CHIEF EXECUTIVE OFFICER’S REVIEW
Overview
The worldwide market for hemodynamic monitoring products continues to evolve, mainly driven by the move away from the use of the older invasive catheter products towards the newer less invasive devices. The potential market for these minimally invasive devices, which include LiDCO’s product range, is estimated at US$800 million per annum (surgery patient market segment). We estimate that sales revenues for minimally invasive hemodynamic monitoring products grew in value last year by 33%. Our objectives for the year were fourfold: achieve revenue growth of our core intensive care product, expand the product range, increase our sales distribution network and contain costs. I am pleased to say that all four of these objectives were achieved. Sales were up 18% on the prior year while we managed to reduce normal operating overheads by 6%. The favourable combination of increased sales and reduced costs means that significant progress towards profitability was made. Following the expansion of the distributor network and the recent introduction of the LiDCOrapid product, our business has both a wider product and geographic base and is now capable of significantly increasing its share of the global hemodynamic monitoring market.
In summary, I feel that this has been one of our most productive periods and the Company is in a strong position to continue to move forward in 2008.
Sales and trading
Our strategy has been to supply the fast growing hemodynamic monitoring market with our proprietary products. I am pleased to report that there is an increasing momentum for the market’s transition to our minimally invasive products and simultaneously in our ability to access this market. Since last year’s preliminary results we have significantly expanded our distribution network with new distributors added in a number of territories, including Canada, the USA, Israel, Turkey, and Saudi Arabia. Negotiations are ongoing with specialty distributors in additional regions of the USA where we do not have direct representation to further improve our sales reach. We expect to be able announce the conclusion of these arrangements during the next few months.
Revenues outside of the UK were up by a very encouraging 63%. The performance of established European distributors in the period was particularly encouraging with revenue increasing by no less than 71%. The resurgence of sales growth in the USA, while anticipated, was also good to see. Overall sales growth at 18% was therefore limited by lower demand for monitors in the UK although disposable sales remained buoyant. In a year where all capital purchases by hospitals in the UK NHS were at a low level for most of the period we decided to redeploy existing sales resources to the export market, which contributed to our 63% increase in export sales. Exports now represent the majority of our sales. This has the positive effect of reducing our reliance on an often ‘stop/start’ UK market. We are expecting trading in the UK to improve moderately this year with NHS capital purchase budgets likely to be a little more freely available. Furthermore our new LiDCOrapid surgery product is targeted at a more accessible revenue budget. Accordingly we have now brought our UK sales force up to strength with a number of new appointments.
Despite an increasing proportion of lower-margin distributor sales, product gross margins were maintained at 78% on monitors, and modestly improved to 87% on disposables. In addition to maintaining product margin the increased sales were achieved without an increase in costs. I am very pleased to be able to report that over the last four years our sales have increased by 79% while we have simultaneously reduced our costs by 16%. Over the last few years we have made strategic investments in our patents, our products and their automated manufacture, coupled with development of clinical/business cases. We are now starting to see clear evidence that these investments have been justified and can now be leveraged to support a significantly larger turnover from both our direct and distributor sales teams.
Looking forward, our new surgery product, the LiDCOrapid Monitor, launched in April, should have a dual advantage for us. Not only does it address the needs of a US$800m per annum surgery market, but also makes our product range more attractive to sell by both the existing and new distribution partners. The attractive features of this new product – proprietary technology and design, high margin, ease of set-up and use – have already helped propel the recent expansion of our distribution network. While this expansion of the sales distribution channel occurred too late to contribute materially to the 2007/08 results, these additions are expected to provide a significant new source of revenue in the second half of the current year.
In addition to signing up more distributors, in June 2007 LiDCO announced the signing of an exclusive UK marketing collaboration with Becton, Dickinson U.K. Limited (‘BD’). BD is a leading global medical technology company and this collaboration involves the joint promotion, in selected UK hospitals where LiDCO already has existing sales and customer relationships, of a number of critical care products currently being sold by the BD Medical Surgical Systems business unit. LiDCO’s strong customer relationship with critical care departments in UK hospitals was a key factor in BD’s decision to form this exclusive collaboration. This marketing partnership will result in enhanced sales coverage for BD’s critical care product lines in the UK and LiDCO will receive a share of any profits made.
Market trends - LiDCO’s sales and marketing strategy
Intensive care market
In a 2007 article in the Journal of the American Medical Association doctors from Harborview Hospital in Seattle noted that their use of the invasive pulmonary artery catheter (PAC) for measuring cardiac output had declined by 77% over the last four years. The authors, whose hospital is now a LiDCO product user, also commented that “Recently nurses and residents gathered around the bedside of the sole patient in the intensive care unit (ICU) with a PAC so they could actually observe one still in use”. The use of the invasive PAC approach to monitor hemodynamics continues to decline and this is particularly so in the ICU. In contrast the sales of the LiDCOplus Monitor are increasing in the ICU – clearly in these LiDCO accounts we are replacing the PAC with our technology, which has been convincingly demonstrated to improve clinical outcome and reduce costs in patients after surgery.
The transition to minimally invasive monitoring in this market is expected to continue. We intend to further distinguish ourselves from older catheter-based technologies by presenting to hospitals a number of strong clinical and business cases associated with use of our products. Accordingly we were pleased to announce during the year the results of a study conducted in 2006 at the University of Iowa, showing that use of our products in severely ill patients with shock and sepsis substantially reduced mortality. The university, which has been using our technology since 2003, conducted a retrospective analysis of outcomes in a group of critically ill patients treated for septic shock and systemic inflammatory response syndrome (SIRS). This epidemiological study was undertaken to evaluate the various hemodynamic monitoring technologies used in the ICU and their effect on outcomes in this gravely ill patient population. Patients treated with the LiDCOplus Monitor had a substantially lower mortality rate than those treated clinically with the PAC: ICU mortality in the LiDCO treated group of patients was only 12% compared with 32% in the PAC treated group or 31% in those patients managed without any hemodynamic monitoring. The compelling data from this study supports the case that using the LiDCOplus Monitor decreases death rates in patients with septic shock or SIRS. This is very exciting news for us and our hospital customers and for patients, as these conditions have historically been very difficult to treat successfully. Similar trials are in progress in other countries to repeat and confirm this observation. If successful the data should have meaningful effects on the uptake of our LiDCOplus Monitor product within our existing ICU customer base.
Major surgery market – a new opportunity
Now that we have established our technology’s credentials and the LiDCO brand name within the technically demanding intensive care market, we have used our expertise to produce a product for sale into the emerging high-risk surgery market. This project resulted in the recent launch of the LiDCOrapid Monitor. Our goal was to introduce a simple and easy-to-use product that would be used to optimize a patient’s hemodynamic profile during surgery. Individualized fluid administration to maintain and optimize hemodynamics and tissue oxygenation plays a major role in the management of the moderate to high-risk surgical patient. This cannot be achieved reliably through the use of conventionally measured parameters such as arterial pressure, heart rate, urine output and central venous pressure but requires use of a specially designed monitor that provides a continuous measure of cardiac output. The LiDCOrapid is the first monitor specifically designed to help surgical teams maintain a patient’s optimal hemodynamic profile. It is easy to use and set up and is designed with a user interface that is both visually intuitive and informative. It provides early warning of hemodynamic change, together with an indication of fluid responsiveness and actual response to a fluid or drug intervention. We are confident that widespread adoption of the LiDCOrapid will have a major impact on improving outcomes after major surgery by reducing complications and shortening hospital stays: this will not only benefit patients but also cut treatment costs. The initial response to this new product has been excellent and we are very excited about the potential of this product to take a significant share of this $800 million surgery market.
Organ transplantation – a developing market opportunity
There has been a large amount of publicity in the press about the growing shortage of transplantable organs. This is in part related to declining numbers of patients suitable to act as organ donors. However the situation is compounded by an assumption that post-collection loss of transplantable organs is inevitable if an initial assessment of the donor suggests that the patients’ hemodynamics, and hence organs, have deteriorated irreversibly. Brain death is known to induce dramatic changes in hemodynamics but donors are often not adequately hemodynamically monitored. This results in inadequate resuscitation, thereby reducing organ yield due to oxygen debt. In an effort to improve donor outcomes, LiDCO is working with an Organ Procurement Organisation (OPO) in the USA which is using our minimally invasive continuous hemodynamic monitoring to guide donor management decisions in hemodynamically unstable donors. The OPO believes that the ability to monitor and assess continuously fluid parameters, pressure and blood flow would enable the OPO coordinator to recognize and apply situation-specific interventions that target improving hemodynamics and hence improve end-organ perfusion. LiDCOplusmonitoring is minimally invasive and brings the advantage that such care could be initiated immediately by the OPO coordinator (frequently a nurse) without the need for inserting specialized catheters (e.g. the invasive pulmonary artery catheter) or requiring specialist physician support. I am delighted to report that minimally invasive hemodynamic monitoring has indeed helped to improve donor outcomes in these cases, with a significant increase in the number of organs available for transplantation.
This issue has been further studied by the University of Pittsburgh in a recently published prospective study. This confirmed our expectation that donors who were adequately resuscitated with the LiDCOplus monitor provided a significantly higher number (3.7 compared with 2) of organs per donor that were suitable for transplant, whereas donors who had inadequate volume resuscitation were associated with a higher inflammatory response. These results have generated considerable interest within the transplantation community, which is beginning to translate into sales of our technology into this developing market.
Regulatory affairs and product quality
During the period both our EC notified body and the US FDA conducted surveillance visits. LiDCO is pleased to report that no non-conformity issues were raised by either group of inspectors. Our product quality and customer satisfaction record continues to be excellent.
Business Review - Summary Table
| |
Year to 31
Jan 2008 |
Year to 31
Jan 2007 |
Increase/
(decrease) |
Increase/
(decrease)
% |
| Revenue by type (£’000) |
|
|
|
|
| - Monitors |
1,934 |
1,443 |
491 |
34% |
| - Sensors |
1,986 |
1,818 |
168 |
9% |
| - Fee per Use & Rentals |
78 |
111 |
(33) |
-30% |
| - Licence Fees |
53 |
70 |
(17) |
-24% |
| - Total Revenues |
4,051 |
3,443 |
608 |
18% |
| Monitors sold & placed (Units) |
151 |
112 |
38 |
34% |
| Sensor and Fee per Use Sales (Units) |
26,081 |
24,316 |
1,765 |
7% |
| Installed Base (year end) |
1,184 |
1,035 |
149 |
14% |
Geographic segmental sales reporting
USA
- Overall sales revenue has increased by 62%* to £1.24m (2006/7: £0.77m)
- Monitor sales increased by 184%* to £0.74m (2006/7: £0.26m)
- Sensor, fee for use & rental sales stable* at £0.50m (2006/7: £0.51m)
* In constant currency terms, overall revenue increased by 70%, monitor sales by 200% and sensor sales by 6%
UK
- Overall sales revenue down 14% to £1.72m (2006/7: £2.01m)
- Monitor sales revenue down 43% to £0.52m (2006/7: £0.92m)
- Sensor and, fee for use sales of £1.20m up 10% (2006/7: £1.09m)
Continental Europe
- Overall sales revenue up 71% to £0.87m (2006/7: £0.51m)
- Monitor sales up 139% to £0.55m (2006/7: £0.22m)
- Sensor sales up 14% to £0.32m (2006/7: £0.29m)
Rest of World & Other Income
- Overall sales revenue up 39% to £0.22m (2006/7: £0.15m)
- Monitor sales up 253% to £120,000 (2006/7: £34,000)
- Sensor sales down by £9,000 to £40,000 (2006/7: £49,000)
- License fees income decreased to £52,000 (2006/7: £70,000)
FINANCIAL REVIEW
IFRS
The attached financial statements for the year to 31 January 2008 have been prepared for the first time in accordance with IFRS and the impact of IFRS has had no effect, other than presentation, on the reported figures and there were no material changes to the opening balances. Where necessary, comparative figures previously reported under UK GAAP have been restated for the transition to IFRS.
Operating results
Turnover increased by 18% to £4.05m (2006/07: £3.44m). The installed base of monitors increased in the year by 149 units to 1,184 (2006/7: 1,035 units), representing an increase of 14%. This has led to an accompanying increase in sensor usage of 7% from 24,316 to 26,081 units.
Product margins against external procurement costs have been maintained at 78% on monitors and modestly improved to 87% on disposables. The overall reported gross margin on sales is 64%, down from 67% in 2006/7 with the decrease being almost entirely accounted for by the increased monthly payments to Med One. Excluding the Med One monthly payments, the gross margin on sales was 75% (2006/07: 76%).
Administrative and distribution expenses were reduced by £320,000 (6%) from £4.94m to £4.62m. This is principally due to savings in staff costs, professional fees and premises costs which were offset by increases in depreciation and amortization.
As a result of the increase in revenues and reduced costs, operating losses decreased by £613,000 to £2.01m (2006/07: £2.62m and the loss per share was reduced to 1.50 pence (2006/07: 2.10 pence).
Taxation
As the Group is still at the pre-profit stage there was no tax charge for the year. In addition the Group has a deferred tax asset of £6.1m to offset against future profits, although this has not been recognized in the accounts. In the UK, the Group qualifies for research and development (R&D) tax credits which amounted to £120,000 in 2007/08 which are shown in the income statement.
Cash, financing and working capital
The net cash outflow from operating activities remained level at £1.10m (2006/07:1.12m) despite the reduction in operating losses. This was largely as a result of exceptional cash receipts in 2006/07 from two years of R&D tax credits and the collection of a large number of old outstanding debtors. Excluding the receipt of R&D tax credits, the net cash outflow from operating activities has reduced by 30% over the last two years.
The net cash outflow before financing increased from £1.60m to £1.69m as the result of increased spending on both fixed and intangible fixed assets.
Debtor days at the year end showed a slight improvement to 111 days compare with 115 days last year. Creditor days have reduced from 45 days to 29 days. Stock at the year end as a percentage of turnover has reduced from 31% to 21%.
In November 2007, the Company placed 23,647,074 shares at a price of 8.5p per share raising £2m before expenses with financial institutions and a number of private investors. The expenses relating to the placing were £67,000.
As anticipated in last year’s financial statements, the Group made use of its £1m (US$2m) Laurus loan facility and drew down £500,000 in August 2007. The amount drawn down at the year end stood at £553,000. The Laurus loan facility is due for repayment in August 2008 and it is anticipated that this will need to be replaced by a new facility of similar size. The Company is in discussions with a number of lenders and the Board is reasonably confident that this facility can be replaced.
As a result of the placing and the draw down of the loan facility, the Group’s cash balances at the year end were £2.23m compared with £1.47m the previous year.
PRODUCT DEVELOPMENT
The last year has been a very active one for product development. Our development strategy is to respond quickly to market opportunities by providing proprietary hemodynamic monitoring products. The LiDCOrapid development follows on from the launch of the LiDCOplus version 4.1 software, the new LiDCO PC products LiDCOviewSE and LiDCOviewPRO (launched) and LiDCOlive (in development and discussed below). LiDCOrapid was launched on target in April of this year with the first shipments of product to our distributor customers. Customer response to this exciting product has been exceptional and we are expecting this product to represent a new standard of care for major surgery patients.
We believe that the combination of the LiDCOplus and LiDCOrapid monitors and our data analysis PC software products collectively represent the most evolved platforms available today for the care and hemodynamic optimization of both intensive care and surgery patients.
LiDCOlive – data display independent of location
The LiDCOlive development is aimed at the creation of a virtual intensive care unit, taking real-time hemodynamic patient data and easy-to-interpret screens to the clinician - irrespective of their physical location. Location-independent monitoring is required to offset the growing shortage of the highly skilled staff needed to care for these patients. LiDCO is therefore developing a PC-based software product called LiDCOlive that can display the LiDCOplus Monitor trend screen and real-time patient data on any PC or laptop regardless of location. The clinician, together with the nurse at the patient’s bed-side, can then discuss potential treatment approaches and immediately see the effects of their agreed change in fluid or drug therapy. This ”virtual ICU” approach using LiDCO's technology has the potential to make a considerable improvement in the care of high-risk patients and to make best use of the skills of the hospital clinical staff. The prototype LiDCOlive product has been successfully demonstrated in Japan, the Czech Republic and the USA at various international meetings this year. One of the trialists of LiDCOlive, Dr. Loua Shaikh (Department of Critical Care Medicine, Frimley Park Hospital, UK), said: “In terms of patient care, the impact of time and distance on the delivery of experience and expert knowledge to the bedside are considerably diminished."
The LiDCOlive software is still a product in development but we expect the first generation of this product to be available during the second half of 2008.
Terry O’Brien
Chief Executive Officer
23 April 2008
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