Vectura Group plc

Preliminary Results

Strong business performance in a transformational year with positive outlook for 2017

Chippenham, UK - 21 March 2017: Vectura Group plc (LSE: VEC) ("Vectura", "the Group", "the Company"), an industry-leading device and formulation business for inhaled airways products, today announces its preliminary results for the nine-month period ended 31 December 2016. 

Financial Highlights

Strong financial results from a broadened portfolio of on-market products. Excluding milestones and other non-recurring sources of revenue, nine-month proforma^[4] revenue growth of 26.2% and proforma^[4] EBITDA^[2] growth of 57.4% highlights the robust underlying performance of the business.

·      Revenue up 76.0% to £126.5m (2015/16: £72.0m) 

o  Continued momentum from seven recently launched inhaled products with in-market net sales for the year to 31 December 2016 growing 81% to over $2.0bn[1]

o  Reported performance also benefits from the addition of Skyepharma following the merger on 10 June 2016

·      EBITDA growth of 47.0% to £34.1m reflecting robust underlying performance

·      Revenue from recurring^[1] sources now accounts for 80.1% of total revenue (2015/16: 59.6%)

·      Loss before taxation of £40.1m compared to £1.9m in the prior period due to a higher amortisation charge of £64.0m (2015/16: £18.8m) and exceptional items of £9.4m (2015/16: £5.6m) driven by the merger

·      Year-end cash of £92.5m with strong operating inflows of £28.2m offset by merger related outflows

Operational highlights

Significant growth across marketed products

·      Strong flutiform^® demand and product supply volumes in calendar year 2016 at record levels with good progress on capacity expansion initiatives

·      Net sales of Ultibro^® Breezhaler^® grew 37% over the period, benefiting from FLAME data

Developments across our novel partnered pipeline

·      Validation of FOX^® smart nebuliser device

o  First EU regulatory progress enabling commercialisation (VR876, partnered with Bayer) 

o  Ablynx exercised option for continued development of their RSV programme ALX-0171 (VR465) in hospitalised infants triggering a milestone for the Group of €1.5m. Phase IIb study initiated with results expected in H2 2018

·      Phase I completed for the inhaled biologic in co-development with UCB (VR942) with a Phase II trial to start in H2 2017

Significant progress across our generics partnered pipeline

·      ANDA filing by Hikma for a generic Advair Diskus^®[2] (VR315 US) accepted by the FDA triggering a $10m
 
milestone for Vectura. GDUFA action date of 10 May 2017 confirmed

·      Pipeline review completed with development initiating on 3-5 additional generics programmes

Continued development of our wholly-owned pipeline

·      Phase III study for VR475 EU (treatment of severe asthma in adults) progressing well with results expected mid-2018

·      IND filing accepted by FDA for VR647 US (nebulised budesonide for paediatric asthma)

o  Phase I study in adults to initiate in H1 2017

o  Phase II study in children planned for H2 2017

Business development leveraging existing partnerships and growing pipeline 

·      Third US licensing agreement signed with Hikma for VR730 (DPI generic salmeterol)

·      Second licensing agreement signed with Mundipharma for VR2076 (pMDI triple combination)

·      US commercial rights for Seebri™ Neohaler^® and Utibron™ Neohaler^® licensed by Novartis to Sunovion and launch expected in 2017

Merger integration and synergy realisation making excellent progress

·      Pipeline review completed

·      New organisational structure in place

·      Annual synergy savings of at least £10 million by 2018

James Ward-Lilley, Chief Executive Officer of Vectura:

"These results reflect the strong organic performance for Vectura in 2016 both before and after the June 2016 merger with Skyepharma which has transformed the outlook for the business.

"As well as strong financial performance, we have made excellent progress on both partnered and wholly owned pipeline projects. In addition, we have executed a number of valuable business development agreements. The merger integration is well advanced and we remain confident of delivering the committed synergy targets as a minimum. The new organisational structure is in place, the portfolio review completed and promising new pipeline projects commenced.

"With its proven formulation, device and development capabilities Vectura is well-positioned to accelerate shareholder value creation, capitalising on changes in the market dynamics of the inhaled respiratory market. The Group has a strong outlook both as a partner for generic and novel development programmes and the opportunity to capture an increasing share of investment value through the future commercialisation of its wholly-owned specialist targeted assets.

"We look forward to 2017 with confidence given the strength of our capabilities and established in-market performance with further newsflow on our generic and novel programmes alongside further additional business development partnering."

Analyst briefing

James Ward-Lilley, Chief Executive Officer, and Andrew Derodra, Chief Financial Officer, will present the Preliminary Results and provide an update on the Group's performance for the nine-month period ended 31 December 2016 at a briefing for analysts at 9.30am to 10.30am GMT on 21 March 2017. The presentation will be held in the Guildhall Room, 85 Gresham Street, London, EC2R 7HE. There will be a simultaneous live conference call. Dial-in details are:

A live webcast of the meeting, with the presentation slides including pro-forma financial information, will be available on Vectura's website: http://www.vectura.com/investors/presentations-webcasts/  

- Ends -

Enquiries

About Vectura

Vectura, a FTSE250 company listed on the London Stock Exchange (LSE: VEC), is an industry-leading device and formulation business for inhaled airways products. With our extensive range of technologies, integrated capabilities and collaborations, we are a leader in the development of inhalation products, increasing our ability to help patients suffering from respiratory diseases. In June 2016 Vectura completed a merger with Skyepharma PLC.

Vectura has seven inhaled, four non-inhaled and ten oral products marketed by partners with growing global royalty streams, and a portfolio of drugs in clinical development, a number of which have licence agreements with several global pharmaceutical and biotechnology companies including Hikma, Novartis, Sandoz, Mundipharma, Kyorin, Baxter, GSK, UCB, Ablynx, Grifols, Bayer, Chiesi, Almirall, Janssen, and Tianjin KingYork.

For further information, please visit Vectura's website at www.vectura.com.

Forward-looking statements

This press release contains forward-looking statements, including statements about the discovery, development and commercialisation of products. Various risks may cause Vectura's actual results to differ materially from those expressed or implied by the forward-looking statements, including: adverse results in clinical development programmes; failure to obtain patent protection for inventions; commercial limitations imposed by patents owned or controlled by third parties; dependence upon strategic alliance partners to develop and commercialise products and services; difficulties or delays in obtaining regulatory approvals to market products and services resulting from development efforts; the requirement for substantial funding to conduct research and development and to expand commercialisation activities; and product initiatives by competitors. As a result of these factors, prospective investors are cautioned not to rely on any forward-looking statements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Operational Review

Robust performance of in-market sales of seven recently-launched inhalation products

Vectura's portfolio of revenue-generating on-market inhalation products partnered with Novartis and Sandoz has been strengthened by the merger and the Group now earns revenues from seven key inhaled products (flutiform^®, Seebri^®/Ultibro^® Breezhaler^®, AirFluSal^® Forspiro^® and the three GSK Ellipta^® products).

During the nine-months ended 31 December 2016, total revenues from these seven products generated 61.8% of the Group's total revenues (FY 2015/16: 60.4%). All of these products were launched within the last five years and together generated in excess of $2.0bn of in-market net sales[3] in the 12 months to 31 December 2016 (12 months to 31 

December 2015: $1.1 billion in-market net sales³). 

flutiform^® 

flutiform^® (fluticasone/formoterol) is a fixed dose combination of an anti-inflammatory (ICS) and a bronchodilator (LABA) in a pMDI device. Vectura earns revenue from product supply in addition to royalties on in-market net sales and is eligible for up to €30.0 million in future sales milestones from Mundipharma. 

flutiform^® continues to benefit from strong demand and in-market net sales^[4] for the nine-month period ended 31
 
December 2016 were 29% ahead of the same period in 2015 at €147.0 million (Q2/Q3/Q4 2015: €113.8 million) generating total recurring product supply and royalty revenue for the Group of £45.6 million during the period. The product is now launched in 34 countries, approved in a further nine and has applications for marketing authorisations under review in 15 other countries.

* Figures shown at actual exchange rates applicable for the relevant quarter.

Volumes within the flutiform^® supply chain were at record levels during the calendar year and the Group continues to make good progress with the previously announced initiatives to expand capacity. In particular, post period, the second manufacturing vessel at the Sanofi facility in Holmes Chapel is now fully commissioned and producing commercial batches for both Mundipharma and Kyorin. Further initiatives to support capacity within previously-guided capital investment levels are planned, including potential investment relating to a second manufacturing line to diversify the supply chain for this important product. In parallel, the Group continues to explore potential initiatives and efficiency measures to manage increases in capacity with a view to minimising or deferring capital outlay without impacting the long-term outlook for flutiform^®.

flutiform^® Mundipharma  (EU & ROW - excluding North America and Japan)

flutiform^® continues to grow strongly based on the approved asthma indication and this indication underpins our expectations for future growth from the product. Therefore whilst disappointing, the news that Mundipharma's European Phase III trial of flutiform^® in COPD did not meet the primary endpoint of annualised exacerbations, it is not expected to have a material impact on our long-term outlook of this product. Mundipharma will publish the results of this study during 2017. The COPD study in China did successfully achieve its primary endpoints.  Whilst supportive of the general safety and efficacy of the product, this trial currently has no wider roll-out implications for flutiform^® in COPD and the current focus for China is the asthma indication. Further details of Mundipharma's planned asthma study in China in H2 2017 are expected once approval of the study protocol is obtained from the Scientific Committee of the Chinese Food and Drug Administration ("CFDA").    

Further newsflow is anticipated in respect of flutiform^® during 2017. Notably, an update on the on-going regulatory review of Mundipharma's application for marketing authorisation in Europe for the breath-actuated version of flutiform^® (K-Haler^®) and continued roll-out into Asia Pacific and Latin America.

During 2016, the value of the European ICS/LABA market declined by 7%. In this challenging market, flutiform^® grew 17% in value[5] and market share has increased to 3.3% at Q4 2016[6] compared to 2.9% at Q4 2015[7]. In the Rest of World (excluding Japan), the value of the total ICS/LABA market was flat and flutiform^® in this region grew by 54% in value[8]. 

flutiform^® Kyorin (Japan)

As a key element of its new drugs group, Kyorin continues to drive flutiform^® success in the growing Japanese ICS/LABA market where total value in 2016 increased 16% and flutiform^® increased its value market share from 8% at Q4 2015 to 10% at Q4 2016[9].

Ultibro^® Breezhaler^® and Seebri^® Breezhaler^® (Novartis (EU & ROW))

Ultibro^® Breezhaler^® and Seebri^® Breezhaler^®are now established and substantial global products. In January 2017, Novartis reported 2016 combined net sales in excess of $0.5 billion for these products triggering a sales milestone of $5.0 million to Vectura in addition to combined royalties of £12.2 million recorded for the nine-month period (2015/16: £10.9 million).

Ultibro^® Breezhaler^® (indacaterol/glycopyrronium bromide, QVA149) a first-in-class once-daily fixed dose inhaled dual bronchodilator (LAMA/LABA) indicated as a maintenance bronchodilator treatment to relieve the symptoms of adult patients with COPD.  

Ultibro^® has continued to benefit from strong data from the FLAME study as well as the results of the CRYSTAL study which showed improved lung function and COPD symptoms after direct switch from previous treatment. The product is now approved in over 90 countries including Japan and countries in the EU, and in January Novartis reported net sales of $285 million during the nine-month period, an increase of 37.0% compared to the same period in the prior calendar year. 

Following the major revisions announced in November 2016, the GOLD treatment strategy now support the use of bronchodilation as the foundation treatment for COPD patients prior to the use of inhaled steroid containing therapies, as supported by the Novartis FLAME study evidence. Over time, these changes are expected to translate to healthcare professionals moving away from the historical reliance on inhaled corticosteroid combinations for the treatment of COPD. Ultibro^® Breezhaler^® is currently the only steroid-free treatment to offer prescribers clinically proven superiority over the most prescribed ICS/LABA combination[10] in preventing COPD exacerbations[11].

Seebri^® Breezhaler^® (glycopyrronium bromide, NVA237) is a once-daily fixed dose inhaled bronchodilator (LAMA) indicated as a maintenance bronchodilator treatment to relieve the symptoms of adult patients with COPD. 

In January, Novartis reported net sales of $114 million during the nine-month period. As expected this level of sales was consistent with the same period in the prior calendar year as Novartis has continued to focus resource on Ultibro^® Breezhaler^® following the positive FLAME results. The product is now approved for use in over 90 countries including Japan and countries in the EU.

Utibron™ Neohaler^® and Seebri™ Neohaler^® (Novartis / Sunovion (US))

As announced in December 2016, Novartis has licensed the US commercial rights to three of their COPD treatments, including Seebri^™ Neohaler^® and Utibron^™ Neohaler^®, to Sunovion, a partner with an established US respiratory focus and expertise in COPD. With its established US respiratory focus and commercialisation expertise, Sunovion is expected to be a strong partner, providing doctors new treatment options for their COPD patients. The Group expects Sunovion to commercialise the products in 2017.  The Group anticipates US sales will generate a further contribution to the substantial and growing recurring royalty stream it receives from Novartis. Novartis will manufacture the medicines for Sunovion. 

Utibron™ Neohaler^® (indacaterol/glycopyrrolate) 27.5/15.6 mcg is a twice-daily fixed dose combination dual bronchodilator (LAMA/LABA). In the US, Utibron™ Neohaler^® is a prescription medicine approved as a long-term maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema[12]. It is not approved for the 

relief of acute bronchospasm or the treatment of asthma. 

Utibron™ Neohaler^® was approved in October 2015 in the US with a dose of indacaterol/glycopyrrolate 27.5/15.6 mcg administered twice-daily, which is different from the product marketed outside the US.

Utibron™ Neohaler^® demonstrated strong efficacy and safety as well as clinically meaningful improvements in health-related quality of life for patients with COPD in clinical studies. Utibron™ Neohaler^® also improved overall quality of life, reduced COPD rescue medication use and improved breathlessness.

Seebri™ Neohaler^®

Seebri^TM Neohaler^® (glycopyrrolate) 15.6 mcg is a twice-daily LAMA bronchodilator. In the US, Seebri^TM Neohaler^® is a prescription medicine approved as a long-term maintenance treatment of airflow obstruction in patients with COPD, including chronic bronchitis and/or emphysema[13]. It is not approved for the treatment of asthma.

Ultibro^®, Seebri^®, Breezhaler^®, Neohaler^®, are registered trademarks of Novartis AG. Seebri™ and Utibron™ are trademarks of Novartis AG.

GSK Ellipta^® products

GSK has reported continued strong performance of their Ellipta^® products (Breo^®/Relvar^® Ellipta^®, Anoro^® Ellipta^® and Incruse^® Ellipta^®) with total net sales in the nine-month period up 159.8% to £769 million compared to £296 million in the comparative period. 

During the period under review, Vectura has earned royalties under two separate agreements with GSK.

Legacy Skyepharma agreement with GSK

Vectura receives royalties on sales of these products under the legacy Skyepharma agreement with GSK, subject to a £9 million calendar year cap and this cap was reached in 2016, a year earlier than previously guided due to the growth of the products, with Vectura recording royalties of £5.4m in respect of this agreement in the nine-month period to 31 December 2016.

Legacy Vectura agreement with GSK

Until the end of July 2016, the Group also earned royalties from GSK under a legacy Vectura agreement, capped at £13 million in any calendar year. From April to July 2016, royalties earned under this contract totalled £7.3 million (2015/16: £13.0 million). During the period from 1 January to 31 July 2016 the Group received substantially all of the royalties that would have been due under the calendar year cap of £13 million. 

In July, Vectura announced that it had initiated legal proceedings against GSK in the US following GSK's decision not to extend the term of its legacy agreement with Vectura beyond 31 July 2016, by licensing additional patent families. The court has scheduled a jury trial commencing on 17 December 2018. Whilst Vectura intends to enforce its patent rights to the fullest extent it remains open to finding a mutually acceptable solution in order to avoid costs and potential uncertainty over royalties that were, up until July 2016, subject to a cap of £13 million per calendar year. 

Until the outcome of the litigation is known, or a compromise is reached, the Group is not reflecting the receipt of further income from GSK in relation to the patent rights covered by the expired 2010 option-to license patent agreement. 

Anoro^® Ellipta^®, Relvar^® Ellipta^®/Breo^® Ellipta^® and Incruse^® Ellipta^® are registered trademarks of GSK

AirFluSal^® Forspiro^® (Sandoz) (fluticasone propionate, salmeterol) an inhaled anti-inflammatory (ICS) and bronchodilator (LABA) combination delivered using a Vectura proprietary dry powder inhaler ("DPI") for the treatment of asthma and/or COPD. This product has been launched to date in approximately 30 countries, in Europe and elsewhere. Vectura reported royalties and device sales of £3.5 million for the 9-month period (2015/16: £4.9 million).

In August 2016, Vectura confirmed the announcement made by Sandoz that new data published in a leading medical journal showed for the first time that the probability of a patient persisting with AirFluSal^® Forspiro^® after one year is double that with Seretide^® Diskus^®[14]. All patients were first time users of salmeterol/fluticasone propionate and persistence to
 
treatment was analysed for a 12-month period.

AirFluSal^® and Forspiro^® are registered trademarks of Novartis AG.  Seretide^® Diskus^® are trademarks owned by Glaxo Group Ltd. Seretide^® Diskus^® is marketed in Germany under the trademarks Viani^®.

Important developments across our novel partnered pipeline validating handheld smart nebuliser technology and industry-leading innovation

Our broad pipeline includes a number of novel partnered assets ranging from pre-clinical programmes to pre-launch assets. Typical novel molecule and/or device partnering arrangements provide Vectura with development services revenues, milestones and low single digit royalties on high-value opportunities balancing financial exposure to programmes with higher molecule risk.

VR876 (EU & ROW ex-US), Vectura's adapted handheld smart nebuliser FOX^® technology (branded as Breelib^TM) used by the Group's partner, Bayer, as an alternative delivery method for their on-market product Ventavis (iloprost solution) for the treatment of pulmonary arterial hypertension.

In December 2016, Bayer confirmed completion of the EU regulatory procedure to allow an alternative device for their on-market product Ventavis^® (iloprost solution) using an adapted version of Vectura's handheld FOX^® smart nebuliser device, branded by Bayer as the Breelib^TM device. Following launch, patients will be able to initiate Ventavis treatment with this device or switch from an alternative device. We expect to confirm the launch of this product during H1 2017.

This regulatory action was particularly significant as it represents the first approval and progression to commercialisation of the FOX^® smart nebuliser device. Although the financial value for the Group from this programme will be limited, given the small patient population, this external platform validation coincides with sustained interest in multiple potential collaborations seeking to leverage the FOX^® unique drug device technology. 

Ventavis^® is a registered trademark of Bayer AG. Breelib^TM is a trademark of Bayer AG. 

VR465 (Global) (inhaled biologic), Vectura's adapted handheld FOX^® smart nebuliser device used to deliver Ablynx's first-in-class, wholly-owned inhaled anti-RSV Nanobody^®, ALX-0171, for the treatment of respiratory syncytial virus ("RSV") in infants. RSV is the leading cause of infant hospitalisation and the primary viral cause of infant death[15]. Infant RSV
 
remains an area of high unmet medical need and there are currently no drugs specifically approved for treatment of RSV infections.

ALX-0171 is a potential breakthrough treatment option for RSV infections in vulnerable patient populations and its inhaled method of delivery offers a major platform advantage. The FOX^® device used in this programme has been adapted for use with neonates and infants, demonstrating the utility of the Vectura smart nebuliser technology.

Following positive topline results for their RSV programme, ALX-0171 (VR465), in hospitalised infants Ablynx confirmed their decision to exercise a commercial license option over Vectura's handheld FOX^® technology for continued development of this programme, triggering a milestone for the Group of €1.5million. 

Post period end in January 2017, Ablynx confirmed the initiation of a global Phase IIb dose efficacy study, RESPIRE, in 180 infants hospitalised as a result of a RSV infection. Topline results from this study are expected in the second half of 2018.

VR942 (Global) (inhaled biologic), a novel dry powder biologic for uncontrolled asthma in co-development with UCB and utilising Vectura's large molecule formulation expertise and delivered using one of Vectura's proprietary DPI devices. This programme represents an exciting opportunity with biologics currently estimated to be worth $1.2 billion in G7 markets (Omalizumab) and expected to increase to $3-5 billion[16] by 2024. Currently there are over 6 million patients with severe
 
persistent asthma[17] in major markets, of which 20% are uncontrolled[18]. This programme, which has the potential to be
 
the first inhaled delivery of a biologic drug for uncontrolled asthma, has the opportunity to displace parenteral biologics with novel medicine that offers similar or better efficacy and a more convenient delivery route.

The programme continued to make good progress during the period and in June the Group announced the successful completion of the Phase I clinical study. The Phase I study showed that the study met its primary objective of evaluating the safety and tolerability of once daily VR942 single or repeat doses, administered as a dry powder via inhalation, in healthy volunteers and mild asthmatics respectively. Presentation of the detailed study outcomes is targeted for the American Thoracic Society on 22 May 2017. However we believe that the generation of data indicating a positive impact on biomarkers of inflammation represents an exciting prospect for this antibody specifically. Additionally, the successful application of our large molecule formulation technology provides a potential platform for other biologic developments in the future.

Preparation is underway to enable Phase II clinical trial initiation in H2 2017. 

QVM149 (EU & ROW) (indacaterol/glycopyrronium bromide/mometasone furoate) is a once-daily fixed dose inhaled dual bronchodilator (LABA/LAMA) and anti-inflammatory (ICS) triple therapy for asthma from Novartis.  This Phase III asset has first-to-market potential in the EU as an asthma treatment delivered in a DPI device.

QVM149 is an important programme for the Group with fixed combination triple therapy treatment expected to develop strongly and likely to take significant share from existing use of multiple "free combination" treatments as well as from the large volume of ICS/LABA combination treatment currently used.

Novartis has continued to make good progress with recruitment into their Phase III study and the study read-out is planned for 2018 with a regulatory submission in 2019 and has the potential to be first-to-market triple DPI combination product, in the asthma indication, in Europe.

VR2076 (Global), a fixed dose inhaled dual bronchodilator (LAMA/LABA) and anti-inflammatory (ICS) for asthma partnered with Mundipharma delivered in a pMDI device is a natural extension of flutiform^®. 

In December 2016, Mundipharma and an associated independent US company confirmed that they wished to exercise an option over Vectura technology to develop and commercialise VR2076, initially targeting the asthma indication thus extending the Group's exposure to this important therapy area. The exercise of this option triggered a €1.5m payment to Vectura with further potential milestones of up to €46.5 million payable dependent upon certain undisclosed pre-defined development and regulatory milestones and subsequent launch of the product. In the event of successful product launches, Vectura will be eligible to receive royalties on future net sales of the product. 

The agreement also includes the potential for further development of the triple combination as a COPD treatment should Mundipharma decide to develop the programme in COPD, Vectura is eligible to receive further undisclosed pre-defined development and launch milestones of up to €20 million in addition to royalties on any future net sales of the product. Vectura is also eligible to receive one-off undisclosed sales milestones should net sales of both the asthma and COPD products achieve certain predetermined levels.

The first regulatory filings of VR2076 are planned in the EU for late 2022 or early 2023.

Significant progress across our generics partnered pipeline assets further demonstrating Vectura's extensive, proven device and formulation expertise

Our partnered generic assets allow Vectura to access high-volume opportunities whilst managing the significant development cost associated with large generic programmes. Typically Vectura's involvement will include both device and formulation development and as a result the Group can earn development services revenues as well as milestones and mid-teen percentage royalties on net sales of the final marketed products. 

VR315 (US), (fluticasone propionate/salmeterol), is the Group's partnered programme with Hikma for a generic version of Advair^® Diskus^® for the treatment of asthma and COPD in adolescents and adults for the US. In April 2016, the US Food and Drug Administration (FDA) accepted an Abbreviated New Drug Application (ANDA) filing made by Hikma and Vectura recognised a milestone receipt of $10 million. The FDA has provided Hikma with a GDUFA goal date of 10 May 2017. Vectura will receive $11 million on approval of the file plus a mid-teen percentage royalty on net sales of VR315 in the US.

This programme remains under FDA regulatory review and we continue to work closely with Hikma through this process. VR315 is one of only two generic Advair^® Diskus^® ANDAs publicly filed and accepted. 

VR730 (US), (salmeterol), a generic inhaled bronchodilator (LABA) for asthma and COPD using Vectura's dry powder inhalation technology and delivered using one of the Group's proprietary DPI devices, partnered with Hikma. VR730 has the potential to address an important market: according to IMS, US sales of inhaled DPI and pMDI LABAs were approximately $128 million in 2016[19].

In November 2016, the Group announced that it had extended its collaboration with Hikma by signing a US development and license agreement for VR730. Under the terms of the agreement Vectura will be responsible for completion of the formulation development and Hikma will be responsible for the clinical development of the programme and the subsequent manufacture and US commercialisation of the product.

Formulation work to be completed by Vectura will largely be funded by Hikma and therefore this programme is not expected to materially impact the Group's level of future R&D investment. Upon signing the agreement, Vectura received an initial payment of $375,000 and is eligible to receive potential further development, filing, approval and launch milestones up to an aggregate of $1.125 million. The Group is also eligible for a share of future returns of the product in line with its existing generic agreements, subject to certain recoveries by Hikma for the costs of clinical studies.

New generics, three to five significant new generic development opportunities were identified in the pipeline review and work is initiating. Activities will be focused on initial formulation, preclinical development and preliminary regulatory interactions of these new mass-market pMDI and DPI opportunities with significant value potential in parallel with partnering discussions underway.

Continued development of our wholly-owned specialist pipeline assets with further clinical activity planned for 2017

Vectura's wholly-owned specialist assets, VR475 and VR647, provide an opportunity for higher margin capture and greater management control. Risk exposure is managed as these drug/device programmes are in niche indications, targeting specialist patient populations delivering known molecules.

VR475 (EU), Vectura's leading and most advanced wholly-owned specialist pipeline drug/device combination asset using the AKITA^® JET smart nebuliser technology delivering nebulised budesonide positioned as an add-on maintenance before the initiation of biologics for the treatment of severe uncontrolled adult asthma in Europe.

The AKITA^® JET smart nebuliser used in the VR475 programme utilises Vectura's innovative proprietary flow rate and volume control (FAVORITE^TM) technology. The programme provides an opportunity to show greater efficacy than conventionally nebulised budesonide and to be more cost effective than biologics. Development risk of the programme is balanced since individual components of this drug-device combination are already market-proven and the product concept has already been tested in an OCS ("oral corticosteroid sparing") trial with positive results. Filing is anticipated in H2 2019.

Partnering options are being considered for the commercialisation of this asset in the EU where the opportunity would target the 40-50% of uncontrolled patients (4.2m patients), with severe persistent asthma[20].

VR647 (US), Vectura's second wholly-owned specialist pipeline drug/device combination asset using the AKITA^® JET smart nebuliser technology as maintenance treatment and prophylactic therapy for paediatric asthma (12 months to 8 years) targeting the US market. 

VR647 harnesses Vectura's innovative smart nebuliser technology targeting superior delivery of an existing drug with a proven track record in an established and significant US market where according to IMS, sales of nebulised budesonide are approximately $930m[21] per year. This programme provides an opportunity to significantly improve the currently
 
available nebulised delivery of budesonide with a faster delivery time, better lung deposition a lower nominal dose whilst maintaining similar efficacy, potentially local and systemic side effects.   

Over the longer term, Vectura's commercial priority is to develop strong commercial revenues in the US market by building its own specialist customer coverage with VR647 targeted for the paediatric specialist segment.

During the period, Vectura made an IND filing to the US FDA and post period we were pleased to confirm that this filing had been accepted and that a Phase I pharmacokinetic study in adults is expected to commence in H1 2017. The Phase I study will inform the doses to be explored in a Phase II study in children planned for H2 2017. These studies will be conducted to support initiation of a Phase III study in H2 2018 with the NDA filing anticipated in 2020.

VR588 (Global), Vectura's wholly-owned novel broad-based, potent and selective inhaled pan-JAK (Janus Kinase) inhibitor as an inhaled therapy, with potential application in multiple indications. Following completion of the pipeline review, this programme is planned to be progressed into Phase I/IIa which will start in H2 2017 with the option to out-license or develop further internally.

Excellent progress with merger integration

The new organisational structure is in place. The Board continues to expect annual synergy savings of at least £10 million by 2018 and that total merger integration costs will be £9 million as announced at the time of the merger, with £3.9 million recorded as an exceptional cost in the Group's 2016 results.  The 2016 results also include a number of merger-related items, principally a £3.9 million inventory fair value uplift included as a cost of sales of the flutiform^® supply chain which will not recur in 2017. There were also £9.4 million of exceptional charges reported in 2016, primarily relating to contingent transaction costs for the Skyepharma merger as well as the initial post-merger integration costs mentioned above.

Oral and Non-inhaled

The core market in which Vectura operates is in inhaled airways disease. Prior to the merger with Skyepharma, Vectura had two legacy revenue-contributing non-inhaled assets partnered with Baxter (ADVATE^® and Adept^®). The Group's ADVATE^® patent expired at the end of January 2016, however owing to higher than anticipated production of ADVATE^® inventory by Baxter prior to this expiry, Vectura has continued to receive royalty from sales of the product totalling £8.2 million for the period under review (2015/16: £12.7 million). Adept^® continues to make a minor contribution to revenue. Skyepharma also had twelve revenue-contributing oral and other non-inhaled products including the topical product Solaraze^®, partnered in the US with Sandoz and Almirall in Europe/ROW, and Pacira's injectable, EXPAREL^®.

The merger with Skyepharma brought significant oral technology and manufacturing expertise and capabilities. Until 30 June 2016, the Group's manufacturing facility in Saint-Quentin-Fallavier, Lyon, France was leased to Aenova France SAS. As expected, this facility transferred back to the Group at the end of June 2016 and since this time a number of initiatives have commenced to maximise the value of the facility, leveraging proven capabilities in multilayer tableting formulation and oral technology innovation. 

Of the twelve oral and non-inhaled products, the facility currently manufactures seven for the Group's partners. Five products use the Geomatrix^TM family of technologies: Diclofenac-ratiopharm^®-uno, Coruno^®, ZYFLO CR^®, Madopar^® DR^®/Prolopa^® and Sular^®, whilst Lodotra^®/RAYOS^® uses the Geoclock^TM chronotechnology. The facility also manufactures one other oral product, Triglide^®, which utilises the Group's solubilisation technology. The facility has cGMP status, with approvals from the European Medicines Agency, the FDA, ANVISA (Brazil) and KFDA (South Korea) amongst others.

Vectura's current focus remains maximising the volumes in the Lyon facility. During the period the Group signed four licensing agreements; demonstrating the capability of Lyon as a solution provider for generic development using one of its core competencies, multi-layer tableting.

Kinnovata

The Group's joint venture, Kinnovata, established to create low cost DPI products for the domestic Chinese market, has made further progress during 2016. The final capitalisation of the joint venture is expected to be concluded during 2017 with the relevant assets being contributed to the business by Vectura and its partners.  Recognition of the Group's share of Kinnovata's net assets at this point will trigger an exceptional non-cash gain to be recorded in the Group's accounts.

Capital allocation

The Group maintains a disciplined approach to capital allocation in support of its priorities for future growth in shareholder value. The Board reconfirms the issued guidance for 2017 investment in research and development (R&D) and sets out guidance for 2018, as shown below. Typically, 45-50% of investment is for wholly-owned programmes with the remainder for partnered programmes where Vectura has the potential to earn milestone and development services revenues over the period of development which may cover some or all of the Group's costs incurred during that time. In addition, once launched, there is potential for significant further milestones and recurring revenues.

During 2017 the key focus for R&D investment will remain focused upon:

·      Vectura's leading wholly-owned specialist pipeline drug/device asset in severe adult asthma (VR475 EU) will continue its Phase III clinical trial in Europe

·      The second, wholly-owned specialist pipeline drug/device asset in paediatric asthma (VR647 US) will progress into a Phase I and subsequent Phase II trial in the US

·      The innovative inhaled biologic co-development programme with UCB (VR942) is planned to move into a Phase II trial

·      The novel pan-JAK inhibitor programme (VR588) is planned to progress into Phase I/IIa

·      Early formulation work will continue on the three to five new generic opportunities previously announced

The Group's development pipeline offers substantial revenue potential to augment the 7 recently-launched and growing on market inhalation products. Assuming successful completion of development and subsequent approval, VR475 could be launched in the EU by 2020, followed by VR647 in the US 2021. Vectura is also developing two inhaled DPI generics with Hikma and a further DPI inhaled generic with Sandoz, which have potential for launch in the 2020-2025 timeframe. QVM149, where Novartis is currently conducting Phase III trials, could be the first DPI fixed dose triple combination for asthma launched in Europe by 2019.

The Board continues to expect that capital expenditure, from a relatively low base of £3.1 million in 2016, will peak during 2017 with initiatives to expand manufacturing capacity for a number of our programmes, including the potential cost of establishing a second manufacturing line to meet growing demand for flutiform^®. In line with the Group's stringent investment criteria, we will continue to explore all potential initiatives and efficiency measures to manage increases in capacity with a view to minimising or deferring capital outlay without impacting the long-term outlook for these key programmes.

Guidance on R&D and capital allocation is summarised below:

Summary and outlook

Following the merger in June 2016 the Group is well positioned, with its unique, integrated formulation, device and development capabilities, to accelerate shareholder value creation and capitalise on changes in the market dynamics of the inhaled respiratory market. Vectura has a strong track record and outlook as a partner for both novel and generic development programmes and the opportunity to capture an increasing share of value through the future commercialisation of its wholly owned specialist targeted assets.

With established momentum of the 7 recently-launched inhaled products, the Board continues to anticipate strong growth in like-for-like recurring revenues in 2017 compared to the 12-month proforma period to 31 December 2016. Like-for-like revenues exclude royalties from both ADVATE^®, where the patent expired in January 2016 and is not expected to provide material contribution in 2017, and also from the GSK Ellipta^® products under the legacy Vectura agreement, as GSK ceased payments after July 2016.

Revenues for the year will be augmented by new recurring royalties from the US launch of Utibron^TM Neohaler^® and Seebri^TM Neohaler^® by Sunovion and the potential launch of VR315, the US generic Advair^® Diskus^® programme partnered with Hikma. The Group will earn an $11 million milestone from Hikma if VR315 is approved, in addition to a mid-teen royalty on net sales of the product.

Validation of the FOX^® smart nebuliser device with its first regulatory approval as Breelib^TM in December 2016 will provide relatively modest milestone revenues once launched by Bayer in 2017 but has the potential to lead to the announcement of a number of collaborations with other partners seeking to leverage the unique FOX^® drug device technology.

Excellent progress has been made with the merger integration and organisation changes and the Group remains on track to deliver at least the £10 million committed annual cost synergies from 2018, with 2017 expected to benefit from a significant portion of that annual amount. It is expected that 2017 will include a further £3-5 million of exceptional post-merger integration costs.

As Vectura earns the majority of its revenues in US dollars and Euros, any continued volatility of sterling against these currencies may also affect reported results.

Vectura is taking a measured approach to the development of its wholly owned portfolio and commercialisation plans, which the Board believes efficiently leverages the Company's strengths in formulation and device technologies. The Group's wholly-owned programmes, VR475 in Phase III and VR647 in Phase I, limit development risk by using known molecules whilst characterising the clinical value of its own novel device delivery technology.

Vectura is in a strong position entering 2017 and we look forward to the year ahead with confidence.

Financial Review

All-share merger with Skyepharma PLC (the "Merger") and subsequent change of accounting reference date

On 10 June 2016, an all-share merger (the "Merger") of Vectura Group plc ("Vectura") and Skyepharma PLC ("Skyepharma") was completed by way of a scheme of arrangement of Skyepharma. Further details are set out in Note 13 to the consolidated financial statements.

In accordance with International Financial Reporting Standard ("IFRS") 3 Business Combinations, for accounting purposes Vectura acquired Skyepharma and its subsidiaries and therefore the results of Skyepharma have been consolidated into the Group's financial statements from the date of acquisition. Vectura changed its accounting reference date to 31 December to align across the Group post-Merger and also with a number of its partners. As a result, the current financial period presented in the consolidated financial statements is the nine-month period from 1 April to 31 December 2016, with the results of Skyepharma and the impact of any fair value adjustments included for an approximately six-and-a-half month period from 10 June to 31 December 2016. As required by IFRS 3, the comparative financial period in the consolidated financial statements is for the year ended 31 March 2016.

Current financial period comparison with previously-reported results is therefore affected by both the Merger and the change of accounting reference date. To assist in understanding current financial period performance, supplementary unaudited summary proforma financial information is presented. The proforma information is prepared for the nine-month and twelve-month periods ended 31 December 2016 and 31 December 2015 as though the Merger was completed on 1 April 2015 and 1 January 2015 respectively and excludes the impact of the acquisition accounting adjustments which are required by IFRS 3 Business Combinations.

Financial highlights

The strong business performance in a transformational year has delivered a robust set of results in the first financial period end since the Merger, on both reported and underlying like-for-like bases, summarised in the table below.

^a Recurring revenue comprises royalties, product supply and device sales and share of sales from EXPAREL^® in the United States.

^b Other revenue includes the share of net sales of EXPAREL^® in the United States of £3.5 for the reported 9 months ended 31 December 2016 and £4.5 million and £3.4 million for the pro-forma periods ended 31 December 2016 and 2015, respectively.

Reported revenue for the period increased 75.7% to £126.5 million (2015/16: £72.0 million) with recurring revenue^a accounting for 80.1% of the total (2015/16: 59.6%). This includes the effect of the Merger and strong organic royalty revenue growth. EBITDA[22] growth was below revenue growth, at 47.0%. This was partly due to a lower margin mix of 

total reported revenues as a reduction in milestones was more than compensated by higher product supply revenues with an associated cost of sales, including a one-off £3.9 million charge from the unwinding of flutiform^® inventory fair value uplifts. R&D investment was also £3.5 million higher at £45.6 million (2015/16: £42.1 million).

Unaudited proforma recurring revenue, which illustrates underlying like-for-like performance, increased 26.2% to £115.6 million (2015 proforma: £91.6 million). Unaudited proforma EBITDA (based on recurring revenue) grew 57.4% to £17.0 million (2015 proforma: £10.8 million). This underlying like-for-like growth was driven by royalties from the 7 recently-launched inhaled products, including flutiform^® and Ultibro^®, as well as flutiform^® product supply.

Revenue

Revenue comprises royalties, product supply and device sales, signing and milestone payments, development services and other income. Revenue for the period increased by 75.7% to £126.5 million compared to £72.0 million for the year ended 31 March 2016, as described above. The inclusion of Skyepharma from 10 June 2016 contributed £78.4 million to Group revenue including further substantial recurring revenue from royalties and flutiform^® product supply.

Recurring revenue, which comprises royalties, product supply and device sales and share of sales from EXPAREL^® in the United States, has grown 136% to £101.3 million during the period under review and accounted for 80.1% of total revenue (2015/16: £42.9 million, 59.6%). On a proforma unaudited basis, recurring revenue was £115.6 million and accounted for 81.4% of total revenue, an increase of 10 percentage points over the 70.1% for the comparative proforma period. This increase was principally from the growth of recurring revenue of the 7 recently-launched inhaled products including flutiform^® and Ultibro^®.

Revenue has also benefitted from the continued weakness of sterling against the Group's main trading currencies, in particular the US Dollar and Euro. The favourable translation impact in the nine-month period to 31 December 2016 had exchange rates remained unchanged from the nine-month period to 31 December 2015 is £14.0 million.

Royalties

Royalty revenue for the nine months ended 31 December 2016 of £47.5 million increased by 21.2% (2015/16: £39.2 million) and 20.7% on an unaudited proforma basis. Following the Merger, the Group now earns royalties from 21 marketed products (2015/16: 8 products), 7 of which were launched since 2012 (2015/16: 6). 

Net sales of Ultibro^® Breezhaler^®, as reported by Novartis, have grown by 37.0% to $285 million for the nine-month period ended 31 December 2016 (nine-month period to 31 December 2015: $208 million). Net sales of Seebri^® Breezhaler^®, as reported by Novartis, have remained consistent with the comparable prior period at $114 million (nine-month period to 31 December 2015: $113 million). As a result of this continued strong sales growth of Ultibro^®, total royalties earned from Novartis for both products have increased to £12.2 million in the nine-month period (2015/16: £10.9 million).

GSK have reported continued strong performance of their Ellipta^® products (Breo^®/Relvar^® Ellipta^®, Anoro^® Ellipta^® and Incruse^® Ellipta^®), with total net sales in the nine-month period ended 31 December 2016 up 159.8% to £769 million compared to £296 million for the nine months ended 31 December 2015.

Royalties for the nine months ended 31 December 2016 in respect of Vectura's legacy licence agreements were £7.3 million (2015/16: £13.0 million). As announced on 27 July 2016, GSK has decided not to extend its legacy Vectura agreement beyond 31 July 2016 by licensing additional patent families under the terms of the 2010 option-to-licence patent agreement between the parties and accordingly royalty payments to the Group ceased.  Whilst this decision by GSK does not materially affect the Group's revenue for the period to 31 December 2016, the impact will be up to £13 million per annum from 2017.

Vectura continued to receive royalties from GSK for sales of the Ellipta^® products under the legacy Skyepharma licence with GSK which totalled £5.4 million in the period 10 June to 31 December 2016. Due to the strong performance of these products, and as announced on 16 February 2017, the £9.0m calendar year royalty cap was reached in 2016, a year earlier than previously guided.

Royalties from flutiform^®, which continue to benefit from strong growing demand, have contributed £3.0m to the Group's reported royalty revenue in the post-Merger period. These royalties are impacted by a cap which limits the aggregate amount of revenues from Mundipharma for royalties and product supply to 35% of Mundipharma's net sales of the product in the same period. Accordingly, the effective royalty rate in respect of Mundipharma during the period was a low single digit percentage. However, when combined with the margin generated by flutiform^® product supply to Mundipharma and excluding fair value adjustments recognised under IFRS 3 Business Combinations, the effective contribution is a low teens percentage of in-market net sales.

Total in-market net sales[23] for all territories covered by both the Group's partners, Mundipharma and Kyorin, for the nine-

month period ended 31 December were €147 million, 29.0% higher than the same period in the prior year (nine months to 31 December 2015: €114 million).

Other royalties largely relate to sales of the non-inhaled products, primarily ADVATE^®, Solaraze^® in the US and the legacy Skyepharma oral portfolio. ADVATE^® royalties of £8.2 million (2015/16:  £12.7 million) reflect the run-off sales of inventory produced by Baxter prior to the patent expiry in January 2016. The Directors believe that the majority of stock has now been sold and do not expect a material contribution in 2017. Solaraze^® royalties were £3.3 million for the period of which £2.3 million relates to US sales which benefited from short-term market factors.

Signing and milestone payments

Product and technology licensing milestones of £20.5 million were recognised in the nine months ending                 31 December 2016 (2015/16: £24.4 million).

In April 2016, the Group received a $10 million (£7.1 million) milestone from Hikma Pharmaceuticals, the Group's partner on VR315 US, following acceptance by the US FDA of Hikma's ANDA filing. Vectura is eligible to receive further milestone payments totalling $11m upon approval by the FDA. The product has an expected GDUFA date of 10 May 2017 and, if approved and launched, Vectura will receive a mid-teen percentage royalty from net sales of VR315 in the US.

In May 2016, Ablynx, the Group's partner on VR465, exercised its commercial licence option to use Vectura's FOX^® handheld smart nebuliser technology to progress its ALX-0171 infant RSV programme into a Phase IIb dose-ranging efficacy study and the Group received a €1.5 million (£1.1 million) milestone. Vectura is eligible to receive further milestones linked to development and regulatory progress of the programme and low/mid-single digit percentage royalties on any future net sales of the product.

In August 2016, the Group recorded receipt of an $8 million (£6.1 million) sales milestone from Pacira following their confirmation that worldwide annual net sales of EXPAREL^® (on a cash-received basis) to 30 June 2016 had reached $250 million. Vectura is also eligible to receive a further sales milestone of $32 million when worldwide annual net sales of the product reach $500 million (on a cash-received basis), the receipt of this milestone is not dependent on patents. In addition, whilst currently the product is only launched in the US, the Group would also be entitled to a milestone payment of $4 million if EXPAREL^® is launched in a major European market.

In December 2016, following the successful completion of feasibility work, which the Group was responsible for, Mundipharma and a US independent associated company exercised their option to develop and commercialise the VR2076 pressurised Metered Dose Inhaler ("pMDI") ICS/LABA/LAMA triple programme and the Group recognised a €1.5 million (£1.3 million) milestone.

Ultibro^® Breezhaler^® and Seebri^® Breezhaler^®are now established and substantial global products. Novartis reported 2016 combined net sales in excess of $0.5 billion for these products triggering a sales milestone of $5.0 million (£4.1 million) to the Group which was recorded in the nine-month period.

Product supply and device sales

Product supply and device sales revenues were £50.3 million for the nine-month period                                      (2015/16: £3.7 million), mainly due to £42.4 million from the supply of flutiform^® to Mundipharma and Kyorin and £4.2 million from the supply of oral products from Lyon to the Group's partners. In addition to the royalty earned on net sales by Sandoz of AirFluSal^® Forspiro^®, recorded within royalty revenues, Vectura also received device sales revenue for the supply of its GyroHaler^® device to Sandoz to support the continued roll out and growth of AirFluSal^® Forspiro^® in a number of European and Rest of the World territories.

Development services                                                                                   

Development services revenues were £4.5 million during the nine months ended 31 December 2016              (2015/16: £4.7 million) and mainly relate to the on-going development of the breath actuated version of flutiform^® for Mundipharma, support for Hikma on the US filing for VR315 and work for Janssen on VR096.

Other revenue

Other revenue of £3.7 million (2015/16:  £nil) is largely comprised of the Group's three percent share of Pacira's cash receipts from net sales of EXPAREL^®. For the nine-month period to 31 December 2016, Pacira reported net sales of EXPAREL^® increased by 11% compared to the same period in 2015. Other revenue also includes the final portion of the annual rental income from the Lyon facility for the period 10 - 30 June 2016, after which the Aenova lease of the facility terminated.

Cost of sales

Cost of sales increased to £41.9 million (2015/16: £3.3 million) mainly due to the inclusion of flutiform^® supply chain from 10 June 2016. Gross profit from flutiform^® product supply was £9.4 million, which equates to a margin of 22.2%, including a £3.9 million charge for the unwinding of the fair value uplift on inventory recognised under IFRS 3 Business Combinations on the Merger date. If the £3.9 million charge is excluded from cost of sales, the gross margin from flutiform^® would be 31.3%. Inventories for the flutiform^® supply chain were £17.6 million at the balance sheet date.

Research and development (R&D)

The Group maintains a disciplined approach to capital allocation in managing its R&D portfolio. Total investment in R&D was £45.6 million, £3.5 million higher than the previous reporting period (2015/16: £42.1 million).

Expenditure during the period comprised £21.1m on the Group's wholly owned specialist assets including VR475 and VR647, £15.0m on novel-patented molecule partnering projects, £8.7m of generic/analogue and device partnering projects and £0.8m on other oral projects. Recruitment into the Phase III study for VR475 is progressing well and an IND filing for VR647 has been made to the US FDA and post period, this filing has been accepted.

As announced on 7 September 2016, the Board has reviewed the Group's combined development pipeline following the Merger to ensure a balanced portfolio with focused investment in additional novel and generic programmes for longer-term value creation funded by halting further development of SKP-2075. As a result, the pipeline has an increased number of programmes with an overall lower risk profile, but similar funding requirements.

Other income

Other income mainly comprises a £1.3 million R&D expenditure credit (2015/16: £nil). Following the Merger, the UK entities within the Group are no longer eligible for the R&D tax credit for small and medium-sized enterprises (SMEs) but are able to claim the R&D expenditure credit for large enterprises. As this is effectively a taxable grant, it is booked within operating profit. For the year ended 31 March 2016, the SME R&D tax credit of £2.0 million was recorded within the taxation line in the consolidated income statement.

Amortisation of intangible assets

The amortisation charge for the nine months ended 31 December 2016 was £64.0 million (2015/16: £18.8 million). The increase in the period is due to the initial amortisation of the £379.5 million of intangible assets recognised as a result of the Merger in accordance with IFRS 3 Business Combinations.

The amortisation charge in the 2017 income statement will increase significantly from the £64.0 million reported for the 9 months to 31 December 2016 reflecting a full twelve months amortisation of the Skyepharma intangibles recognised on the 10 June 2016 merger date.

Exceptional items

EBITDA is stated before £9.4 million of exceptional items (2015/16: £5.6 million). These comprise £6.1 million for professional advice payable on completion of the Merger, £3.9 million of post-Merger integration activities, mainly redundancy and third-party consultancy costs, a £1.1 million credit for the pension curtailment of Swiss employees who are leaving the Group and £0.5 million for restructuring costs at the Group's manufacturing facility in France and legal fees incurred from initiating legal proceedings against GSK to enforce Vectura's patents in respect of the Ellipta^® products.

Net finance income

Net finance income totalled £4.0 million (2015/16: £3.8 million) largely comprising foreign exchange gains on settlement of receivables for royalty and milestones and on funding to non-UK based subsidiaries. Net finance income for the comparative period mainly relates to contingent consideration for the sale of ProFibrix BV to the Medicines Company in 2013.

Loss before taxation

The Group has reported an increased loss before tax of £40.1 million (2015/16: £1.9 million) as a result of the significant increase in amortisation of intangible assets as well as exceptional items associated with the Merger, as noted above.

Taxation

The Group's effective tax rate ("ETR") is a 20% credit. The ETR is driven by the mix of tax credits on losses in the UK and Germany (16%) and tax charges on profits in Switzerland (12%) and the US (28%). It is significantly impacted by deferred tax credits on the amortisation of acquired intangibles (19%).  

The Group's ETR is a tax credit on an overall loss driven by significant amortisation of acquired intangibles, a mix of losses in the UK and profits in Switzerland and the US. The long term trend for the ETR is likely to be a mid to high teens percentage, assuming there are no significant changes to tax legislation in the jurisdictions where the Group operates and depending on the timing of EXPAREL^® revenues in the US where the tax rate is expected to be in the range of 30 - 35%. In addition, as the Group moves into a pre-tax profit position, there may be opportunities to utilise unrecognised tax assets related to losses in prior periods which may have a material short term impact on the ETR. The Group continues to monitor the anticipated tax reforms in the US and Switzerland as the introduction of new tax legislation would likely impact the ETR in future years.

Net result

Loss after taxation was £32.1 million (2015/16: £5.0 million profit).

Earnings per share

Basic EPS reflects the increased amortisation charges and exceptional costs which were associated with the Merger, as noted above, and was a 5.3p loss per share for the nine-month period ended 31 December 2016 (2015/16: 1.2p profit per share). Basic EBITDA per share for the nine-month period was 5.6p profit per share (2015/16: 5.7p profit per share).

Balance sheet

Synergies

A new organisation structure has been largely implemented and the Group remains on track to deliver at least £10 million synergy savings per annum by 2018.

Goodwill

At 31 December 2016, goodwill increased by £105.4 million to £162.8 million (31 March 2016: £57.4 million) due to the goodwill recognised on the Merger of £100.8 million and £4.6 million of foreign exchange gains, largely from the date of acquisition to the balance sheet date.

Intangible assets

At 31 December 2016, intangible assets of £456.8 million have increased by £364.6 million during the period (31 March 2016: £92.2 million). Intangible assets of £379.5 million have been recognised due to the Merger, with the largest asset being attributed to flutiform^®. These assets, which are denominated in Swiss Francs and US Dollars, will be amortised over their useful lives which range from two to seven years, with an average life of six years. 

Property, plant and equipment

Vectura has invested £3.1 million during the nine-month period mainly comprising of laboratory and manufacturing equipment. In addition, assets with a fair value of £39.5 million were acquired as a result of the Merger.

In January 2017, the Group's investment in expanding capacity of flutiform^® at the Sanofi manufacturing facility in Holmes Chapel, classified as an asset under construction at 31 December 2016, became fully operational.

Translation reserve

The assets and liabilities, including goodwill, acquired from Activaero are denominated in Euros and those arising from the Merger with Skyepharma are denominated in Sterling, Swiss Francs, Euros and US Dollars. In accordance with accounting standards, the Group has recognised a net foreign exchange gain of £49.0 million (2015/16: £5.4 million gain) within reserves as a result of the movement in the relevant exchange rates between 1 April 2016 (for the Activaero assets) and 10 June 2016 (for the Skyepharma assets) and the balance sheet date. In future periods, the movement in this reserve will be dependent upon the £/€, £/CHF and £/$ exchange rate at the relevant balance sheet dates.

Cash position and liquidity

Vectura continues to maintain a strong cash position with cash and cash equivalents at 31 December 2016 of £92.5 million (31 March 2016: £99.8 million). The Group generated a net cash inflow of £28.2 million from operating activities (2015/16: £32.9 million). Cash flow benefits from strong and sustainable cash receipts from growing recurring revenue from inhaled products and a continued focus on cost control and capital allocation throughout the business. Increased working capital from timing differences in production and shipments in the expanded supply chain post-Merger and lower milestone receipts impact on cash flow generated from operating activities in the period.

During the period, Vectura paid £52.1 million to the former shareholders of Skyepharma, being the partial cash alternative offered as part of the consideration for the Merger. Skyepharma's cash holdings on the date of acquisition were £27.1 million, such that the net cash outflow before transaction costs in respect of the Merger was £25.0 million. Exceptional acquisition costs of £11.9 million were also paid during the period. The remaining consideration was settled by a transfer of shares. No further consideration is due in respect of this transaction. 

By order of the Board

Andrew Derodra

Chief Financial Officer

20 March 2017