Vectura Group plc - 2020 Interim Results
2020 Interim Results
- Vectura reports 2020 financial performance on-track and demonstrates progress on strategy execution with 12 new CDMO deals signed year to date -
Chippenham, UK – 15 September 2020: Vectura Group plc (LSE: VEC) ("Vectura”, “the Group", “the Company”), an industry-leading specialist inhalation CDMO, today announces its unaudited Interim Results for the six-months ended 30 June 2020.
Financial summary
| H1 2020 | H1 2019 (restated) | % change | |
| Revenue | £89.7m | £91.7m | (2.2%) |
| Gross profit | £44.8m | £51.9m | (13.7%) |
| Research and development1 (‘R&D’) | (£12.8m) | (£18.1m) | (29.3%) |
| General and administrative1 | (£15.5m) | (£14.0m) | 10.7% |
| Adjusted EBITDA2 | £23.1m | £25.1m | (8.0%) |
| Operating profit/(loss)3 | £2.9m | (£14.1m) | n/m |
| Basic earnings/(loss) per share3 | 0.3p | (2.0p) | n/m |
| Cash from operating activities | £19.9m | £3.2m | >100% |
| H1 2020 | 31 Dec 2019 | % change | |
| Cash and cash equivalents | £81.9m | £74.1m | 10.5% |
Operational highlights
- Executing on strategy to become an industry-leading inhalation CDMO
- New Business Development team now established with presence in East and West Coast US, Europe and UK
- 4 New CDMO contracts signed, with a further 8 signed since the period end; £3m-£5m revenue impact, expected in H2 2020
- Operational transformation continues throughout COVID-19 pandemic
- Resilient base business performance with no disruption to customer supply chain, despite COVID-19 pandemic
- Progress across co-development pipeline
- Approval of Enerzair® Breezhaler® in Japan triggered $1.25m milestone recognised in H1 2020; post period approval of the product in Europe triggered a further $5.0m milestone to be recognised in H2 2020
- Potential approval of generic Advair® programme (VR315 (US)), partnered with Hikma, in H2 2020
Financial highlights
- Total revenue of £89.7m, 2.2% down versus prior period (H1 2019: £91.7m)
- Product supply revenue growth of 2.0% to £55.4m, driven by flutiform® product supply revenues of £49.7m, up 2.7% (H1 2019: £48.4m)
- Development services revenues down 29.6% to £5.0m, reflecting phasing of development milestones; revenues expected to be second half weighted with contribution from new CDMO revenues
- Royalties of £29.3m down 3.3% versus prior period (H1 2019: £30.3m), impacted by market conditions
- Gross profit of £44.8m down 13.7% (H1 2019: £51.9m), impacted by revenue mix and one-off costs to improve Breelib™ manufacture
- Progressive reduction in R&D1 costs, down 29.3% to £12.8m (H1 2019 restated: £18.1m), with reported R&D spend focused on co-development programmes and technology platform investments
- Operating profit of £2.9m (H1 2019: £14.1m loss) as a result of a lower amortisation charges arising from asset impairments in 2019 (notably VR647) and extension to certain flutiform® Japan patents
- Adjusted EBITDA2 of £23.1m, down 8.0% (H1 2019: £25.1m), reflecting decline in gross profit, partially offset by reduction in costs
- Strong liquidity maintained with closing cash and cash equivalents of £81.9m (2019: £74.1m), following a capital return of approximately £9.2m in H1 2020
- New presentation of Income Statement in line with CDMO peers, with support costs, previously dedicated to R&D, now reported under ‘General and administrative’
Commenting on the results, Will Downie, Chief Executive Officer of Vectura, said:
"I am pleased to report that financial performance for 2020 is on-track, with our base business proving resilient in the face of wider challenges posed by the Coronavirus outbreak. We are continuing to execute on our inhalation CDMO strategy and have signed 12 new deals to date, revenue from which will begin to feed through in the second half of the year.
“We welcomed the recent approval of Novartis’s Enerzair® Breezhaler® (QVM149) in both Europe and Japan, and VR315 (US) remains under review by the FDA with potential approval and launch in the second half of the year. Clearly there are still uncertainties related to the current pandemic situation, but with measures in place to mitigate risks, combined with a positive outlook for our inhaled CDMO business, we are confident 2020 will be another year of strong delivery for Vectura.”
Analyst webcast and conference call today
Vectura will present its Interim Results via live webcast today from 9.30am to 10.30am BST. There will be a simultaneous live conference call.
The live webcast and the presentation slides can be accessed on Vectura's website: https://www.vectura.com/investors/presentations-and-webcasts
Dial-in details are:
Participant local dial-in: +44 (0) 207 192 8338
Participant free phone dial-in: +44 (0)800 279 6619
Participant code: 8899744
- Ends-
For more information, please contact:
Vectura Group plc
Elizabeth Knowles - VP Investor Relations +44 (0)7767 160 565
David Ginivan - VP Corporate Communications +44 (0)7471 352 720
Consilium Strategic Communications +44 (0)20 3709 5700
Mary-Jane Elliott / Sue Stuart / David Daley
About Vectura
Vectura is a provider of innovative inhaled drug delivery solutions that enable partners to bring their medicines to patients. With differentiated proprietary technology and pharmaceutical development expertise, Vectura is one of the few companies globally with the device, formulation and development capabilities to deliver a broad range of complex inhaled therapies.
Vectura has eleven key inhaled and eleven non-inhaled products marketed by partners with global royalty streams, and a diverse partnered portfolio of drugs in clinical development. Our partners include Hikma, Novartis, Sandoz (a division of Novartis AG), Mundipharma, Kyorin, GSK, Bayer, Chiesi, Almirall, 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 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: 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
Progress against our strategy
Through the execution of our strategy, we are building a market-leading company in the inhalation contract development and manufacturing organisation (CDMO) space. Globally, the CDMO market is growing at a rate of c.7% per annum, a rate of growth which slightly outpaces the growth of the pharmaceutical sector as a whole, reflecting the ongoing shift toward increased outsourcing.4
Our global Business Development team is now established, with a presence in the East and West Coast of the United States as well as in Europe and the United Kingdom. Led by Mark Bridgewater, our newly appointed Chief Commercial Officer, the Business Development team has continued to engage with customers and potential customers through digital communication channels, despite the travel restrictions in place as a result of COVID-19. Supporting business development activities, a number of marketing and communications initiatives have been delivered to further raise our profile as an inhalation CDMO including digital advertising, a new website, scientific webinars and a thought leadership and media programme.
As a result of these initiatives, the number of customers in the deal funnel has grown more than three-fold since December 2019, and we are now in an active dialogue with more than fifty customers. Reflective of wider market trends, approximately 90% of the opportunities in the deal funnel are for small and medium-sized companies, with approximately 70% of the opportunities for pre-Phase II programmes across multiple disease areas.
During the first six months of 2020, we signed four new deals ranging from pre-clinical to Phase I programmes, delivering across a broad range of client needs, with a further eight deals signed post-period. The breadth of the deals signed demonstrates the applicability of our unique inhalation expertise beyond the larger indications such as Asthma and Chronic Obstructive Pulmonary Disease (COPD). Two of the deals signed are for the treatment of asthma and COPD, with the other programmes addressing a range of indications, including specialist respiratory diseases5, COVID-19, and prevention of postpartum haemorrhage.
Of the 12 deals signed, nine are feasibility programmes which may lead to full development deals in the event of a successful outcome. One of the deals, signed with Aerami Therapeutics for development of inhaled imatinib, is a full development deal, which includes potential licensing milestones and royalties in addition to services based revenues. Inhaled imatinib is a former Vectura proprietary pipeline asset.
Whilst new CDMO deals did not make a material contribution to H1 2020 revenue, we anticipate that the new deals signed will contribute between £3m-£5m in 2020, to be recognised in the second half of the year. We are pleased with the progress made so far, which reinforces our confidence in the attractiveness of Vectura’s inhalation platform in the CDMO market.
Our operational and business process transformation, led by Sharon Johnson, our newly appointed EVP – Delivery Management, and other members of the Executive Leadership Team, has also continued throughout the pandemic. Work has focused on transforming the core business processes that support the customer experience, from initial quote through project to delivery and revenue recognition. In addition, a number of key hires have been made to further enhance Vectura talent in both front and back office functions.
Resilient base business
The focus on growing CDMO revenues is underpinned by a resilient base business, with performance on-track for a positive 2020. We continue to expect 2020 revenue to be second half weighted, with the potential approval of VR315 (US), our generic Advair® programme partnered with Hikma, in H2 2020, and incremental development revenues from both legacy and new deals.
Overall reported revenue of £89.7m for the six-months ended 30 June 2020 is 2.2% lower than the prior period (H1 2019: £91.7m), with growth in product supply revenues offset by a decline in development revenues, reflecting the phasing of development revenues, and a decline in royalty and other marketed revenues versus the prior period.
Product supply revenues grew 2.0% to £55.4m in H1 2020, led by flutiform® which grew by 2.7% versus the prior period.
flutiform® (Mundipharma, Europe and Rest of world (excl. North America) / Kyorin, Japan) for the treatment of asthma has continued to perform well in the competitive asthma ICS/LABA market ex-US, generating total in-market sales of €134.3m (constant exchange rates 'CER') during H1 2020, up 5.6% in value and up 7.0% in volume compared to the prior period.6,7
- In Europe, the highly competitive and genericised ICS/LABA market grew by 6.8% in volume terms during the first six-months of 2020.7 This is in contrast to 2019 performance where market volumes grew by 1.9%.7 The increased growth in the ICS/LABA market during the first half of 2020 is thought to be the result of changing prescribing and pharmacy stocking behaviours during the COVID-19 outbreak.
- Against this backdrop, flutiform® continued to outperform the wider European ICS/LABA market, growing volumes by 12.1% compared to the prior period.7 flutiform® volumes grew 5.3% in Europe in 2019.7
- In Japan, flutiform® volumes grew by 6.2%, versus market volume growth of 3.6%, compared to the prior period.6,7
- flutiform® remains at an early stage of its lifecycle in rest of world territories and it declined by 9.0% in volume compared to the prior period, with in-market sales of €13.4m (CER).6,7 Rest of world territories are more reliant on tender driven markets and therefore growth is more volatile than the European and Japanese markets.
Following the strategic shift to become an inhalation CDMO, Vectura has updated the presentation of expenses on the Income Statement to better reflect the activities and priorities of the new organisation. Under the new presentation, which is intended to aid comparison against other CDMO companies, R&D costs comprise the costs of delivering existing co-development programmes, most notably VR2081 with Sandoz and the generic Ellipta® co-development agreement with Hikma which continue to progress well, and the cost of investment in platform technologies to support new business growth. On a like-for-like basis, R&D has decreased by 29.3% to £12.8m (H1 2019 restated: £18.1m), reflecting the termination of investment in VR475, VR647 and the broader Vectura enhanced therapies pipeline in 2019. Further details regarding the change in accounting policy are provided in the Financial Review.
With increasing product supply revenues and lower development and royalty revenues, alongside one-off costs to improve Breelib™ manufacture, the Group’s gross margin has reduced to 49.9% (H1 2019: 56.6%). Adjusted EBITDA2 margin of 25.8% was 1.6 percentage points lower than the prior period (H1 2019: 27.4%) as continued strong cost management supported operational leverage.
Guidance and outlook
The Group expects to maintain momentum on the execution of its services based strategy during the second half of 2020. Revenues from existing co-development contracts are expected to be broadly similar to 2019, with the majority being milestone based and recognised in H2 2020. Revenue from newly signed CDMO contracts is expected to begin to complement these revenues in the second half of the year, with revenue in the range of £3m-£5m expected in H2 2020.
Approval of VR315 (US) H2 2020 would trigger milestones to Vectura of $11m, with a mid-teen percentage royalty on net sales of the product. We expect all other royalties and marketed revenues in H2 2020 to be broadly in-line with H2 2019 (H2 2019: £21.6m).
Whilst continued growth of flutiform® in-market partner sales is expected in 2020, Vectura product supply revenues for the full year are expected to be in the range £92m-95m (2019: £101.4m). The Group expects flutiform® underlying gross margin to be within the range of 30-32% for 2020, lower than 2019 as a result of dose presentation mix changes, pricing pressure in Japan and rest of world, and an expectation of additional compliance costs following the UK’s exit from the European Union.
Under the Group’s revised accounting policy, R&D investment for 2020 is expected to be within the range of £23m-£26m.
The Group currently expects to incur minimal cash outflows in relation to exceptional costs in 2020.
R&D costs associated with co-development agreements are expected to decline in-line with the progression and completion of co-development programmes. The Group will continue to invest in technology platforms over the medium and longer term. The deployment of existing resources to support new CDMO contracts, good cost management and a focus on simplifying the Group’s operating model are all expected to have a positive impact on the Group’s operational leverage over the medium term.
COVID-19
Protecting the health, safety and wellbeing of our employees and ensuring the continued supply of important medicines, such as flutiform®, to our partners and ultimately to patients, have remained Vectura’s top priorities throughout the COVID-19 outbreak.
Informed by robust crisis management and business continuity plans, our laboratories and manufacturing site have remained open and operational throughout national lockdowns, with social distancing and stringent hygiene protocols in place to protect employees. Where possible, extensive home working utilising digital platforms has been encouraged, and as a consequence 98% of our employees have been able to work throughout the crisis, either onsite or remotely.
Our ‘COVID-19 Management Team’ has worked to ensure that our employees feel supported and a number of new health, safety and well-being initiatives have been rolled-out across the Company. The team has communicated regularly and proactively with employees sharing the latest guidance and Vectura policies. We would like to thank our employees for their continued diligence, agility and commitment throughout this difficult time.
From an operational perspective, product supply activities have continued to progress normally with no interruption of supply to our partners, and we have not noted any signals of diminished demand from supply partners. We continue to work closely with key suppliers to identify and mitigate potential supply chain disruptions, and closely monitor inventory levels to ensure that continuity of supply can be maintained.
Virtual marketing and business development activities have continued through-out the first six-months of the year, and despite travel restrictions in place, we have made significant progress in expanding our business development funnel.
Whilst the situation continues to evolve, the Group is now in the ‘return’ phase of its four-step business continuity plan, with a phased increase in on-site working now underway. As we move through the next phases of our plan, we will consider the learnings taken from the COVID-19 pandemic and reflect these in our long-term plans to shape an even stronger and more agile organisation.
With a strong balance sheet, an undrawn £50m Revolving Credit Facility (‘RCF’) and minimal corporate debt, Vectura continues to be a resilient business in the face of the risks posed by COVID-19.
The Group’s current RCF facility expires in August 2021. The Group intends to renew this facility and discussions are being finalised.
Return of capital
The Board announced a capital return to shareholders of approximately £60m in September 2019, to be made up of a £40m special dividend, and two tranches of share buyback, each of £10m.
The special dividend of approximately £40m in aggregate, representing 6 pence per ordinary share, was paid out to shareholders on 25 October 2019. The first £10m tranche of the share buyback commenced in October 2019; approximately £3.5m was completed as at 31 December 2019, with the balance completed in Q1 2020.
In May 2020, the Group entered into arrangements with Numis Securities Limited to execute the second £10m tranche of the share buyback. As at 14 September, £9.0m of this second share buyback tranche had been completed. The remaining £1.0m is expected to be completed in 2020.
Leadership and Board changes
To support the Group’s ambition to become the market-leading company in the CDMO space, two key leadership roles were appointed to the Executive Leadership Team in 2020. Sharon Johnson joined Vectura as EVP - Delivery Management, and Mark Bridgewater joined as Chief Commercial Officer.
Neil Warner stepped down as Non-Executive Director and Chairman of the Audit Committee on 27 May 2020. The Board would like to thank Neil for his significant contribution to Vectura and his commitment to the Group during his tenure. The role of Audit Committee Chair has transitioned to Juliet Thompson who has been a member of the Committee since December 2017. Reflecting Juliet’s new role as Audit Committee Chair, Kevin Matthews has taken on the role of Chair of the Remuneration Committee, although Juliet remains on the Committee in her role as Non-Executive Director.
Post period, on 7 July 2020, Kevin Matthews became a member of the Audit Committee.
Brexit
The Group has closely reviewed the potential risks associated with Brexit. The Board believes Vectura has undertaken a robust approach to ensuring any impact within the Group's control is mitigated as far as possible.
Mitigating activities have included continued close working with our supply chain network and partners, establishing a new EU legal entity and transferring our notified regulatory body for our device assets.
GSK Litigation
Following a US Jury trial in May 2019, Vectura was awarded damages and estimated ongoing royalties amounting to approximately $200m, based upon the application of a 3% royalty rate to US sales of GSK infringing products for the period August 2016 to the expiration of Vectura's patent in mid-2021. Interest will also accrue on damages at the Treasury bill rate, compounded annually. No amounts have been recognised in the H1 2020 results in respect of these damages.
GSK has initiated an appeal in the US, with a hearing currently scheduled for 5th October 2020. Based on the present appeal briefing schedule, a decision is likely to be received before the end of Q1 2021.
Financial review
Following the Group’s shift in business model to a contract development and manufacturing organisation (CDMO), the Board has reviewed the presentation of the Income statement to assess whether it continues to provide reliable and relevant information about the effects of transactions, other events or conditions on the financial performance of the Group.
The previous Income statement presentation was relevant when the Group’s primary focus was on developing, or co-developing, a proprietary product pipeline of respiratory therapies or complex generics.
However, with the shift in business model, and the ceasing of investment in the development of proprietary respiratory therapies, the Board determined that it was appropriate to update the Group’s accounting policy relating to the categorisation of Research and development costs (R&D) and General and administration costs (G&A) to be more in line with peers and to provide a better understanding of the Group’s performance. As a result of this change the costs of support functions that were focused on supporting the Group’s R&D efforts under its previous strategy, and therefore reported as an R&D expense, are now reported within G&A expenses, reflecting the fact that these functions are focused on supporting a wider number of business priorities. The impact of the changes in accounting policy are detailed in note 13 to the interim financial statements.
This change is intended to improve the relevance of our financial statements by enabling users of the accounts to better interpret the Group’s performance versus CDMO peers. The scope of R&D, as now defined, will also be more closely aligned to Group decision making around investments, which are intended to provide longer term returns through innovation, differentiation and the creation of intellectual property.
| Summary financial information for the six months ended 30th June 2020 | |||
| H1 2020 | H1 2019 | % | |
| (restated) | |||
| £m | £m | change | |
| Product supply revenues | 55.4 | 54.3 | 2.0% |
| Royalty and other marketed revenues | 29.3 | 30.3 | (3.3%) |
| Development revenues | 5.0 | 7.1 | (29.6%) |
| Revenue | 89.7 | 91.7 | (2.2%) |
| Cost of sales | (44.9) | (39.8) | 12.8% |
| Gross profit | 44.8 | 51.9 | (13.7%) |
| Gross profit margin | 49.9% | 56.6% | (6.7) ppts |
| Research and development (R&D) expenses | (12.8) | (18.1) | (29.3%) |
| Selling and marketing expenses | (2.1) | (1.3) | 61.5% |
| General and administrative expenses | (15.5) | (14.0) | 10.7% |
| Other operating income | 1.5 | 0.5 | >100% |
| Exceptional items | (0.8) | (2.6) | (69.2%) |
| Amortisation and impairment | (12.2) | (30.5) | (60.0%) |
| Operating profit/(loss) | 2.9 | (14.1) | n/m |
| Adjusted EBITDA | 23.1 | 25.1 | (8.0%) |
| Adjusted EBITDA margin % | 25.8% | 27.4% | (1.6) ppts |
| Basic earnings/(loss) per share | 0.3p | (2.0p) | n/m |
| Diluted earnings/(loss) per share | 0.3p | (2.0p) | n/m |
The focus on growing CDMO revenues is underpinned by a resilient base business, with performance on track for a positive 2020. We continue to expect 2020 revenue to be second half weighted with potential approval of VR315 (US), our generic Advair® programme partnered with Hikma, in H2 2020, and incremental development revenues from both legacy and new deals.
Product supply revenues grew 2.0% in H1 2020, led by flutiform® which grew by 2.7% versus the prior period. Royalty and other marketed revenues fell by 3.3% due to market conditions. Development revenues declined by £2.1m, due to the non-reoccurrence of certain licensing income recognised in H1 2019. Taken together, overall revenue declined by 2.2% versus H1 2019.
flutiform® product supply delivered a gross margin of 36.6% in H1 2020, contributing £18.2m to gross profit (H1 2019: 34.5% gross margin, £16.7m gross profit), helped by a one-off supplier credit of £0.8m. However, a shift in revenue mix towards lower margin revenue streams, including strong growth of the oral development services business which to date contributes a negative margin, and one-off costs incurred to improve BreelibTM manufacturing performance, have diluted overall gross margin to 49.9% (H1 2019: 56.6%). Royalty and milestone payments associated with VR315 (US) would contribute to an improved gross margin performance in the second half of the year.
R&D expenses declined 29.3%, mainly due to the reduction in costs associated with VR475 and VR647, as the Group ceased investment in its own proprietary product pipeline. The focus of R&D investment is now on existing co-development agreements, principally generic Ellipta® (Hikma) and VR2081 (Sandoz), and investments in proprietary device and formulation technology platforms.
Selling and marketing costs increased in line with the build out of the Business Development function and increased promotional activities. General and administrative expenses increased 10.7% primarily due to increased share scheme costs relating to new senior hires, and the weakening of UK sterling versus the Swiss franc.
Adjusted EBITDA, a measure of underlying performance, decreased by 8.0% to £23.1m (H1 2019: £25.1m), despite the weakening of UK sterling against the US dollar contributing an additional £0.4m to adjusted EBITDA in the first half of 2020. The Group ended the period with an operating profit of £2.9m (H1 2019: loss of £14.1m) helped by significantly lower amortisation charges compared to the prior period.
1. Revenue
1.1 Product supply revenue
The Group generates significant revenues from the supply of finished or semi-finished products, largely manufactured by third-party suppliers, to commercial distribution partners. The costs incurred to deliver these revenues are reported under cost of sales. These revenues grew by 2.0% in H1 2020, driven by positive volume demand from partners for flutiform®.
| Total product supply revenues and gross margin | |||
| H1 2020 | H1 2019 | % | |
| £m | £m | change | |
| flutiform® | 49.7 | 48.4 | 2.7% |
| Other inhaled products | 1.3 | 2.0 | (35.0%) |
| Non-inhaled products | 4.4 | 3.9 | 12.8% |
| Revenue | 55.4 | 54.3 | 2.0% |
| Cost of sales | (42.1) | (39.8) | 5.8% |
| Gross profit | 13.3 | 14.5 | (8.3%) |
| Gross profit margin % | 24.0% | 26.7% | (2.7) ppts |
flutiform®
flutiform® product supply revenues grew to £49.7m, a 2.7% increase versus the prior period, primarily due to higher in-market sales growth in Japan. flutiform® continued to perform well in the competitive asthma ICS/LABA market ex US, with total in-market sales up 5.3% on a constant exchange rate ‘CER’ basis, compared to the prior period, with volume growth of 7.0%8.
| flutiform® revenues | |||
| In-market flutiform® volumes1 | H1 2020 | H1 2019 | % |
| '000 units | '000 units | change | |
| Territory | |||
| Europe | 2,029 | 1,809 | 12.1% |
| Japan | 1,620 | 1,525 | 6.2% |
| RoW (ex. North America) | 462 | 508 | (9.0%) |
| Total in-market volumes | 4,111 | 3,842 | 7.0% |
| Vectura product supply revenues and gross profit | H1 2020 | H1 2019 | % |
| £m | £m | change | |
| flutiform® product supply revenue | 49.7 | 48.4 | 2.7% |
| Cost of sales | (32.3) | (31.7) | 1.9% |
| One-off margin credit | 0.8 | - | n/a |
| Gross profit | 18.2 | 16.7 | 9.0% |
| Gross profit margin % | 36.6% | 34.5% | 2.1 ppts |
| Gross profit margin % (ex. one-off credits) | 35.0% | 34.5% | 0.5 ppts |
| 1 IQVIA SMART MIDAS volume data. | |||
flutiform® gross margin was up 2.1 percentage points compared to H1 2019 primarily due to a one-off supplier credit relating to 2018 and 2019. Without this credit, the margin would have been similar to the same period in 2019, despite increased price pressure in Japan and Rest of World.
We expect the full year flutiform® margin to be within the guidance range of 30-32% as a result of dose presentation mix changes, pricing pressure in Japan and rest of world, and an expectation of additional compliance costs following the UK’s exit from the European Union.
The Group also earns royalties on flutiform® sales made by Kyorin in Japan. Including these royalties, total revenues for flutiform® were £52.9m (H1 2019: £51.4m).
Other inhaled products
The Group earns revenue from the supply of GyroHaler® and GyroPLUS® device components to Sandoz for use in the AirFluSal® and AirBuFo® Forspiro® products. Revenues are also earned from the supply of FOX® devices to Bayer for use in their BreelibTM product. In total this revenue stream contributed £1.3m, a decrease of 35.0% compared to the prior period.
Non-inhaled products
The Group’s oral manufacturing facility in Lyon, France, generates product supply revenues from sales of oral products to partners. The site has focused efforts on bringing new manufacturing contracts to the site to help mitigate the volume declines and operating losses from older products. In H1 2020, product supply revenues from Lyon were £4.4m, a 12.8% increase compared to the prior period (H1 2019: £3.9m).
Some of the products manufactured at the Lyon site also earn the Group royalties, reported separately.
1.2 Royalty and other marketed revenues
The Group also generates revenues from products marketed by partners which incorporate the Group’s intellectual property. These revenues typically comprise royalties, sales-based milestones, and product approval and launch milestones. These revenues reflect financial returns from historic R&D investments in co-development programmes and intellectual property and are earned without further material costs being incurred by the Group.
| Total royalty and other marketed revenues | |||
| H1 2020 | H1 2019 | % | |
| £m | £m | change | |
| Ultibro® and Seebri® | 8.1 | 8.3 | (2.4%) |
| GSK Ellipta® | 9.0 | 9.0 | - |
| flutiform® | 3.2 | 3.0 | 6.7% |
| AirFluSal® Forspiro® | 1.2 | 1.3 | (7.7%) |
| Other inhaled royalties | 0.1 | - | n/a |
| Non-inhaled royalties | 5.8 | 7.3 | (20.5%) |
| Royalty revenue | 27.4 | 28.9 | (5.2%) |
| Other marketed revenues | 1.9 | 1.4 | 35.7% |
| Royalty and other marketed revenues | 29.3 | 30.3 | (3.3%) |
Vectura royalty revenues for Ultibro® and Seebri® Breezhaler® are derived from a percentage of net sales reported by Novartis and are also subject to certain contractual adjustments. Royalties from Ultibro® and Seebri® Breezhaler® remained virtually flat in 2020, although declined by 4.9% on a CER basis.
In respect of GSK’s Ellipta® products Vectura has recognised the capped annual royalty of £9.0m in H1 2020.
flutiform® royalties are predominantly received in respect of sales made in Japan. Strong in-market performance by Kyorin drove value and volume growth in Japan, up 6.2% (CER) and 6.2% respectively. As a result, royalties from Japan grew by 6.7% (CER 2.3%), to £3.2m (H1 2019: £3.0m).
Non-inhaled royalties comprise royalties earned on oral and other non-inhaled products, which incorporate the Group’s intellectual property. Many of these products are manufactured at the Group’s production facility in Lyon.
Total non-inhaled royalties decreased by 20.5% primarily due to market conditions. The Group remains eligible to receive a non-patent dependent $32m sales milestone when twelve-month net sales of EXPAREL® reach $500m on a cash received basis. In the twelve months ended 30 June 2020 net product sales of EXPAREL® were $392.7m.
Other marketed revenues of £1.9m include a £1.0m ($1.25m) milestone received on approval in June of QVM149 (Enerzair® Breezhaler®) for use in Japan. In July, Enerzair® Breezhaler® was also approved for use in Europe which earned the Group a $5m milestone, which will be recognised in H2 2020. The Group will receive low single-digit royalties on net sales of Enerzair® Breezhaler® in both Japan and Europe.
Other marketed revenues also include a £0.9m milestone received on the anniversary of the first European launch of BreelibTM. Under the terms of its agreement with Bayer, the Group is eligible to receive a further €1.75m in milestones spread over the next three years, paid annually.
In relation to new product launches, the Group will earn an $11m milestone upon approval of VR315 (US) plus a mid-teen royalty on net sales of the product, with potential approval in H2 2020.
1.3 Development revenues
The Group also earns revenues from contracted development activities provided to clients and partners. These activities draw on the Group’s device and formulation capabilities to help deliver commercially attractive inhalation products.
Historically these contracts have primarily been co-development agreements, under which the risks, costs and rewards of product development are materially shared between the parties. Under these types of agreements, Vectura would typically receive a series of cash flows in consideration for a variety of activities. These cash flows would often comprise an upfront fee as consideration for a licence to access intellectual property (licensing revenues) and milestone payments for specific clinical or other development-based outcomes or fees billed directly for work performed (inhaled development services).
Revenues are recognised when contractual performance obligations are deemed to have been met, with the profile of these revenues varying by programme and over time. Under co-development agreements revenues would normally be structured to cover the Group’s costs during the development phase, with the majority of returns earned later through the payment to the Group of approval and launch milestones, and royalties.
Given their co-development nature, costs to deliver these revenues continue to be reported under research and development expenses in the consolidated Income statement.
Following a shift in business model in 2019, the Group is focused on generating revenues from service-based (‘CDMO’) contracts, where the material risks, costs and rewards of development remain with the client. Under these contracts, revenues to Vectura will be normally derived from fees billed directly for work performed, including a profit margin, rather than milestone payments which are contingent on specific clinical or development-based outcomes. The costs to generate these ‘fee-for-service’ based revenues are reported under cost of sales in the Income statement.
Contracts may still involve a client paying to access the Group’s device and/or formulation intellectual property. This may result in upfront licence fees, milestones and royalty payments. These licensing revenues will be reported under development revenues where they relate to the development phase. Any subsequent approval, launch or sales milestones, or royalty payments, relating to this licence will be reported as Royalty and marketed revenues.
| Development revenues by programme | |||
| H1 2020 | H1 2019 | % | |
| £m | £m | change | |
| Licensing of intellectual property | |||
| Enerzair® Breezhaler®/QVM149 (Novartis) filing milestone | - | 1.9 | n/m |
| Other inhaled programmes | - | 0.4 | n/m |
| Total licensing revenues | - | 2.3 | n/m |
| Development services | |||
| Inhaled development services | 3.6 | 4.0 | (10.0%) |
| Non-inhaled development services | 1.4 | 0.8 | 75.0% |
| Total development services | 5.0 | 4.8 | 4.2% |
| Total development revenues | 5.0 | 7.1 | (29.6%) |
Licensing revenues
Enerzair® Breezhaler® (QVM149)
In May 2019, the Group recognised a $2.5m (£1.9m) milestone under an exclusive licensing agreement with Novartis AG following EU Regulatory Authorities acceptance of a valid Marketing Authorisation Application (MAA) made by Novartis for its Enerzair® Breezhaler® (QVM149) product.
As detailed above the Group has received further milestones related to Enerzair® Breezhaler® approvals in Japan and Europe, which are recognised within Royalty and other marketed revenues.
Development services
Inhaled development services
Overall inhaled development services revenue has decreased primarily due to lower activity related to the development of Mundipharma’s k-haler® product. Inhaled development revenues are expected to be weighted to the second half of 2020, as new CDMO contracts begin to deliver revenues, and the expected payment of certain milestones related to the progression of the generic Ellipta® and VR2081 programmes. In H1 2020, four new CDMO contracts were signed, and a further eight have been signed since the period end. New CDMO deals did not make a material contribution to H1 2020 revenue, however we anticipate that the new deals signed will contribute between £3m and £5m in 2020, to be recognised in the second half of the year.
Non-inhaled development services
The Group earned £1.4m in H1 2020 (H1 2019: £0.8m) from the provision of development services by Skyepharma SAS (Lyon, France) related to oral products. Costs to deliver these revenues are reported under cost of sales.
2. Research and development (R&D) expenses
Following a voluntary change in accounting policy, support function costs, including HR, Finance and IT that were previously considered as dedicated to R&D, are now included within general and administrative costs reflecting that these functions are now supporting a broader range of activities across the Group. Costs for H1 2019 have been restated in line with this new policy.
R&D expenses declined 29.3%, mainly due to the reduction in costs associated with VR475 and VR647. In addition as the focus of the Group has moved towards generating revenues from service based contracts, where the material risks, costs and rewards of development remain with the client, the Group ceased investment in its own proprietary product pipeline of respiratory therapies in 2020.
The scope of R&D expenses comprises expenditure relating to:
- Co-development R&D – this category is the equivalent to the previous ‘Partnered’ category and represents
