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The
Medical House PLC
Preliminary results for the year ended 30 June 2005 The Medical House PLC ("TMH"), (AIM: MLH) the orthopaedic devices and drug delivery company, announces its preliminary results for the year ended 30 June 2005.
Ian Townsend, Chairman, The Medical House, said: "It is a pity that the edge has been taken off such a successful year for both our divisions. The company has come a long way in the past 12 months, although unfortunately the delay to FDA approval for one of our key customers has deferred the financial rewards of some of our endeavours. However with agreements in place for the Drug Delivery division progressing to plan and with growth in the Orthopaedic division in line with industry projections, 2006/7 should show a useful profit."
Chairman's Statement The year to 30 June 2005 has been one of yet further progress. Our Orthopaedic division reported a record year, achieving its highest-ever sales and operating profits, with our Drug Delivery division making considerable strides forward in what is a significant and challenging global market.
Eurocut’s improved first half sales continued in the second half, resulting in a record year for both revenues and operating profits. The majority of growth came from sales to one major customer for a new system which has been very well received in their market. Unfortunately, as we announced in August, approval for this product by the US regulator (FDA) has been delayed which resulted in a dip in orders. The effects of this will be felt in the first half of 2005/6, but this should not be allowed to detract from the excellent performance in 2004/5. Even if we were much larger with a wider range of customers placing large volumes of business with us, such a situation would still have a significant detrimental effect on sales and earnings as it inevitably takes time to replace work, and re-build the order book. Further the work which is more readily available tends to be at lower margins and may not be of the optimum mix to fully utilise all of our available production facilities. In order to mitigate the effects of any recurrence of such a situation, Eurocut is seeking to enter into more Vendor Managed Inventory (VMI) partnerships, enabling instruments to be made for stock, based upon customers’ forward commitments, which provides the combined advantages of rapid product availability and short lead times for customers, as well as improved manufacturing efficiencies at Eurocut. We already supply DePuy (a subsidiary of Johnson and Johnson) with their new image-guided knee system instrumentation on such a VMI arrangement and we are actively working to expand this approach with other key customers in the coming year. Another feature of VMI agreements is that they do have a short-term impact on working capital as instruments are initially made for stock and invoiced to the customer as they are called off. We have a tremendous asset in our capability to design and manufacture innovative solutions for the orthopaedic market, but in the past this has always been on a subcontract basis for our customers. By developing concepts and technologies in which the intellectual property is owned by Eurocut, we not only give ourselves the opportunity to create new revenue streams but we also greatly add to the value of our business. I am pleased to reveal that during the past year we developed a colour coding process for all sized instruments, assisting surgeons by simplifying the selection of the appropriate instrument during a surgical procedure. This process enables the embedding of coloured polymers within these instruments to indicate instrument size, with the coloured polymer remaining intact throughout repeated cleaning and sterilisation of the instrument. Such colour coding is already attracting considerable interest from our customers and we are progressing regulatory approval with a major customer. Although sales are unlikely to be generated from this colour coding system before 2006/7, this will meet a considerable market need and represents a significant opportunity. This is a good example of an area in which Eurocut can generate a great deal of future sales, as orthopaedic companies continually seek innovative ideas and solutions to differentiate themselves from their competitors. The opportunity for growth at Eurocut is as good as ever and with recent investment in capital equipment we are confident of increasing sales significantly, without the need for any major additional capital expenditure. The company currently has a day shift and smaller night shift, which represents considerable scope for revenue growth by improving machine utilisation and increasing manufacturing capacity. The current order book is below the corresponding level of last year, primarily because of the delay in FDA approval on one of our major production items as announced in August. However, this situation will reverse in due course as this particular customer places more orders to replenish its stocks and as additional new business is won from elsewhere. The likelihood is that the year just started will now be a challenging period rather than one of continued growth which we would have experienced had this customer’s US regulatory approval not been delayed. Finally, I would like to thank our Eurocut employees for their hard work during what still has been an excellent year, despite the recent disappointment. Medical House Products Ltd Our Drug Delivery division made some major steps forward in the past year which will result in significant sales in 2006 and beyond. Revenues grew strongly to £440,000 (2004: £122,000) as a result of improved device sales coupled with development fees received from our customers and licensees. Although this growth is encouraging, our revenues are still relatively small in relation to the overall global drug delivery market in which we are operating. We fully anticipate that sales will move ahead strongly during the calendar year 2006 as we commence supplies of devices and consumables to three pharmaceutical companies with whom we have signed development, license and supply agreements. These include Serono and BioPartners, both of whom will be supplied with needle-free devices for injection of their respective human growth hormone (hGH) products. Additionally, in 2006 we will commence sales to our as-yet undisclosed pharmaceutical company partner for the ASI disposable autoinjector. At this point it is perhaps worth expanding on our future strategy for further growth, in order that shareholders can better appreciate the potential which exists in the global drug delivery market for this division. Firstly, there is the needle-free injector market which although attractive, is undoubtedly a difficult market in which to achieve rapid growth since it is represents a significant change to traditional, needle-based injections. It is also worth noting that only a relatively small number of injectable drugs are currently regarded suitable for needle-free injections, with the major candidates being insulin, human growth hormone and local anaesthetics. Despite the fact that fewer patients (typically children) receive human growth hormone than insulin, the hGH market is more developed than the market for needle-free injection of insulin. This relates to the fact that pharmaceutical companies such as Serono are prepared to spend more time and resource supporting needle-free injection of their hGH, which has a higher cost than insulin. The overall market for insulin is much bigger, but is dominated by companies which promote needle-based pen injectors on the basis of user-convenience, although needle-free systems have a number of major advantages in avoiding needlestick injury risks and need for sharps disposals, as well as helping patients to overcome anxieties associated with needles. Nevertheless we continue to pursue sales in the insulin market through a number of distributors, which are in the process of obtaining local regulatory approvals. Our own experience in the UK, however, indicates that even when the product is provided free-of-charge, a significant cultural shift is needed to generate a major movement away from needle-based systems. Consequently, although we will be assisting our distributors in every way we can it would be imprudent to expect too much too soon from them. The new SQ-PEN needle-free insulin injector has passed all relevant European regulatory approvals (including NHS Drug Tariff approval) and will be launched in the UK in December 2005, replacing the mhi-500 which will be withdrawn at the end of this calendar year. It is worth emphasising that the credibility engendered by these insulin delivery devices has probably surpassed their sales value and that this credibility has brought several major pharmaceutical companies to our Sheffield premises to further investigate our technologies and capabilities. From such discussions we have signed agreements for both needle-free and the ASI needle-based autoinjector delivery systems. Indeed, it is the ASI autoinjector, incorporating drugs packaged in prefilled syringes, which is undoubtedly attracting most current interest from potential licensees and partners from the pharmaceutical and biotechnology industries. The particular attractions of the ASI relate to:
Each year, more than one billion doses of drugs are packaged in prefilled syringes; in extremely competitive pharmaceutical markets, where companies are looking to create and maintain marketing advantages, the ASI autoinjector represents a very attractive proposition. It has always been my view that large pharmaceutical companies with blockbuster drugs (i.e. with sales in excess of $1bn) will always be cautious about partnering these drugs, and their high sales volumes, with companies which may have limited track records. This is one reason why the signing of license and supply deals with Serono and other pharmaceutical companies, along with NHS Drug Tariff approval for our mhi-500 injector, have been so important for the development and future prospects of this division. I now believe we have a demonstrable track record of achievement and delivery to support our products and I am confident that further deals will follow for the ASI and other variants of this particular technology. Additionally, it is worth pointing out that the current deal for the ASI, and much of the interest from elsewhere is for a disposable device but that we also have plans for a re-useable version which may have appeal for injection of insulin and other drugs. In summary, our Drug Delivery division continues to make excellent progress and I anticipate reporting further deals for our devices in the current year. Dividend Our policy of developing and bringing new products to market remains unchanged and the Board does not therefore recommend a dividend in the year to 30 June 2005 Colleagues The progress we continue to make is only possible due to the key skills and dedication of our staff who continually demonstrate their commitment to the business. On behalf of the Board I express sincere thanks to them all. As things currently stand, orthopaedic sales are likely to be below those achieved in the year just ended and consequently despite an improving Drug Delivery division I would expect the Group’s trading performance in the year just started to be below the level we are currently reporting. However, with the agreements in place for the Drug Delivery division progressing to plan, and with growth in the Orthopaedic division in-line with industry projections, 2006/7 should show a useful profit.
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