Editing Instem plc: Final Results

Instem plc (AIM: INS), a leading provider of IT solutions to the global life sciences market, announces its unaudited results for the year ended 31 December 2021 (the "Period").

== Details ==

The achievements of the Company in the year have been outstanding. Not only has our operational performance been exceptional but the business has also accomplished a fundamental strategic shift in its scale and reach as a result of the completion of three important acquisitions. As a consequence, our standing within the wider industry has been significantly enhanced.

Whilst the integration of the acquired businesses is ongoing, we have already seen the benefits of their skillsets and teams operating within the enlarged Group, providing a significant contribution to our overall financial performance in the year.

The Company's strong infrastructure and ability to operate remotely provided essential resilience in our business operations as the pandemic continued. We are delighted with and thankful for the team's efforts throughout this challenging period.

We have made notable progress on a number of key metrics during the Period. In particular:

We were delighted to welcome Mr Riaz Bandali to the Board in December 2021. Riaz has spent his entire career in the healthcare and life sciences industries in a variety of strategic, commercial and operational roles at senior level, also including exposure to fundraising and M&A activity and, as such, brings a wealth of relevant experience and contacts in the North American and wider life sciences industry. We are also continuing with our efforts to identify a further suitable Independent NED candidate and look forward to updating shareholders in due course.

We were also delighted to appoint Stifel  as Joint broker alongside/with Singer Capital Markets to enhance our presence, both in the North American and European investor markets.

In the short term, we are confident that we can continue to execute our growth plans for the Group. That said, labour cost inflation, in particular, has significantly increased in recent times. As a result, although anticipating material improvement over 2021, we are prudently moderating our profit expectations for the current year, whilst planning to regain ground in the following year, as justifiable price increases flow through to revenue.

Whilst our near-term focus remains on completing the successful integration of the recently acquired businesses, the Board believes that this new platform will create substantial opportunities for further development of the business. These include:

In summary, we believe that the momentum and platform we now have in place ensures that the Company is well positioned for continued success over the longer term.

During 2021, the Group materially advanced its ability to pursue its strategic thesis of providing data driven, "in silico" alternatives to traditional client experimental processes with the aim of radically reducing the cost and time of life sciences R&D. The strategy is based on leveraging trusted client and regulatory relationships and our intimate understanding of complex scientific data, established by providing a broad portfolio of market leading IT solutions that optimize today's life sciences R&D processes, from early discovery to late-stage clinical trials.  The acquisition of The Edge has strengthened our position in discovery and d-wise adds a well-respected market leader in the analysis and de-identification of clinical trial data.  Instem's already strong market presence in non-clinical development was enhanced by the acquisition of long-term competitor PDS and we are now well positioned to provide innovative solutions across the entire R&D continuum.

Organic growth remained strong, with retention of recurring SaaS and Annual Support revenue once again ahead of our 98% key performance indicator and new business win rates confirming our market leadership across our broad portfolio.  Although the increasing rate of SaaS deployment, for existing and new clients, moderated short term revenue growth, due to the switch from perpetual license revenue recognition to longer term subscription rentals, overall organic revenue growth remained strong.

The market backdrop continues to be favourable for the Group given global population growth and life expectancy underpinning increased demand for successful innovation in life sciences. Increasing amounts of money are being invested in the biotech industry with the pharmaceuticals sector investing heavily in drug development, underpinning a strong pipeline for Instem. The market dynamics were highlighted further by the ongoing COVID-19 pandemic, which presented a number of new opportunities as R&D increased with all the major companies focusing on developing vaccines or therapies.

The constant development of the drug discovery pipeline continues to drive demand for Instem's solutions - which enable companies to provide faster and cheaper routes to market for their life changing products. Importantly, the regulatory-backed Standard for the Exchange of Non-clinical Data ("SEND") continues to underpin longer term opportunity and visibility in the non-clinical segment. Similar regulatory standards help with demand for our clinical trial analysis solutions and mandatory provision of de-identified clinical trial data for European and Canadian regulatory authority approved drugs enhances demand for our clinical trial transparency software and services.

Performance here was very pleasing, with revenue growth compared with the prior period of 35%, with 17% organic growth and 17% from acquisitions, including 10 months contribution from The Edge and 4 months from PDS.

The 11% increase in the number of drugs in the non-clinical stage of development has supported significant growth for the contract research organizations (CROs) specializing in this area and they in turn have been purchasing additional users for our products, additional product modules that they had not yet licensed and services to support their successful deployment and use of our solutions.

Following a slow H1 2021, as a result of the pandemic, demand picked up during H2.  This is an area where we have historically generated significant market awareness and sales pipeline at scientific conferences, as both Instem staff and reference clients presented a new, "disruptive" approach to the established method of assessing the potential safety issues of modulating a biological target thought to offer therapeutic benefit.  We were eagerly awaiting the post COVID-19 return to in person conferences, which were further delayed by the Delta and Omicron variants.  Post period end, in late March 2022 we attended the largest event of this type, the "Society of Toxicology" annual meeting, and were extremely encouraged by the strong interest in our In Silico solutions.

In November 2021 the Company announced the release of the latest edition of its Leadscope Model Applier computational toxicology software solution. This release included a comprehensive package of new and updated models to meet the growing market demand for in silico solutions, which are often heavily encouraged and supported by the global regulatory authorities.

Every drug company is required to submit non-clinical data in the SEND format to the FDA (Food and Drug Administration) as part of the processes for testing and getting approval for a new drug. The combination of the industry's focus on addressing a continuing backlog of SEND conversion work, in addition to the standard being extended to new study types, provides a solid platform for continued growth.

The acquisition of competitor PDS allows for greater industry standardization on Instem's SEND technology platform and has brought a further 17 US-based SEND consultants to an outsourced services team of 72 people, 38 of whom are based in India.  Instem's expertise, capacity, and business in this area is unrivalled.

The acquisition of d-wise on 1 April 2021 led to the creation of a fourth business unit, Clinical Trial Acceleration, which pleasingly met its EBITDA-based earn out target for the financial year ending 31 December 2021.

Solid progress was made in all areas of the business, with material contribution during the period from two statistical computing environment (SCE) solution lines of business:

Focus and investment increased during the year on Aspire, a next generation clinical analytics framework of flexible components that can be leveraged in both the productised or custom approaches to building and deploying SCE solutions. Aspire is expected to significantly speed up the time to deployment of a new SCE solution, to provide recurring SaaS revenue and, ultimately, to result in higher project margins.

With some Covid-related relaxation by the European and Canadian regulatory authorities of the requirement for submission of anonymised clinical trial data for each approved new drug, we experienced lower than expected demand for our clinical trial transparency products and outsourced services, however this remains a promising regulatory mandated growth opportunity.

The directors review monthly revenue and operating costs to ensure that sufficient cash resources are available for the working capital requirements of the Group. Primary KPIs at the year-end were:

{| class="wikitable"

Earnings before interest, tax, depreciation, amortisation and non-recurring items (Adjusted EBITDA) increased by 41% to £8.3m (2020: £5.9m). For this measure of earnings, the margin as a percentage of revenue decreased in the period to 17.9% from 21% in 2020, entirely due to the impact of the lower than Instem average margins of d-wise and PDS.  

Non-recurring costs in the period were £1.29m (2020: £0.06m), consisting of £0.1m for legal expenses associated with historical contract disputes, £0.17m for share based payments and £1.02m of acquisition costs. Non-recurring income of £0.8m ($1.1m) relates to US federal government COVID-19 support loans, which were forgiven during 2021, refer to note 3 for non-recurring items.

Finally on 1 September 2021, Instem announced the acquisition of PDS Pathology Data Systems Ltd ("PDS"), a direct competitor in the life sciences space with headquarters in Switzerland and offices in the United States and Japan. The Initial Consideration was satisfied by CHF 4.7m in cash (c. £3.7m) and CHF 3.5m (c. £2.8m) via the issuance of 359,157 new ordinary shares of 10p each in Instem plc.  The cash payment, loan repayments and other net liabilities payments are being funded from the Group's existing financial resources. PDS acquisition enables Instem to concentrate investment on a single line of SEND and preclinical study management products, removing unnecessary duplication in the market. The combination of technologies and highly experienced teams will enable the Group to enhance the development and delivery of existing and new solutions that provide higher value to its clients.

The financial obligations associated with these acquisitions during 2022 and 2023 are deferred and contingent consideration payments of £6.5m and £5.3m respectively, in a combination of cash and shares. The contingent consideration reflects management's estimate that the entities will achieve the profitability target. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be settled in a combination of cash and shares of Instem plc at the discretion of the Group. However, the amount of £0.8m which is part of the d-wise deferred consideration will be payable in shares.

At 31 December 2021, the IAS19 accounting pension deficit decreased by £1.9m to £2.0m (2020: £3.9m). The agreed Group cash contributions currently approximate to £0.6m per annum, payable through to September 2026. The deficit at the 2021 year-end of £2.0m (2020: £3.9m) is represented by the fair value of assets of £14.0m (2020: £12.5m) and the present value of funded obligations of £16.0m (2020: £16.4m), after applying a discount rate of 1.90% (2020: 1.40%).

This Annual Report and Accounts contains certain financial alternative performance measures ("APMs") that are not defined or recognised under IFRS but are presented to provide readers with additional financial information that is evaluated by management and investors in assessing the performance of the Group. This additional information presented is not uniformly defined by all companies and may not be comparable with similarly titled measures and disclosures by other companies.

The table below provides the data for certain performance measures mentioned above:]

{| class="wikitable"

|+

£000

£000

|-

|Annual support fees

|14,378

|8,917

|-

|SaaS subscription and support fees

|9,704

|8,024

|-

|Recurring revenue

|24,082

|16,941

|-

|Licence fees

|4,597

|3,477

|-

|Professional services

|3,651

|1,603

|-

|Technology enabled outsourced services

|6,378

|6,196

|-

|Consultancy services

|7,309

|<nowiki>-</nowiki>

|-

|Total revenue

|46,017

|28,217

|26,724

|}

An historical contractual licence dispute, which does not affect the ongoing operations of the Group, was heard by a German court on 17 March 2022 and the official outcome is awaited. The Group has been defending the action and strongly believes that the claim should be dismissed.  

Notwithstanding this, the cost provision of £0.25m made in 2017 has been maintained in the 2021 financial statements. As the potential financial outcome cannot yet be determined with any certainty the Board has concluded that the £0.25m provision was appropriate at 31 December 2021. To date all legal expenses have been expensed.

NOTES TO THE FINANCIAL STATEMENTS

The principal activity and nature of operations of the Group is the provision of world class IT solutions to the life sciences market. Instem's solutions for data collection, management and analysis are used by customers worldwide to meet the needs of life science and healthcare organisations for data-driven decision making leading to safer, more effective products. Instem plc is a public limited company, listed on AIM, and incorporated in England and Wales under the Companies Act 2006 and domiciled in England and Wales. The registered office is Diamond Way, Stone Business Park, Stone, Staffordshire, ST15 0SD.

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements for the years ended 31 December 2021 or 2020 as defined in section 435 of the Companies Act 2006 (CA 2006). The financial information for the year ended 31 December 2021 has been extracted from the Group's unaudited financial statements. Statutory financial statements for 2020 have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

This financial information has been prepared on a going concern basis and prepared on the historical cost basis. Refer to the Going Concern note for further details.

These results were approved by the Board of Directors and authorised for issue on 26 April 2022. This document contains certain forward-looking statements which reflect the knowledge and information available to the Company during the preparation and up to the publication of this document. By their very nature, these statements depend upon circumstances and relate to events that may occur in the future thereby involving a degree of uncertainty. Therefore, nothing in this document should be construed as a profit forecast by the Company.

While the financial information included in this preliminary announcement has prepared in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006, this announcement does not in itself contain sufficient information to comply with UK-adopted international accounting standards.

The Group and Company financial statements have been prepared in accordance with IFRS, IAS and International Financial Reporting Interpretations Committee (IFRICs) effective as at 31 December 2021. The Group and Company have chosen not to adopt any amendments or revised standards early.

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB which are all effective from 1 January 2021. The most significant of these are as follows:

Those standards, amendments to standards, and interpretations have been adopted and did not have a material impact on the accounting policies of the Group.

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the Group has decided not to adopt early. The most significant of these are as follows, which are all effective for the period beginning 1 January 2022:

These standards are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred.

Contingent consideration that is classified as an asset or a liability is re-measured at subsequent reporting dates with the corresponding gain or loss being recognised in statement of comprehensive income.

The financial position of the Group, its cash flows and liquidity position are set out in the primary statements within these financial statements.

The Directors have adopted the going concern basis in preparing these financial statements after careful assessment of identified principal risks and the possible adverse impact on financial performance. The Directors have assessed the financial position and liquidity at the end of the reporting period and for the forecast period up to 30 April 2023, including sensitivity analysis. The going concern period covers the 12 months from the date of signing the financial statements. The process and key judgments in coming to this conclusion are set out below.

The Group's activities, including the factors likely to affect its future development, performance and position are set out in the Chairman's Statement and Strategic report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review.

The Group's trading performance for the year ended 31 December 2021 has been strong with Revenues of £46.0m and Adjusted EBITDA of £8.3m. Instem is fully operational, with all staff in all territories working from home in accordance with governmental guidelines, no staff have been furloughed and there is no intention of curtailing any business activities. The company has continued to recruit staff across its geographic footprint.

The financial cash obligations associated with these acquisitions during 2022 are deferred and contingent consideration payments of £3.6m and £2.5m respectively. The contingent consideration reflects management's estimate of a 100% probability that the entities target profitability will be achieved. The amount of £1.1m payable to d-wise in relation to its contingent consideration could be a combination of cash and shares of Instem plc at the discretion of the Group.

The Company has considered two scenarios which are also linked to the company's risks when modelling the forecast results and cash flow. The sensitivity assessment includes the trading performance and cash flows of the three acquisitions occurred in 2023.

In a worse scenario where many of the identified risks occurred, the Group would take remedial action to counter the reduction in profit and cash through a cost cutting and fund-raising exercise that would include staff redundancies, general cost control measures. These further downside scenarios are considered unlikely.

After considering the uncertainties described above, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing this annual report and accounts.

In the process of applying the Group's accounting policies, which are described above, management have made judgements and estimations about the future that have the most significant effect on the amounts recognised in the financial statements. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of revision and future periods if the revision affects both current and future periods.

The following judgments have the most significant effect on the financial statements.

The Group invests on a continual basis in the development of software for sale to third parties. There is a continual process of enhancements to and expansion of the software with judgement required in assessing whether the development costs meet the criteria for capitalisation. These judgements have been applied consistently year on year. In making this judgement, the Group evaluates, amongst other factors, whether there are future economic benefits beyond the current period, the stage at which technical feasibility has been achieved, management's intention to complete and use or sell the product, the likelihood of success, availability of technical and financial resources to complete the development phase and management's ability to measure reliably the expenditure attributable to the project. Judgement is therefore required in determining the practice for capitalising development costs.

Information about estimations and assumptions that may have the most significant impact on recognition and measurement of assets, liabilities, income and expenses is provided below. Actual results may be substantially different.

For Professional services and technology enabled outsourced services revenue recognition there is a significant estimation of the planned project hours, which determines the percentage of completion of service revenue contracts. Before the project is started, the project manager estimates the budgeted hours needed for the agreed services. If the project is expected to overrun, then the project manager will amend the expected budgeted hours in accordance with the new available information which also mitigates the risk of early revenue recognition.

The Group has disaggregated revenue into various categories in the following tables which are intended to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Historically the Group's finance systems have recorded costs centrally and have managed costs in this way. Over recent years the Group has expanded both organically and through acquisition, increasing the number of products and services offered and in 2020 the Group reported through three operating segments, Study Management, Regulatory Solutions and In Silico Solutions. During 2021 the fourth segment, Clinical Trial Acceleration (CTA), was established after following the acquisition of d-wise.