2004 Annual Report
`
`JANSSEN EXHIBIT 2138
`Mylan v. Janssen IPR2016-01332
`
`

`

`Corporate Synopsis
`
`Biocompatibles is the medical device company
`focused on the treatment of cancer,
`cardiovascular disease, and benign tumours.
`The Company’s proprietary biomedical polymer systems provide
`medical devices with enhanced biocompatibility and offer a platform
`for drug delivery.
`
`2004
`
`G Positive ruling in Isostent trial – jury finds in favour of the defendants
`G Positive ruling in Isostent trial – jury finds in favour of the defendants
`
`G First patient enrolled in Abbott’s Drug Eluting Stent Clinical Trial
`G First patient enrolled in Abbott’s Drug Eluting Stent Clinical Trial
`
`G Positive preliminary data from PRECISION clinical trials
`G Positive preliminary data from PRECISION clinical trials
`
`Contents
`
`1 Financial Summary
`2 Chairman’s Statement
`6 Operational Review
`10 Financial Review
`13 Principal Advisors & Management
`14 Board of Directors
`15 Directors’ Report
`18 Statement of Directors’ Responsibilities
`19 Independent Auditors’ Report to the Members
`20 Corporate Governance Report
`
`26 Directors’ Report on Remuneration
`32 Consolidated Profit and Loss Account
`33 Consolidated Balance Sheet
`34 Consolidated Cash Flow Statement
`35 Statement of Group Total Recognised Gains and Losses
`35 Reconciliation of Movements in Group Shareholders’ Funds
`36 Company Balance Sheet
`37 Notes to the Financial Statements
`55 Five Year Record
`56 Advisors and Investment Information
`
`

`

`Financial Summary
`
`G 2004 operating loss of £7.6m (2003: £7.8m).
`
`G Net funds at 31 December 2004 of £45.2m (2003: £55.1m).
`
`G £17.6m in escrow account, on which interest is accruing.
`
`G £4.9m release of disposal provisions (2003: £21.6m).
`
`G Turnover of £2.6m (2003: £2.1m).
`
`G Loss before tax of £0.6m (2003: profit £16.0m).
`
`G Net cash outflow before acquisitions and financing £6.5m (2003: £8.9m).
`
`2005
`
`G Acquisition of CellMed AG, announced on 4 March 2005, expands product pipeline
`G Acquisition of CellMed AG, announced on 4 March 2005, expands product pipeline
`
`G Further data shows positive tumour response in PRECISION trial
`G Further data shows positive tumour response in PRECISION trial.
`
`G Basis for a global, multi-centre randomised controlled trial – PRECISION IV
`G Basis for a global, multi-centre randomised controlled trial – PRECISION IV.
`
`“
`
`OUR VISION
`We intend to establish our Drug Eluting Bead technology
`as the Gold Standard treatment for Intermediate HCC and
`plan that our polymer systems will be recognised as the
`best in the field of Interventional Medicine
`
`”
`
`Annual Report 2004
`
`1
`
`

`

`Chairman’s Statement
`
`Biocompatibles made good progress in 2004.
`
`The Principal Investigators of the Company’s
`PRECISION clinical trial presented positive
`data at the CIRSE1 conference on 26 September
`2004; and Abbott announced the start of a
`clinical trial for the evaluation of its ZoMaxx™
`Drug Eluting Stent on 14 September 2004.
`
`The Company is delivering its plan.
`
`The Business
`
`Biocompatibles is a world leader in technology
`for “Combination Products” – medical products
`that combine the functionality of a medical
`device, like an orthopaedic hip or a coronary
`pacemaker, with the systemic therapeutic action
`of a drug, like a cytotoxic cancer drug or an
`anti-inflammatory steroid. The growth in the
`market for Drug Eluting coronary stents,
`from $1.3bn2 in 2003 to $3.9bn2 in 2004 was
`a significant factor in the growth of the wider
`market for Combination Products whose sales
`are expected to reach $10bn in 20093.
`
`We are focused on two markets within
`Combination Products – Drug Eluting Beads
`and Drug Eluting Stents. Both products are
`delivered by means of the same keyhole
`surgery imaging system, fluoroscopy, used by
`interventional radiologists and interventional
`cardiologists respectively.
`
`Our lead programme is the Drug Eluting Bead
`which we are developing without a partner at
`this stage. The Board believes that the value
`of this programme will grow with more clinical
`evidence of efficacy and that the Company has
`sufficient cash and management resources to
`continue to develop this programme in the
`near term. The Company’s first generation
`Bead product, Bead Block, is distributed in
`a marketing alliance with Terumo, a leading
`supplier of products for interventional medicine,
`head-quartered in Japan.
`
`We also have a programme in partnership
`with Abbott Laboratories in the market for
`Drug Eluting Stents, which is managed and
`financed by Abbott.
`
`The Technology
`
`Biocompatibles has a portfolio of granted
`patents around the two proprietary polymer
`systems – the PC Technology that formed the
`origin of the company and which is used by
`Abbott and Dideco, amongst other leading
`medical device companies; and the N-fil™
`technology licensed from the Biocure affiliate
`of Novartis’ Ciba Vision subsidiary and which
`is used in the Drug Eluting Bead programme.
`The patents provide a strong position over
`the use of these polymer systems in the target
`interventional products markets.
`
`“ Current evidence on uterine artery
`
`embolisation (UAE) suggests that it is safe
`enough for routine use and that there is
`symptomatic benefit in the majority
`
`of patients in the short term.”
`
`The National Institute for Clinical Excellence (NICE).
`
`1 Cardiovascular and Interventional Radiological Society of Europe
`2 Merrill Lynch: 18 January 2005: Boston Scientific Corp.: Updated Stent Model
`3 Reference: Navigant Consulting (2003) Combination Products: An Impact Analysis on the Convergence of Medical Devices and Therapeutic
`
`2
`
`

`

`Chairman’s Statement
`
`Continued
`
`A considerable part of Biocompatibles’
`intellectual property also resides in the expertise
`of its product development staff. For nearly a
`decade, Biocompatibles’ team of scientists,
`engineers, clinical, quality and regulatory as well
`as other support staff, have been developing drug
`eluting polymer systems. This experience is vital,
`given the complex interaction of sophisticated
`Combination Products with the many facets of
`human biology and disease. We also have a team
`which has considerable experience in dealing with
`the requirements of the agencies that regulate the
`marketing of our products.
`
`Strategic Milestones
`
`The Board is measuring the implementation
`of the Company’s plan with strategic milestones,
`adapted from previous years. These are as follows:
`
`2005 PRECISION establishes our Drug
`Eluting Bead as a safe and effective
`treatment for intermediate HCC.
`We establish the PRECISION IV
`Randomised Control Trial.
`
`2006 We intend to become the market
`leader in spherical embolic devices.
`
`2007 Abbott launch the Drug Eluting
`Stent in the United States.
`
`2008 PRECISION IV shows a survival
`benefit and our Drug Eluting Bead
`becomes the global gold standard
`treatment for Intermediate HCC.
`
`We intend to establish a similar strategic roadmap
`for CellMed which was acquired in March 2005
`as their programmes develop.
`
`The strategic milestones form the basis of the
`annual goals which are described in the
`Operational Review.
`
`Crystallising
`Value
`
`The Company’s
`principal objective
`is to maximise
`shareholder value and
`this might be achieved
`either by growing a product
`line to deliver significant and
`sustainable operating profitability,
`or by the sale or licence of a package
`of products and technologies. The latter
`approach was taken in 2002 with the sale
`of the cardiovascular stent and contact lens
`businesses, and the subsequent return to
`shareholders of £111m of capital, with a
`further £12m to come.
`
`Business Development
`
`In the 2004 Annual Report, the Chief Executive
`Officer commented that, with the Drug Eluting
`Bead in clinical trials, the Board had concluded
`that it was appropriate to narrow the focus of
`business development on the two key areas
`identified – medical device and pharmaceutical
`technologies to support the Company’s strategic
`focus on drug-device combinations; and small
`investments in sensibly valued medical device
`programmes that offered the prospect of high
`value growth without consuming excessive
`financial or managerial resource.
`
`We were pleased to identify a German medical
`technology company that met these criteria and
`we completed the acquisition of CellMed after
`the year-end. CellMed is described in more
`detail in the Operational Review.
`
`MOLECULAR STRUCTURE
`for Phosphorylcholine (PC)
`
`Technology central to the
`
`drug-eluting stent and
`
`licensing programmes
`
`Annual Report 2004
`
`3
`
`

`

`Chairman’s Statement
`
`Continued
`
`Corporate Governance
`
`Board Changes
`
`Ian Ardill’s appointment as Finance Director
`was reported in the 2004 Interim Report.
`
`Outlook
`
`The Company recognises that, in the absence of
`the traditional business metrics of profitability and
`cash generation, regular updates on the progress
`being made with new product programmes are
`important. The Company made seven such
`announcements in 2004. Expected newsflow in
`2005 includes tumour response data from the
`PRECISION trials, following the good safety data
`in 2004; data from Abbott’s clinical trial outside
`the United States as well as the progress of
`Abbott’s planned clinical programme within the
`United States; and progress towards the release
`of the escrow account, described in the Finance
`Director’s report.
`
`The Company’s programmes are focused on
`areas of unmet or poorly met clinical needs and
`the Board remains optimistic about the potential
`of the programmes to create shareholder value.
`
`As always, my fellow Directors and I would like
`to recognise the splendid contribution made by
`Biocompatibles’ employees. It is because of their
`talent and enthusiasm that the Company remains
`strong and positioned at the cutting edge of
`medical technology.
`
`Sir Richard Needham
`Chairman
`
`The Directors place a high priority on maintaining
`high standards of corporate governance and
`rigorous management systems, and the Company
`is now in compliance with the revised Combined
`Code on Corporate Governance. Biocompatibles’
`quality management system incorporates a
`number of the important provisions, including
`those relating to risk management and internal
`control. A fresh approach was adopted during
`2004 to the internal control risk review ensuring
`that, as the Company and its technology evolves,
`its approach to risk keeps pace at all times.
`
`option. Our patients have tolerated the
`
`“ The Drug Eluting Bead is a promising
`treatment well.”
`
`Dr Ronnie Poon, Associate Professor
`at the Centre for the Study of Liver Disease,
`University of Hong Kong.
`
`The Company’s continued accreditation to the
`ISO 9001 quality standard represents independent
`verification of the Company’s compliance with
`some of the key elements of corporate
`governance.
`
`Since 2001, the Company has also held both
`the FTSE4Good and Investor in People
`accreditations. The FTSE4Good status
`symbolises a commitment to high standards
`of corporate and social responsibility, and
`Investors in People recognises the Company’s
`dedication to employee development.
`
`4
`
`

`

`The Potential of Biocompatibles’ Technology
`
`Together, Biocompatibles’
`proprietary PC Technology
`and the N-fil technology cover
`a broad range of medical
`applications. Leading companies
`such as Abbott Laboratories and
`The Cooper Companies market
`PC products
`
`Fillers for aneurysms
`
`Contact lenses
`
`Coronary stents
`Drug-eluting stents
`Guidewires
`
`Ureteric stents
`Nephrostomy tubes
`
`Peripheral stents
`
`• Licensed/in market
`• Under development
`• Feasibility work
`complete
`
`Tympanostomy tubes
`
`Extracorporeal circuits
`(oxygenators, etc.)
`Blood filters
`
`Drug eluting beads
`for liver cancer
`
`Fillers for aneurysms
`
`Embolic beads for
`benign tumours
`such as uterine
`fibroids
`
`Annual Report 2004
`
`5
`
`

`

`Operational Review
`
`Biocompatibles had a good year in 2004. In the
`2003 Annual Report, the Company established
`ten items that were planned for announcement
`during the course of the year. These were
`largely accomplished.
`
`Commercial Product Lines:
`Bead Block and PC Licensing
`
`Sales of our Bead Block product, for the
`embolisation of tumours such as uterine fibroids
`and liver cancer, continued to grow through our
`global distribution partner, Terumo Corporation.
`Sales in the second half fell short of budget with
`sales in the United States growing at a slower rate
`than planned. Sales in Europe continued to grow
`steadily. Bead Block is now used by more than
`100 hospitals globally. In 2005 we expect sales
`growth to increase in the United States as a result
`of planned growth in the Terumo sales force and
`the anticipated publication of positive clinical
`data on Bead Block.
`
`We estimate the Bead Block market to be
`growing at 5-10% per annum – largely as a result
`of growth in the uterine fibroid embolisation
`procedure. There is not yet widespread adoption
`of the procedure as an alternative to hysterectomy,
`but the publicity about the procedure continues
`to be positive. A new set of guidelines was
`published by the UK’s National Institute for
`Clinical Excellence in 2004 and news reports
`on US Secretary of State Dr Condoleeza Rice’s
`fibroid embolisation treatment in the United
`States further raised the profile of the procedure.
`
`Bead Block manufacturing processes have
`been validated at Biocompatibles’ Farnham
`facility and product from Farnham is now
`available for both the European and United
`States markets. The focus for the Farnham
`process development team is manufacturing
`systems for the Drug Eluting Bead products.
`
`Based on independent market research,
`we estimate the world market for spherical
`embolisation products to be worth approximately
`$22m: $17m in the US where Bead Block has
`an estimated market share of less than 5%
`and $5m in Europe where Bead Block has an
`estimated market share of 20%. We expect
`continued market share growth for Bead
`Block in 2005 and expect additional
`growth following the approval of
`Drug Eluting Bead product which
`is expected in 2006.
`Cancer: Significant Unmet Needs
`
`Our PC Licensing activities had a satisfactory
`year – featuring increased demand from
`Dideco SpA for a PC TechnologyTM coating
`for cardio-pulmonary by-pass systems and
`income from feasibility studies exploring the
`use of PC coatings on a range of medical
`devices. The Company signed a letter of intent
`for a new PC Technology out-licence and
`studies required for the Licence agreement
`have continued into 2005.
`
`Survival Post Diagnosis (Years)
`
`Number of New Cases in 2002 (US)
`
` Liver
`
` Pancreas
`
` Lung
`
` Multiple myeloma
`
`Colorectal
`
` Breast
`
` Prostate
`
`0
`
`2
`
`4
`
`6
`
` Years
`
`Prostate
`
`Lung
`
`Breast
`
`Colorectal
`
`Pancreas
`
`Multiple Myeloma
`
`Liver
`
`0
`
`100000
`
`Cases
`
`200000
`
`6
`
`Source : Globocan 2002, Biocompatibles’ analysis.
`
`

`

`Operational Review
`
`Continued
`
`The Pipeline
`
`Implementation of the Drug Eluting Bead
`programme, which is initially focused on the
`treatment of primary liver cancer with the
`Doxorubicin Eluting Bead, continues to make
`good progress.
`
`On 26 September 2004, the Principal
`co-investigator of the PRECISION trial,
`Dr Ronnie Poon, Associate Professor at the
`Centre for the Study of Liver Disease at the
`University of Hong Kong, presented positive
`safety data – showing a statistically significant
`reduction in the level of circulating doxorubicin
`in the first 15 patients, low complication rates
`in the first 30 patients and a positive initial
`trend in tumour response.
`
`The benchmark for assessing the data from
`the PRECISION trial is another study conducted
`in Barcelona with a similar protocol, published
`in the Lancet in 2002, where a tumour response
`rate of 35% and a complication rate of 27.5%
`rate were recorded.
`
`During the course of 2004 the United States
`Food and Drug Administration (FDA) confirmed
`that the Drug Eluting Bead is a “Combination
`Product”, the same designation given to drug
`eluting stents. We are now in a dialogue with the
`FDA on their specific requirements for the design
`of the required clinical trial. We expect to initiate
`the PRECISION IV clinical trial before the end
`of 2005. It will be a multi-centre, randomised,
`controlled trial with endpoints that will include
`tumour response, survival and quality of life.
`
`The first generation of the Drug Eluting Bead,
`the DC Bead, has CE Mark approval and, after
`the year end, we initiated a limited European
`pre-marketing evaluation with our Bead Block
`marketing partner, Terumo, and a selection of
`key doctors. We intend to record results from
`100 cases in the pre-marketing evaluation and
`review them for insight into a number of key
`factors including physician technique, product
`utilisation, dosing, clinical indication and pricing.
`We have already recorded initial product
`
`evaluations in a
`variety of clinical
`indications
`including
`primary liver
`cancer and
`liver metastases
`from neuro-
`endocrine and
`colorectal cancers;
`and the feedback so
`far is encouraging. We
`intend to launch the second
`generation product, the
`PRECISION Bead, in 2006 and
`expect to have selected our distribution
`strategy at that time.
`
`Based on independent market research,
`we estimate that for the doxorubicin
`beads only and for the intermediate
`primary hepatocellular carcinoma (HCC)
`indication, the initial market opportunity in
`Europe and the target markets in Asia (China,
`Korea and Taiwan) to be worth approximately
`$70m, of which only 20% is conservatively
`estimated to be in Asia. With positive
`PRECISION IV data and a US approval,
`we estimate the market opportunity to be
`worth up to $400m. There is therefore scope
`for the market opportunity to be increased
`to the extent the Doxorubicin Eluting Bead
`can be used to treat other indications.
`
`PVA MOLECULAR
`STRUCTURE
`for N-fil, the basis of
`Bead Block and the
`Drug Eluting Bead
`
`Two further Drug Eluting Bead programmes
`are now in pre-clinical evaluation. A Bead eluting
`irinotecan will focus on the treatment of colorectal
`cancer and a Bead eluting ibuprofen will be
`targeted at pain relief. The most significant
`application for pain relief is likely to be in
`fibroid embolisation.
`
`Since the year end, Biocompatibles has
`acquired CellMed AG, a medical technology
`company developing medical device and
`drug delivery products. CellMed’s core
`biodegradable bead technology complements
`Biocompatibles’ existing permanent bead
`
`Annual Report 2004
`
`7
`
`

`

`Operational Review
`
`Continued
`
`2004 Goals
`
`In early 2004 we set ourselves goals for the year, most of
`
`which were achieved.
`
`Review of 2004 Goals
`
`G Completion of recruitment in the PRECISION Drug
`
`Eluting Bead trial and first data by year-end
`
`This goal was partly met – 46 out of the 60 patient
`
`target were recruited by year end. The goal of
`
`presentation of the first data was met by the
`
`presentations at the CIRSE conference.
`
`G Strengthening of the pipeline with two new programmes
`
`This goal was met - see Operational Review
`
`G Additional clinical trial for the Doxorubicin Eluting Bead
`
`This goal was met – see Operational Review
`
`G Pre-clinical development for a second Drug Eluting
`
`Bead product This goal was exceeded -
`
`see Operational Review
`
`G Bead Block used in its 100th hospital This goal was
`
`met- see Operational Review
`
`G Launch of Bead Block in Asia (excluding Japan)
`
`This goal was not met - product for Asia was shipped
`
`but there was limited field activity
`
`G Signing of a new PC Technology licence agreement
`
`This goal was not met –though a letter of intent for a
`
`potentially valuable licence was signed
`
`G Announcement of Drug Eluting Stent trial data from
`
`Medtronic This goal was met – see Operational Review
`
`G Announcement from Abbott on Drug Eluting Stent trials
`
`This goal was met – see Operational Review
`
`G Further developments in Isostent litigation
`
`This goal was met - see Operational Review
`
`8
`
`products, which are focused on cancer and
`benign tumours. The acquisition strengthens
`Biocompatibles’ product pipeline and extends
`the patent portfolio.
`
`Biocompatibles will prioritise three programmes:
`
`G The development of CellMed’s biodegradable
`drug-eluting embolisation bead technology to
`add to Biocompatibles’ drug-eluting bead
`programme.
`
`G The development of CellMed’s tissue
`transplant bead that is in a Phase 2a trial for
`the treatment of hypoparathyroidism.
`
`G The commercialisation of CellMed’s cosmetic
`implant bead.
`
`Biocompatibles continues to support the
`development of Abbott’s ZoMaxx Drug Eluting
`Stent programme, which uses our PC Technology
`coating in combination with Abbott’s proprietary
`drug, ABT578. In September 2004, Abbott
`announced the start of ZoMaxx I, a 400-patient
`prospective randomized clinical trial that will be
`conducted in more than 30 centres in Europe,
`Australia and New Zealand. The study compares
`Abbott's ZoMaxx drug eluting coronary stent to
`Boston Scientific's market leading Taxus Express
`drug eluting stent. Analysts estimate the world
`market for drug eluting stents to have reached
`$3.9bn in 2004.
`
`Abbott is reportedly expecting to register the
`ZoMaxx stent in Europe in 2006 and in 2007 in
`the US. Biocompatibles will receive a royalty on
`Abbott’s sales of drug eluting stents.
`
`Medtronic announced in May 2004 that its drug
`eluting stent, ENDEAVOR, was found to be safe
`and effective 12 months after implantation in a
`100-patient Phase I trial (ENDEAVOR I).
`Medtronic is now recruiting patients in three other
`trials with more than 2,500 patients and further
`results are expected during 2005. The Medtronic
`drug eluting stent also uses PC Technology and
`ABT578 and Biocompatibles will receive a small
`royalty on sales of the ENDEAVOR stent.
`
`

`

`Operational Review
`
`Continued
`
`Intellectual Property
`
`Biocompatibles’ patent portfolio continued to
`grow in 2004 with the filing of four new patent
`applications, in relation to some of our drug
`eluting embolic materials. The company obtained
`five US and four European patent grants during
`2004, and two US patents were granted early in
`2005. These patents are in relation to new stent
`coating technology.
`
`Biocompatibles is a world technology leader
`in the development of Combination Products -
`medical devices combined with an active
`pharmaceutical agent. In 2004 we made
`significant progress with the implementation of
`our business plan and we are optimistic about the
`progress we can make in 2005. Our Drug Eluting
`Bead programme, Abbott's Drug Eluting Stent
`programme, with which we are partnered, and the
`development of CellMed under Biocompatibles'
`ownership, all offer potential for improved
`products for patients and the doctors that treat
`them and improvement in the value of our
`shareholders' investment in Biocompatibles.
`
`Crispin Simon
`Chief Executive
`
`2005 Goals
`We have set ourselves the following goals for 2005 and will
`report on their progress through the course of the year.
`
`G Farnham: Final report from PRECISION I (Asia) (H2).
`
`G Farnham: First patient PRECISION IV (H2).
`
`G Farnham: 100 cases in the DC Bead pre-marketing
`programme (H2).
`
`G Farnham: Filing the CE Mark application for the
`PRECISION Bead (H2).
`
`G Farnham: Abbott’s start of US Drug Eluting stent
`clinical trial.
`
`G Farnham: Data from the ZoMaxx I clinical trial.
`
`G CellMed: Initiating a pre-clinical trial for a
`biodegradable drug eluting bead (H2).
`
`G CellMed: Completing recruitment in the
`hypoparathyroidism Phase 2a trial (H2).
`
`G CellMed: Securing CE Mark approval for the cosmetic
`implant bead (H2).
`
`G Group: Achieving the sales guidance of £3-4m.
`
`G Group: Delivering the year-end cash balance guidance
`of £35m.
`
`G Group: Delivering the Escrow release (H1) and the third
`return of capital (H2).
`
`Less Drug in the Bloodstream (1)
`
`Less Drug in the Bloodstream (2)
`
`Time (hrs)
`
`72
`
`9
`
`5.00
`
`4.50
`
`4.00
`
`3.50
`
`3.00
`
`2.50
`
`2.00
`
`1.50
`
`1.00
`
`0.50
`
`0.00
`
`Concentration (ng/ml)
`
`Log10 Doxorubicin
`
`IV
`Chemotherapy
`
`Conventional
`TACE*
`
`PRECISION
`TACE
`
`0
`
`25
`
`50
`
`TACE* - Doxorubicin delivered without lipiodol1
`PRECISION TACE - Doxorubicin delivered via DC BeadTM
`
`
`* Transarterial Chemoembolisation
`1Johnson et al.
`
`Annual Report 2004
`
`

`

`Financial Review
`
`Profit and Loss Account
`
`The loss before tax for the year ended
`31 December 2004 was £0.6m, including £4.9m
`of exceptional profit resulting from the release
`of provisions related to the 2002 disposals of the
`Cardiovascular, Eyecare and Urology divisions
`(2003: profit of £16.0m, which included £21.6m
`of profit on disposals). As a result of the provision
`release, the total profit on sale of these divisions
`is now £76.0m.
`
`Turnover increased by 23% to £2.6m in 2004
`(2003: £2.1m) and primarily comprised
`revenues from Bead Block and PC licensing.
`Sales growth in 2005 is expected to continue
`as a result of the increase in the size of the
`US sales force of Terumo, Biocompatibles’
`partner for Bead Block, which occurred in the
`second half of 2004.
`
`Operating expenses, before intangible
`amortization and exceptional items, increased
`by 5%, from £8.0m in 2003 to £8.4m in 2004.
`Selling, marketing and distribution costs
`increased by 9% to £1.2m (2003: £1.1m) as
`a result of the continuing support for the Bead
`Block product and PC Technology out-licensing
`programme. Research and development costs
`increased by 15% to £5.3m (2003: £4.6m) due
`to the investment made in the Bead programmes,
`including pre-clinical and clinical trials and the
`set up of the Bead Block manufacturing site in
`Farnham. These increases were partly funded by
`reducing general and administrative costs by
`
`17% to £1.9m (2003: £2.3m), as a result of the
`continuing focus on cost reduction.
`
`Overall, the operating loss decreased from £7.8m
`in 2003 to £7.6m.
`
`Following the review of the provisions at the year
`end, the Directors decided that a further provision
`release of £4.9m was appropriate. The Board
`believes that the remaining disposal provision
`balance of £4.1m represents a prudent view of
`the liabilities associated with the remaining
`warranties and indemnities given as part of the
`2002 disposals of the Cardiovascular, Eyecare
`and Urology divisions.
`
`The Group has recognised Research and
`Development tax credits of £0.5m which are
`receivable from the Inland Revenue. This is as
`a result of the Group being classed as a small
`or medium enterprise (SME) in 2004.
`
`At the year-end, the Group had 74 employees
`(2003: 69) and the net increase reflects the
`investment in the Bead programmes being partly
`offset by a rationalisation of roles in the general
`and administrative functions.
`
`Isostent Lawsuit and Return of Capital
`
`In the civil trial in the Santa Clara County
`Superior Court for the state of California in
`relation to the claim by Isostent LLC (“Isostent”)
`against the defendants, LPL Systems and
`Divysio Solutions ULC Inc., the jury found in
`favour of the defendants. Isostent has filed several
`
`Continuing operating expenses
`
`Analysis of year end share price
`
`110.0
`
`18.6
`
`1.0
`
`250
`
`200
`
`150
`
`100
`
`pence per share
`
`1,879
`
`1,188
`
`2,332
`
`1,091
`
`10,000
`
`8,000
`
`6,000
`
`3,030
`
`4,000
`
`£000
`
`2,000
`
`4,336
`
`4,550
`
`5,325
`
`50
`
`94.8
`
`123.9
`
`123.5
`
`0
`
`2002
`
`2003
`
`2004
`
`0
`
`2002 - 95.8p
`
`2003- 142.5p"
`
`2004 - 233.5p
`
`G&A
`
`SMAD
`
`R&D
`
`Net asset value per share
`
`Technology premium per share
`
`10
`
`

`

`Financial Review
`
`Continued
`
`post trial motions, including a request for a new
`trial and equitable relief for unjust enrichment, but
`all motions have been denied. Isostent has since
`exercised its automatic right of appeal to the
`intermediate appellate court based in San Jose.
`The appeal process is expected to take six months
`to a year. If successful, it is likely to result in a
`new trial. If not, Isostent may appeal to the
`California Supreme Court.
`
`If the Isostent litigation has not been concluded
`by 8 May 2005, the Company will seek the
`release of the £17.6m held in an escrow account,
`in relation to a number of matters including the
`Isostent indemnity, under the terms of the
`agreement between the Company and Abbott
`for the sale of the Company’s Cardiovascular Stent
`Business to Abbott, subject to the retention of an
`amount to cover any bona fide claims by Abbott
`under the Isostent indemnity.
`
`The release of the monies held in the escrow
`account is a condition for the third of three
`capital repayments to be made to Biocompatibles'
`shareholders. The first payment of £100m was
`made in June 2002. The second payment of
`£11.3m was made in October 2003. The size
`of the third payment is expected to be in the
`region of £12m or approximately 29p/share.
`Once the escrow is released, the Company will
`seek High Court approval for the return of
`capital and expects to make the payment in the
`third quarter of 2005.
`
`Cash Flow
`
`The net cash outflow from operating activities
`was £8.5m (2003: £10.3m). Cash outflow
`relating to acquisitions and disposals (Abbott
`R&D services agreement and the settlement
`of warranties and indemnities) was £4.8m
`(2003: £4.1m). Capital expenditure, net of
`disposals, was £0.1m (2003: £1.2m). This was
`offset by net interest received of £2.1m
`(2003: £2.6m) and proceeds from the issue of
`share capital for the exercise of employee share
`options of £1.2m (2003: £0.5m). No return of
`capital was made in 2004 (2003: £11.3m).
`
`Balance Sheet
`
`Net assets at 31 December 2004 were £48.5m
`(2003: £47.5m as restated for the adoption of
`UITF 38). These included net funds of £45.2m
`(2003: £55.1m) and debtors including funds
`of £17.6m held in escrow. The total amount
`remaining due to Abbott in relation to the R&D
`services agreement was £2.6m (2003: £7.1m).
`The creditor relating to the royalty prepaid by
`Abbott decreased from £5.6m to £5.3m in the
`year due to the recognition of income arising
`from Abbott’s sales of its Dexamet stent.
`
`At the year end, net assets represented
`123.5 pence per share. The growth in the
`share price over the year led to a technology
`premium of 110.0 pence per share.
`
`CellMed AG Acquisition
`
`On 4 March 2005 the Company announced that
`it had conditionally agreed to acquire CellMed
`AG and confirmed that it had completed the
`acquisition on 7 March. The Company has
`acquired 97 per cent of the CellMed shares and
`has the right to acquire the remaining 3 per cent.
`CellMed is a medical technology company
`developing medical device and drug delivery
`products and is both located and incorporated
`in Germany. CellMed employs 15 people and
`in the year ended 31 December 2004 recorded
`a net loss before taxation of £0.8m. Its net
`liabilities as at 31 December 2004 were £0.1m.
`The acquisition of CellMed brings new product
`programmes to the Group and will contribute
`modest revenues to the Group in 2005.
`
`The consideration is payable in three stages:
`initial consideration payable on closing, deferred
`consideration payable in 2006 and profit-sharing
`payments payable on the receipt of net cash
`income from CellMed’s cell technology up to
`and including 2010. The initial consideration
`paid was £3.4m (£2.0m in cash and £1.4m by
`issue of 573,276 new ordinary shares). The
`deferred consideration is £3.4m and is payable in
`two instalments: £0.8m by the issue of 358,295
`new ordinary shares on 30 June 2006 and £2.6m
`
`Annual Report 2004
`
`11
`
`

`

`Financial Review
`
`Continued
`
`“ We are pleased to be joining Biocompatibles. The company has
`product portfolio.”
`
`complementary technology and relevant skills to ours – and an
`excellent track record of generating shareholder value from its
`
`Dr Peter Geigle, Chief Executive of CellMed
`
`by the issue of 1,074,890 new ordinary shares on
`31 December 2006. The profit-sharing payments
`are to be made annually at the rate of 10 per cent
`of the net cash income received by the group
`from the sales and licensing of products based on
`CellMed’s cell technology, up to a maximum of
`£8.4m, payable as to 30 per cent in cash and
`70 per cent by the issue of up to 2,418,823 new
`ordinary shares. The maximum consideration
`payable for CellMed is £15.2m, of which
`approximately 30 per cent will be satisfied in
`cash and 70 per cent by the issue of shares.
`
`The Company has the option to sell CellMed
`back to the vendors for nominal value on
`30 June 2006 or on 31 December 2006 in which
`case the obligations to make future payments of
`deferred consideration or profit sharing payments
`would cease.
`
`2005 Cash Expectation
`
`The Group’s expectation for 2005 cash outflow
`is summarised in the following table:
`
`Acquisition
`BII CellMed
`Costs
`£m
`£m
`£m
`
`Total
`£m
`
`Operating cash expenditure
`
`Non operating cash flow
`
`Abott R&D expenditure
`
`(8)
`
`(2)
`
`(3)
`
`(13)
`
`Escrow release including accrued interest 20
`
`Return of capital
`
`(12)
`
`(5)
`
`(2)
`
`–
`
`–
`
`(2)
`
`–
`
`–
`
`(2)
`
`–
`
`(3)
`
`–
`
`(3)
`
`–
`
`–
`
`(3)
`
`(10)
`
`(5)
`
`(3)
`
`(18)
`
`20
`
`(12)
`
`(10)
`
`12
`
`The closing net funds position is expected to
`be around £27m prior to the anticipated escrow
`release and subsequent return of capital, or £35m
`following these events.
`
`Foreign Currency
`
`The Group has a policy of monitoring exchange
`rate movements in the main currencies in which it