceptional returns that can be achieved when healthcare technology is successfully commercialised. The Directors therefore focus their review of risk on the issues that can cause projects to be delayed, as well as on those that can cause projects to fail.
Outlook and Dividend
Over the next few years we expect a flattening of overall healthcare expenditure but broadly helpful market conditions for our products, which remain at a relatively early stage of their product life-cycle and are targeted at generally prevalent, growing and poorly-treated diseases. Nor is the cost of our products significant to hospital executives whose job is to challenge all input costs.
In summary, the Board considers that its current strategy is delivering: sales are growing, market acceptance for the Oncology Products is increasing, the clinical data is good and key programmes with our large partners are progressing well. To maintain this progress, we will need to deliver on our Asian market entry strategies for the Drug-Eluting Beads – especially in China, Korea and Japan, to deliver some strong clinical data to sustain our entry into the market for colo-rectal metastases and to deliver good data from the first human trials in the diabetes programme license to AstraZeneca.
The Board is optimistic that management will be able to meet these challenges and that the good progress will continue; and has therefore decided to recommend the payment of a further interim dividend at an increased level of 6.25p per share.