Interim Results

Sinclair Pharma plc

Interim Results

Revenue £21.3 million, headline growth of 6% with Ex-US revenues up 18% at constant currency.

Sinclair Pharma plc (SPH.L), ("Sinclair", or the "Group", or the "Company") the international aesthetics company, today announces its unaudited interim results for the six months ended 30 June 2018.

Highlights

- Revenues increased 6% to £21.3 million (H1 2017: £20.1 million)

o Silhouette Soft® sales increased 8% to £7.9 million (H1 2017: £7.3 million)

o Ellansé® sales increased 19% to £5.0 million (H1 2017: £4.2 million)

o Perfectha® sales increased 7% to £4.5 million (H1 2017: £4.2 million)

- Ex-US business grew strongly reporting 18% increase in revenues on a constant currency basis

- Regained US distribution rights for Silhouette InstaLift® following early termination of Thermi distribution agreement on 31 March

o Sales between 1 April and 30 June 2018 of £0.8 million, ahead of management's expectations

- Successful formation of new direct sales operation in US

- Successful launch of Ellansé® in Brazil

- Adjusted EBITDA* loss of £1.6 million (H1 2017: loss of £1.7 million)

- Operating loss of £8.5 million (H1 2017: £5.5 million)

- New €23.0 million debt facility in place with Hayfin to fund investment in future growth

- Net debt at 30 June 2018 of £14.8 million

Post Period Highlights

- On 5 July 2018 announced that Sinclair had received an approach from China Grand Enterprises, Inc. and its affiliate company Huadong Medicine Co., Ltd

- On 28 August 2018 announced that an offer agreement had been entered into regarding the terms of a possible offer by Huadong Medicine Aesthetics Investment (Hong Kong) Limited ("Huadong") at a price of 32p per share

- On 18 September 2018 announced a recommended cash offer from Huadong at 32p per share valuing the entire issued and to be issued share capital of Sinclair at approximately £166.6 million

Chris Spooner, CEO, commented: "I am pleased with the performance of the Group in the first half of 2018 which has seen a consolidation of our direct presence in several key markets. Much was achieved during the period and the Group continues to see strong demand for its products. Sinclair is well placed to deliver strong second half sales, particularly in leading markets Brazil, South Korea and the US, and underpinned more generally by a growing global aesthetics market. Trading since the end of the interim period has shown significant growth over the same period in 2017. We remain confident of delivering strong sales growth for the full year ending 31 December 2018."

*Adjusted EBITDA defined as earnings before interest, tax, depreciation, amortisation, impairment, share-based payments, exceptional items and loss from discontinued operations.

Ends

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About Sinclair Pharma plc - www.sinclairpharma.com 

Sinclair Pharma plc is an international company operating in the fast growth, high gross margin, global aesthetics market. Sinclair has built a strong portfolio of differentiated, complementary aesthetics technologies, which are experiencing significant growth, targeting unmet clinical needs for effective, high quality, longer duration, natural looking and minimally-invasive treatments. Sinclair has an established sales and marketing presence in the leading EU markets, Brazil, South Korea and the US, and a network of international distributors worldwide.

"Safe Harbor" Statement under the US Private Securities Litigation Reform Act of 1995: Some or all of the statements in this document that relate to future plans, expectations, events, performances and the like are forward‐looking statements, as defined in the US Private Securities Litigation Reform Act of 1995. Actual results of events could differ materially from those described in the forward‐looking statements due to a variety of factors. BUSINESS REVIEW

The first half of 2018 has been very important for the development of Sinclair, as the Group has consolidated its direct presence in a number of strategically important markets, namely the US, Brazil, South Korea and Mexico. During this period Sinclair has established a strong footprint to drive the future growth of the business.

In the US, Sinclair announced in April 2018 the creation of its own direct sales operation following the early termination of the distribution agreement with ThermiGen ("Thermi"). There were no sales of Silhouette InstaLift® in Q1 2018 following over stocking at the end of 2017. However, sales of £0.8 million in the period from April to 30 June 2018 exceeded management's expectations, and provided early signs of encouragement. This performance reaffirms our belief that the US is a major market opportunity for Silhouette InstaLift®, and that the product's reputation remains highly positive among both using physicians and patients. Our ambition to grow the salesforce steadily is on track with 12 reps now directly employed, and we continue to expect to build to 15 reps by the end of the year.

In Brazil, we were very pleased to announce the approval of Ellansé in January 2018, earlier than originally anticipated. This enabled Sinclair's Brazilian affiliate to launch Ellansé at the end of March. In May 2018, Sinclair held its first LATAM World Expert Meeting in Rio de Janeiro, which was attended by over 900 physicians from across the region. With a full portfolio of Silhouette Soft®, Ellansé® and Perfectha® now all approved and launched through our Brazilian affiliate, Sinclair is well placed to drive strong growth from this important market.

In South Korea, Sinclair has expanded its direct sales team to 14 sales representatives over the first half of 2018 and in the process has taken back direct control of Ellansé® from the local distributor in this important market. Sales of Ellansé grew slowly in the period while the previous distributor sells down inventory. However Silhouette Soft® revenues have continued to grow strongly in this country, reaching £2.0 million in the first six months and in the process became the product's largest territory.

In Mexico, negotiations were concluded with our local partner to enable the launch of a Sinclair direct affiliate in Q3 2018 and in the process, we have taken control of our three brands in another fast growth and strategically important aesthetics market.

In Europe, restructuring activities undertaken in 2017 have resulted in a much improved performance in the period, with the UK in particular performing strongly.

Recommended Cash Offer

Post the period end, on 5 July 2018, Sinclair announced that it had received an approach from China Grand Enterprises, Inc. and its affiliate company Huadong Medicine Co., Ltd. On 28 August 2018 Sinclair announced that an offer agreement had been entered into regarding the terms of a possible offer by Huadong Medicine Aesthetics Investment (Hong Kong) Limited ("Huadong") at a price of 32p per share. On 18 September 2018 Sinclair announced a recommended cash offer from Huadong at 32p per share valuing the entire issued and to be issued share capital of Sinclair at approximately £166.6 million. A scheme of arrangement circular setting out further details on the recommended cash offer is expected to be posted to shareholders shortly.

Silhouette Soft®

Sales grew to £7.9 million in the period (H1 2017: £7.3 million), representing reported growth of 8.2% and a constant currency growth rate of 12.0%. Growth has been strong in a number of regions, in particular South Korea, South East Asia and the UK. Increasing adoption of new techniques involving more sutures per procedure, which produces an improved clinical outcome and therefore patient satisfaction, is driving sales growth in many markets and this trend is expected to continue as Sinclair's Practice Development Programme is rolled out to physicians and clinics. 

Ellansé®

Ellansé® delivered strong growth in the period achieving revenues of £5.0 million (H1 2017: £4.2 million), representing actual growth of 19.0% (20.2% on a constant currency basis). Growth remains broad based, most notably in Brazil where the product has performed strongly following launch in March 2018, and provides a key growth opportunity for the second half of 2018 and beyond. The fast uptake by doctors and evident enthusiasm for the product is highly encouraging and we are well placed to take advantage with our largest sales force based in this market. Elsewhere, growth was strong in the UK as well as in a number of Asian markets, while in South Korea sales through Sinclair's own affiliate are increasing month over month as the market is now largely free from our ex distributor's inventory which we expect will lead to a much stronger performance in the second half. 

Perfectha®

Revenues increased 7.1% to £4.5 million in the period (H1 2017: £4.2 million) equivalent to 8.7% growth on a constant currency basis. Growth was driven by the brand's re-launch in Brazil in Q4 2017 where sales have exceeded our expectations, as well as continued strong performance by partner DNC in South Korea, the product's largest market.

Sculptra®

Revenues were £3.1 million compared with £2.0 million in H1 2017 with the pickup in demand seen in the second half of 2017 continuing through into H1 2018.

Product Development

The expansion of the portfolio through continued product development and line extensions is an essential part of our growth strategy.

In China, Ellansé development responsibilities reside with our partner Clovers Medical Technology Ltd. The 12 month China clinical study is fully recruited and will report in Q1 2019. Approval is expected in 2020. In the US, the Ellansé IDE submission is expected in Q1 2019 ahead of a planned 12-24 months study and first approval of Ellansé in 2021.

The regulatory approval process for Perfectha Lidocaine is now well underway and the Board continues to expect that a CE Mark for this important line extension to the Perfectha family will be granted during 2019. Development of Perfectha Lips has also continued in the period with an initial launch in Europe in 2020/21 on track.

The launch of Silhouette Refine® in the US also remains on track for H1 2019 as the switch to a new site for commercial manufacture moves closer following the fire damage to the original production facility in 2017.

Financial Review

Revenue for the six month period to 30 June 2018 reached £21.3 million, compared with £20.1 million for the same period in 2017, representing headline growth of 6.0%. The Group's ex-US business performed encouragingly in the period with sales of £20.5 million (2017: £17.6 million) representing reported growth of 16.5% and 18.0% on a constant currency basis.

Gross profit increased by 1.9% to £14.8 million as a result of the increase in revenues but offset by a reduction in the gross margin to 69.7% (2017: 72.4%). The gross margin was adversely impacted by selling repurchased Silhouette InstaLift® inventory in the US and by the improved performance of lower margin Sculptra® that made up a larger proportion of overall sales than in the prior year.

Selling, marketing and distribution costs declined to £10.9 million for the period compared with £11.1 million in 2017 due to the end of marketing support contributions to Thermi, partly offset by costs of the new direct presence in South Korea, launch costs of Ellansé® in Brazil and the Group's new US operation.

Adjusted EBITDA* loss for the period was £1.6 million (2017: loss of £1.7 million).

Exceptional items included within administrative expenses in the period amounted to £3.5 million. These include the early termination fee paid to Thermi in order to regain the rights to Silhouette InstaLift (£1.4 million) and an inventory provision of £1.9 million arising on the excess inventory taken back from Thermi in order to ensure an orderly in market transition for the brand.

Finance costs of £2.9 million for the period (2017: £2.3 million) include the non-cash discount unwind charge on deferred consideration liabilities of £1.6 million as well as early termination costs on existing borrowings resulting from the new debt facility (£0.6 million) and interest on overall borrowings of £0.4 million.

Cash flow

Net cash used in operating activities before exceptional items and discontinued operations was reduced to £3.1 million from £3.8 million in 2017 as a result of better management of working capital. Exceptional items paid of £2.7 million and the final tranche of the Alliance Pharma warranty claim (£1.0 million) resulted in net cash outflow from operations of £7.0 million (2017: £10.3 million). A significantly lower level of non-operating cash outflows is expected in the second half of the current financial year.

Cash used in investing activities in the period was £3.8 million, including payment of deferred consideration liabilities of £2.9 million as well as general capital expenditure.

Borrowings

In February 2018, the Group received an investment of £3.6 million via a convertible loan from EW Healthcare Partners. The proceeds of this investment were used to settle the one-off exit payment and acquisition of inventory arising from the early termination of the distribution agreement with Thermi for Silhouette InstaLift® in the US. Interest accrues at 8.0%, compounded annually, and if not converted the loan is repayable not before 1 September 2020. The loan is convertible from three months post issue at a price of 28p per ordinary share.

In April 2018, the Group announced the signing of a new five year €23.0 million debt facility from Hayfin Capital Management. This new facility was taken on to repay existing bank borrowings of £5.0 million and to fund the Group's investment in future growth, especially in building out the direct operation in the US and to settle nearer-term deferred consideration liabilities. Net debt at 30 June 2018 was £14.8 million.

*Adjusted EBITDA defined as earnings before interest, tax, depreciation, amortisation, impairment, share-based payments, exceptional items and loss from discontinued operations.

Outlook

Much was achieved during the first half of 2018 and the Group continues to see strong demand for its portfolio of differentiated, high growth aesthetics products. Sinclair is well placed to deliver strong second half sales, particularly in leading markets Brazil, South Korea and the US, and underpinned more generally by a growing global aesthetics market. Trading since the end of the interim period has shown significant growth over the same period in 2017. Sinclair remains confident of delivering strong sales growth for the full year ending 31 December 2018 with at least mid-teens percentage constant currency revenue growth in the ex-US business and with full year US sales of approximately £3.0 million on a constant currency basis. At the adjusted EBITDA level, the Board continues to expect the Group to remain profitable in 2018 despite the reduction in US sales and investment in the Group's growing direct operations.

Sinclair Profit Forecasts

In its annual report and accounts for the financial year ended 31 December 2017, Sinclair made the following statement (page 9):

"At the adjusted EBITDA level, the Board expects the Group to remain profitable in 2018 despite the reduction of sales in the US, significant Ellansé® launch costs in Brazil and the incremental costs of the direct operation in South Korea."

In these unaudited interim results, Sinclair makes the following statement:

"At the adjusted EBITDA level, the Board continues to expect the Group to remain profitable in 2018 despite the reduction in US sales and investment in the Group's growing direct operations."

The above statements constitute profit forecasts for the purposes of Rule 28 of the Code (together, the "Sinclair Profit Forecasts").

Basis of preparation

The Sinclair Directors confirm that the Sinclair Profit Forecasts have been properly compiled and are based on the unaudited interim results for the six months ended 30 June 2018, the unaudited management accounts of Sinclair for the eight months ended 31 August 2018 and an unaudited forecast for the period ending 31 December 2018.

The Sinclair Profit Forecasts exclude the costs and ongoing impact of the offer by Huadong to acquire the entire issued and to be issued share capital of Sinclair.

The Sinclair Profit Forecasts have been prepared on a basis consistent with the accounting policies of Sinclair, which are in accordance with IFRS and are those that Sinclair expects to apply in preparing its annual report and accounts for the financial year ending 31 December 2018.

Sinclair Directors' confirmation

The Sinclair Directors have considered the Sinclair Profit Forecasts and confirm that they remain valid as at the date of this document and that they have been properly compiled on the basis set out above and that the basis of the accounting policies used is consistent with the accounting policies of Sinclair, which are in accordance with IFRS and are those that Sinclair expects to apply in preparing its annual report and accounts for the financial year ending 31 December 2018.

Unaudited Consolidated Income Statement

For the six months ended 30 June 2018

Unaudited Consolidated Statement of Comprehensive Income

For the six months ended 30 June 2018

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information.

Unaudited Consolidated Balance Sheet

As at 30 June 2018

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information.

Unaudited Consolidated Statement of Changes in Shareholders' Equity

For the six months ended 30 June 2017

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information.

Unaudited Consolidated Statement of Cash Flows For the six months ended 30 June 2018

The notes on pages 12 to 20 form an integral part of this condensed consolidated interim financial information.

Notes to the unaudited condensed consolidated half-yearly financial information

1. General Information, basis of preparation and accounting policies

Sinclair Pharma plc (the 'Company') is an international speciality pharmaceutical company focused on Aesthetics. The Group has a direct sales and marketing presence in the UK, Spain, France, Germany, Brazil, South Korea and the US and a rapidly growing international division concentrated on key emerging markets through long-term multi-product and multi-country sales, marketing and distribution deals with key strategic partners.

The principal activities of the Group are the manufacture, commercialisation and sale of aesthetic products. The Group is also engaged in research and development and owns various product rights and licences in different territories.

The Company is a public limited company which is listed on the AIM market of the London Stock Exchange, and is incorporated and domiciled in the United Kingdom. The address of its registered office is Whitfield Court, 30-32 Whitfield Street, London, W1T 2RQ, England.

This condensed consolidated interim financial information for the six months ended 30 June 2018 is prepared in accordance with the Group's accounting policies which are based on the recognition and measurement principles of International Financial Reporting Standards ("IFRS") as adopted by the EU and effective, or expected to be adopted at 31 December 2018.

The interim condensed consolidated financial report should be read in conjunction with the annual financial statements for the year ended 31 December 2017, which have been prepared in accordance with IFRSs as adopted by the European Union. Statutory accounts for the year ended 31 December 2017 were approved by the board of Directors on 03 May 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Sections 498 (2) or (3) of the Companies Act 2006.

This condensed consolidated interim financial information for the six months ended 30 June 2018 has not been audited or reviewed and does not constitute full statutory accounts within the meaning of Section 434 of the Companies Act 2006. The unaudited interim financial statements were approved for issue by the Board of Directors on 27 September 2018.

Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2017, as described in those annual financial statements. These are available on the Company's website at www.sinclairpharma.com.

The Group has adopted the following accounting standards for the first time for the year commencing 1 January 2018:

IFRS 9 'Financial instruments' - this addresses the classification, measurement and recognition of financial assets and financial liabilities. An expected credit losses model replaces the incurred loss impairment model used in IAS39. The classification and measurement basis for the Group's financial assets and liabilities are unchanged by adoption of IFRS9. The main impact of adopting IFRS9 arises from applying the expected loss model to the provision for impairment of trade receivables, which has not resulted in a material impact on the results or net assets of the Group.

IFRS 15 'Revenue from contracts with customers' - this deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. The Group has carried out a review of existing contractual arrangements which has not resulted in a material impact on the results or net assets of the Group.

Estimates

The preparation of the interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported values of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these condensed interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2017.

Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss, ignoring other timing differences which may occur between now and the year end.

2. Segment information

The chief operating decision maker has been identified as the Board of Directors. The Board reviews the Group's internal reporting in order to assess performance and allocate resources. Based on this, management has determined that, the continuing business consists of one reportable segment, which is Aesthetics.

The Board assesses the performance of the reportable segment based on a measure of adjusted earnings before interest, tax, depreciation, amortisation, exceptional items and share based payments (Adjusted EBITDA).

The Board also monitors business performance based on geographic destination of sales. Revenues on a geographic basis were as follows:

A reconciliation of total adjusted EBITDA to operating loss is provided as follows:

Segment information (continued)

3. Exceptional items

Exceptional items represent significant items of income and expense which due to their nature, size or the expected infrequency of the events giving rise to them, are presented separately on the face of the income statement to give a better understanding to shareholders of the elements of financial performance in the current period, so as to facilitate comparison with prior periods and to better assess trends in financial performance.

In March 2018, Sinclair terminated its US distrubition agreement for Silhouette InstaLift with ThermiGen LLC and consequently incurred a termination payment of $2,000,000 (£1,423,000).

The inventory provision relates to the write off of excess inventory acquired from ThermiGen LLC, following termination of the distribution agreement.

Business development costs were incurred exploring options for the distribution of Silhouette InstaLift in the US following the early termination of the ThermiGen contract and prior to establishing the Group's direct presence.

Adjustments to contingent consideration in the six months to 30 June 2017 include a debit of £593,000 following changes to the profile of deferred consideration payments for the acquisition of Obvieline SAS, and changes to the forecast timing of payments for certain milestones payable following the acquisition of Silhouette Lift SL. These adjustments have been debited to the income statement as the changes were triggered more than twelve months after the original acquisition completion date. There is no tax impact of these adjustments.

4. Finance expense

5. Taxation

6. Loss per share

The basic loss per share has been calculated by dividing the loss for the period by the weighted average number of shares in existence. The diluted loss per share is the same as the basic loss per share, as a loss is not dilutive.

7. Goodwill

Exchange adjustments arise as a result of the impact of the difference in the Sterling: Euro exchange rate and the Sterling: US Dollar exchange rate during the period.

8. Intangible assets

9. Trade and other receivables

11. Borrowings

The Group's borrowings are denominated in the following currencies

Borrowings (continued)

On 21 February 2018, the Group agreed a £3.6 million investment in the Group via the issue of a convertible loan to EW Healthcare Partners ("EW"). Interest accrues at 8%, compounded annually, and if not converted into Ordinary shares, will mature no earlier than 1 September 2020. Conversion into Ordinary shares in the Company can occur at any time from three months post the date of issue at a conversion price of 28.0p per Ordinary share. The convertible loan is secured by way of a second ranking charge over the Group's assets. The proceeds of the investment were used to finance the one-off payment and acquisition of inventory following the termination of the US distribution agreement for Silhouette InstaLift with ThermiGen LLC.

On 27 April 2018, the Group agreed a new five year €23.0 million term loan facility with Hayfin Capital Management. Proceeds of the facility were utilised to repay existing borrowings of £5.0 million, and will fund growth (particularly in the Group's direct operations in the US and South Korea), settle deferred consideration liabilities as they come due and to invest in expanding as well as upgrading and increasing Ellansé® manufacturing capacity and pre US clinical trial development activities for Ellansé®.

The facility is available in two tranches, the first €17.3 million was drawn immediately, and a further €5.7 million is available to be drawn before 31 March 2019, with a five year term ending in April 2023. Interest is charged at EURIBOR+9.0% (subject to a EURIBOR floor of 0.75%) with interest being added to the capital balance for the first 18 months of the facility. The facility is secured by a first ranking fixed and floating charge over the assets of the Group.

Movements in borrowings are analysed as follows:

12. Other financial liabilities 

Other financial liabilities include deferred and contingent purchase consideration which falls due as follows:

Items of deferred and contingent consideration represent the Directors' estimate of the fair value of the assumed contractual minimum liabilities discounted to their present value.

13. Cash flow from operating activities