Avacta : Half-year Report

25 April 2016

Avacta Group plc

('Avacta' or the 'Group')

Interim Results for the Period Ended 31 January 2016

Avacta Group plc (AIM: AVCT), the developer of Affimer biotherapeutics and research reagents, announces its interim results for the period ended 31 January 2016.

Highlights

Operational

· Following the successful £21m fund raise in August 2015 that has allowed us to begin developing our own Affimer biotherapeutics, we have made good progress on several programmes.

o Several lead Affimer drug candidates identified against the PD-L1 immune checkpoint target and we are progressing those in pre-clinical studies.

o A key collaboration has been initiated with Dr Ramzi Ajjan at the Leeds General Infirmary to carry out pre-clinical characterisation of Affimer drug candidates that modulate blood clotting.

o The research collaboration with Moderna is expanding with increasing resources allocated to this programme during the period.

· Affimer technology evaluations started with 13 large pharma and biotechs, including four of the 10 largest pharma companies, several large diagnostics providers and numerous commercial partners and academic institutes.

· Dr Mike Owen, ex- SVP and global Head of Research of Biopharmaceuticals R&D at GSK, appointed as Non-Executive Director and Chair of the Scientific Advisory Board.

· Dr Philippe Cotrel, ex-Commercial Operations Director at Abcam, appointed as Chief Commercial Officer.

· Mr Tony Gardiner, ex-Finance Director at AHR, appointed as Chief Financial Officer.

Financial

· Half year revenue of £1.0m (£0.7m FY15) comprising of £0.3m (£0.01m FY15) from Avacta Life Sciences and £0.7m (£0.7m FY15) from Avacta Animal Health.

· Operating loss from continuing operations £2.0m (£1.6m FY15).

· Reported loss reduced to £1.8m (£6.6m FY15).

· Cash balances increased to £25.0m (£7.3m 31 July 2015) following completion of placing in August 2015.

Post-period highlights

· Three world-class immunologists appointed to form the Scientific Advisory Board to advise the Company on its immuno-oncology drug development strategy.

· Grant awarded to develop and potentially commercialise novel Affimer reagents to reduce use of animals in life sciences research.

· Key technical milestone achieved in in-house therapeutic programme: Multimeric Affimer constructs generated with excellent production yields enabling, for instance, the construction of 'bispecific' Affimer molecules. Bispecific molecules are emerging as essential components of many approaches to cancer immuno-therapies.

· Discovery programme initiated covering a range of immune checkpoint targets, othertumourexpressed antigens and T-cell receptors.

Alastair Smith, Chief Executive Officer, commented:

'We have seen solid performance in all areas of Affimer technology development during the period, continuing the transformational progress made in 2015 following the fund raise in August.

I am delighted with the additions to the Senior Leadership Team with Tony Gardiner and Philippe Cotrel both joining us in the New Year. They bring invaluable experience and insight and together we have refined and focused the medium term reagents commercial strategy into some key application areas where Affimer reagents have the attributes for considerable commercial success.

I am also pleased to say that we have attracted an excellent group of advisers to the Scientific Advisory Board. This group will be key in helping to select therapeutic targets in immuno-oncology and in guiding and reviewing our therapeutics development programmes.

We have made good technical progress with our PD-L1 pre-clinical programme and are now entering the discovery phase for a wide range of other immune checkpoint andtumourcell antigen targets. The initiation of a second programme to address bleeding disorders through the research collaboration with Dr Ajjan is also an important step towards our primary objective of getting the first Affimer therapeutic into the clinic.

We are in a strong position having laid the technical and commercial foundations and we are well funded to deliver on our strategies. I look forward to keeping the market updated on our progress.'

Investor Evening

Avacta will be hosting an investor evening at the offices of FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD, on Thursday 5 May 2016 from 17.00-20.30 BST. The Company will discuss its proprietary Affimer technology and provide an update on the progress made against its commercial and therapeutic goals.

For further information and to reserve a place at the event please contact:

avacta@fticonsulting.com

About Avacta Group plc -www.avacta.com

Avacta's principal focus is on its proprietary Affimer technology which is a novel engineered alternative to antibodies that has wide application in Life Sciences for diagnostics, therapeutics and general research and development.

Antibodies dominate markets worth in excess of $50bn despite their shortcomings. Affimer technology has been designed to address many of these negative performance issues, principally; the time taken to generate new antibodies, the reliance on an animal's immune response, poor specificity in many cases, and batch to batch variability. Affimer technology isbased on a small protein that can be quickly generated to bind with high specificity and affinity to a wide range of protein targets.

Avacta has a pre-clinical biotech development programme with an in-house focus on oncology and bleeding disorders as well as several partnered development programmes. Avacta iscommercialisingnon-therapeutic Affimer reagents through custom Affimer services to provide bespoke solutions to research and diagnostics customers and via a small on-line catalogue of Affimer products.

CHAIRMAN'S AND CHIEF EXECUTIVE OFFICER'S REPORT

Business Overview

The Group has made substantial progress against key objectives for its Affimer technology during the period, laying the commercial and operational foundations required to support its anticipated medium term growth plans and long term generation of value for shareholders. Avacta Life Sciences is targeting long term, significant value generation through in-house and partnered Affimer therapeutic development programmes. The Company is also generating nearer term revenues from Affimer reagents for research and diagnostics addressing commercial opportunities where the Affimer technology has particular competitive advantages rather than choosing to compete head-to-head with established and effective antibody reagents. Avacta Animal Health continues to build its diagnostic test offering and develop its route to market to deliver future growth.

Avacta Life Sciences

Avacta Life Sciences is a pre-clinical biotechdeveloping medicines based on its proprietary Affimer therapeutic protein platform that will drive long term value, with nearer term revenues being generated from research and diagnostics reagents.

Therapeutics Programme Strategy and Milestones

Following the Company's progress in demonstrating the potential of Affimers as a therapeutic platform and the transformational therapeutic partnership that was established with Moderna Therapeutics in May 2015, Avacta successfully raised £21 million net by way of a placing on 3 August 2015 with both existing and new institutional shareholders.

The proceeds are being used to:

· develop the Affimer technology as a next generation therapeutic platform through programmes demonstrating important performance properties such as ease of production and formatting, half-life extension, targeting and combination therapies.

· generate a pipeline of therapeutic assets focusing on immuno-oncology and blood clotting disorders; and

· support co-development partnerships.

The primary strategic objective is to progress the first Affimer therapeutic into the clinic as soon as possible. This is expected to be achieved in approximately three years and this should be a significant value inflection point when it occurs.

Other major interim therapeutic milestones during 2016-17 that will also drive value include:

· the outcome of efficacy, pharmacokinetics (PK) and immunogenicity studies for the first few lead Affimer candidates;

· generation of a range of immune checkpoint Affimer inhibitors and co-stimulatory receptor agonists;

· results of in-vitroand in-vivostudies of Affimer blood clotting modulators;

· demonstration of ease of manufacturing and functionality in in-vitroassays of the first multi-specific Affimer immuno-oncology therapy;

· further therapeutic co-development partnerships or licensing deals; and

· milestones associated with partnered programmes.

Platform Technology Development: The Critical Importance of Multi-specific Drug Formats

The immuno-oncology field is growing rapidly and there are many high value therapeutic opportunities emerging. Most of these opportunities rely on the development of 'multi-specific' agents that can bind to more than one target to produce combinatorial therapeutic effects or to recruit immune cells such as T-cells to the tumour site. Generally these multi-specific formats are produced by 'stringing together' into chains individual therapeutic proteins that each hit a different target. Most importantly, the final multi-specific system must be manufacturable. This is often not the case for biotherapeutic molecules such as antibodies and antibody fragments and the difficulty in manufacturing dimers, trimers and tetramers becomes a significant barrier to development of these important formats.

Affimer proteins are small, stable and have excellent production yields and they should therefore be ideal for linking together to form manufacturable multi-specific therapies. The Company has therefore adopted an immuno-oncology strategy of developing a range of inhibitors and agonists that can be combined to form multi-specific therapies or for T-cell recruitment therapies. These Affimer therapeutics could also be used in combination with cytotoxic agents to develop the Affimer equivalent of antibody-drug-conjugates but at the present time this lies outside the scope of the Company's resources and plans.

Demonstration of the ease of manufacture of multi-specific Affimer constructs is a key milestone that was set out at the time of the placing in 2015. The Company has recently completed a key study aimed at generating dimers, trimers and tetramers of its lead programmed death ligand 1 (PD-L1) Affimer inhibitor as well as building 'Fc fusions', a second important class of therapeutic construct. The study has shown that the production yield of all of these constructs is very good and they are stable and resistant to aggregation. Even the largest Affimer construct, a tetramer, has a comparable production yield to that of the monomer Affimer molecule itself producing hundreds of milligrams perlitrein a simple, un-optimisedproduction process. These important results indicate that the Affimer technology has potentially best-in-class performance as a multi-specific therapeutic platform and a key milestone has been achieved.

Immuno-oncology Programme Update

The first molecule in the Company's immune checkpoint programme is aimed at inhibition of PD-L1. Good progress has been made during the reporting period in identifying a large number of Affimer candidates that bind to and inhibit the biology of this immune checkpoint target. A number of such Affimer candidates have been selected and are now in pre-clinical trials to evaluate pharmacokinetics, serum stability, immunogenicity and efficacy. These studies will be concluded early in 2017.

The discovery phase has now begun on a wide range of other immune checkpoint targets and co-stimulatory receptors with the aim of generating a portfolio of Affimer inhibitors and agonists from which multi-specific combinations can be generated. One or two such multi-specific combinations will then be taken forwards into pre-clinical characterisation towards the end of 2016to demonstrate initial functionality in in-vitrocell based assays and manufacturability, before entering a pre-clinical programme to be carried out during 2017.

Blood Clotting Disorders Programme Update

During the reporting period the Company established a significant research collaboration with Dr Ramzi Ajjan, a consultantdiabetologistand endocrinologist at the Leeds General Infirmary, to gain access to his pre-clinical and clinical models of blood clotting. Dr Ajjan evaluated Affimer proteins with regard to their potential to bind to and modulate the behavior of fibrinogen, a key protein involved in blood clotting. This proof of concept work has discovered two families of Affimer molecules: one that reduces clot formation and one that promotes clot formation. These data suggest that anti-thrombotic treatments and treatments for bleeding disorders are potentially achievable and, given Dr Ajjan's clinical access, the Company believes that a development programme in this area could provide a quick route to achieving its primary objective of getting the first Affimer into the clinic. A two year pre-clinical study was therefore initiated in February 2016 to study the effects of certain Affimer reagents on clot formation and breakdown. This programme, funded by the Company and to be carried out primarily in Dr Ajjan's research group at the Leeds General Infirmary and Leeds Institute for Genetics, Health and Therapeutics, will deliver in-vitroand in-vivodata on the blood clotting modulation properties of a range of Affimer candidates during the first 18 months of the work. The programme will establish mechanism of action for lead candidates by the end of the calendar year 2017 with a view to preparing for transition from pre-clinical to clinical studies as soon as possible thereafter.

Scientific Advisory Board

During the period Dr Mike Owen was appointed to the Group's Board as a Non-Executive Director. Dr Owen was Senior Vice President and Global Head of Research of the Biopharmaceuticals R&D Unit at GlaxoSmithKline and was responsible for initiating and rapidly growing GSK's robust pre-clinical and clinical therapeutic antibody pipeline during the last decade through in-house development as well as through acquisitions such as Domantis. Dr Owen brings extensive clinical trial, scientific and commercial experience to the Company in support of the therapeutics development strategy.

Part of Dr Owen's role is to chair a Scientific Advisory Board to provide guidance to the Affimer immuno-oncology therapeutic development programme.In March the Company announced that it had appointed three pre-eminent biologists to form the Scientific Advisory Board: Professor Terrence Rabbitts of the University of Oxford and John Radcliffe Hospital, Professor Adrian Hayday of the Crick Institute King's College and Guy's Hospital, and Professor Paul Moss, Director of the School of Cancer Sciences at Birmingham University and Honorary Consultant at the University Hospitals Birmingham NHS Foundation Trust.

Collectively, this group of internationallyrecognisedscientists has made numerous pivotal discoveries in immunology, ranging from fundamental studies on the genes and proteins that regulate the adaptive immune system to the development of treatments for cancers, and has published several hundred scientific papers on these subjects. They sit on a number of Scientific Advisory Boards for pharmaceutical and biotechnology companies, public and private funding bodies and charities. They bring a very high level of scientific knowledge and experience in translational science and clinical medicine and will help guide the Company's therapeutic development strategy. They will also advise on, and review, the pre-clinical and clinical programmes that will establish Affimer proteins as a next generation biotherapeutic technology.

Detailed biographies of the Scientific Advisory Board are available atwww.avacta.com/team.

Therapeutic Co-development Partnerships

The Company will update the market on progress being made in its co-development partnerships, subject to the terms of its commercial agreements, when significant milestones are achieved.

Research and Diagnostics Reagents: Strategy and Milestones

The Company's commercial strategy for the Affimer technology is to provide Affimer research and diagnostic reagents to the wider Life Sciences R&D market to complement antibodies where they struggle rather than compete head-to-head with established antibody products, as well as building long term value through its therapeutic pipeline.

The commercialisation of Affimer reagents is being carried out primarily via a custom Affimer reagents service and the Company is also providing a small catalogue of Affimer reagents addressing gaps in the antibody market.

Since the commercial launch of Affimer reagents late in 2014, the fundamental benefits of the Affimer technology: high specificity; rapid generation of new binders; stability and robustness; ability to address targets which antibodies find difficult or impossible; and batch to batch consistency are proving successful in generating widespread customer interest. The custom Affimer reagents sales pipeline has grown strongly, order intake continues steadily and a number of Affimer technology evaluations are underway. The Company is engaged with a wide range of customers including large pharma and biotechs, a number of diagnostics providers, several large bioprocessing and chromatography companies, and several EU, US and Asian academic and research institutes.

The Company has appointed a Chief Commercial Officer to build on this early success, lead the commercial strategy and business development activities, and to drive the commercialisation of the Affimer technology. Dr Philippe Cotrel has joined the Company from Abcam where he was Commercial Operations Director and was responsible for all sales and marketing activities, successfully growing revenue from £37 million to £144 million over a 7-year period.

Antibodies are a well established technology and, in applications where good quality antibodies are working well, the Company does not intend to try to compete head-to-head. Based on the technical benefits of Affimers outlined above the Company believes that the most effective commercial strategy is to provide complementary research and diagnostic reagents in high value applications where there is a technical or commercial benefit over the alternatives. There are a number of such applications and the Company has reviewed these opportunities in detail and is now focusing its R&D and business development resources in the near term on providing high quality custom Affimer reagents to third parties who have the potential to market Affimer powered products such as diagnostics and reagent kits in three main application areas: immunoassays, affinity separation and lateral flow devices. This near term focus will be used to guide the application of internal R&D and commercial resources and does not exclude working with partners in other areas on demand.

The Company is now engaged in a programme of tailoring its discovery processes to generate Affimers with performance benefits specific to these application areas and working with partners to demonstrate the technical and commercial benefits of Affimers in real-world commercial examples. The Company will report on these key technical milestones and on commercial agreements in these application areas as they are completed subject to any confidentiality restrictions required by partners.

A key aspect of the Affimer reagents business model is that a proportion of custom Affimer projects and evaluations will lead to longer term commercial partnerships generating payments for exclusivity, development milestones and longer term royalties on sales of Affimer containing products.Affimer technology evaluations have started with thirteen large pharma and biotechs, including four of the ten largest pharma companies, and with several diagnostics providers including one of the top three, and numerous other commercial partners and academic institutes.The establishment of longer term commercial relationships with third parties who can take products 'powered by Affimer technology' to market is the primary commercial objective that will drive value rather than near term revenues. Whilst it is difficult to predict the timing of the completion of these evaluations, the Company expects to be able to announce the first of these longer term commercial partnerships over the coming year.

Avacta Animal Health

Trading in Avacta Animal Health was in line with our expectations.

Since the period end the Company has launched an equine allergy test which was developed in-house and is offered as a laboratory service in the UK. It is expected to be offered to laboratories in Europe in due course. Further product launches are expected in the second half of the year which will contribute to revenue from the start of the next financial year.

Future developments will include the Group's Affimer technology to help achieve market leading performance in a number of tests along with additional multi-marker algorithms.

The core allergy market remains competitive but Avacta Animal Health has maintained its position through a number of marketing and sales initiatives and excellent customer service.

Financial Overview

Revenue for the six month period ended 31 January 2016 was £1.05 million (2015: £0.73 million).

Revenue contribution from the Group's Affimer life sciences business increased to £0.35 million (2015: negligible) and there was a small reduction in revenue from the Animal Health diagnostic testing business to £0.70 million (2015: £0.73 million).

As the Companycommercialisesits Affimer technology, the variety and structure of commercial agreements that may be entered into is becoming clearer. Revenue recognition of upfront and other payments received will be spread over the relevant period as defined by obligations set out in the commercial agreements. Whilst not impacting cash flows from such agreements this will provide visibility of revenues as the Company grows.

Overheads have increased to £2.65 million (2015: £2.07 million). This is due to the substantial increase in overhead in the Affimer life sciences business, following the establishment of the commercial and operational delivery teams and associated activities invested ahead of anticipated revenue generation.

The Group's operating loss before amortisation and share based payment charges increased to £1.91 million (2015: £1.47 million) and the reported operating loss from continuing operations increased to £2.04 million (2015: £1.60 million).

The basic loss per share increased to 2.61p (2015: 0.13p).

The Group capitalised £1.21 million (2015: £1.28 million) of development costs, primarily relating to the Affimer technology development programmes. These development costs arerecognisedwithin the total intangible asset value of £11.54 million (31 July 2015: £10.36 million).

On 3 August 2015, the Company raised £22.0 million (before expenses) through a placing of 1,760,000,000 ordinary shares of 0.1 pence each at a placing price of 1.25 pence per share.

There was a cash outflow from operations of £2.39 million (31 January 2015: £1.67 million) and an outflow from investing activities of £1.61 million (31 January 2015: £1.98 million) during the period. The Group ended the period with £24.98 million net cash (31 July 2015: £7.33 million).

On 26 January 2016, following approval by shareholders at the Annual General Meeting on 25 January 2016, the Company completed a share consolidation, creating 1 new ordinary share of 10 pence each for every 100 existing ordinary shares of 0.1 pence each. The new 10 pence ordinary shares carry the same rights as the old 0.1 pence ordinary shares. Following the share consolidation, the Company had a total of 67,462,959 ordinary shares of 10 pence each in issue.

Having received approval by shareholders at the Annual General Meeting on 25 January 2016, following the period end on 24 February 2016, the Company having subsequently received Court Approval, has had its share premium account totaling £55.44 million cancelled, which has enabled the Company to generate sufficient distributable reserves to allow the declaration of dividends in the future should the Board determine to do so. The Company currently has no current intention to declare a dividend.

As announced on 7 July 2015, Tim Sykes, who held the part-time role of Chief Financial Officer since IPO, informed the Board he wished to step down from this role to pursue other business interests. Mr Tony Gardiner was appointed as Chief Financial Officer on 4 January 2016. Tony joined Avacta from AHR an international architecture and building consultancy practice where he was Finance Director since 2011. Prior to this, Tony was the Chief Financial Officer of AIM listed Fusion IP plc, an IP commercialisation company, which was subsequently acquired by IP Group plc in 2014. Here, he played a key role in supporting the Chief Executive Officer in growing the business and oversaw all finance activities as well as directly supporting life sciences and health technology companies in Fusion's portfolio.

Outlook

The Company has laid solid technical and commercial foundations during the past twelve months and is well funded to carry out its current Affimer therapeutic development plans and to grow its revenues from research and diagnostics Affimer reagents. The Senior Leadership Team and Scientific Advisory Board are in place and shortly the Company will move into larger facilities in both Wetherby and Cambridge.

The Company has today set out in more detail its therapeutic development programmes and its commercial strategy for the reagents business including key milestones over 2016-17 against which it will report progress.

Progress in the reporting period has continued the operational and commercial advances made in 2015 and the Company is confident of its ongoing performance against its stated objectives.

Condensed consolidated income statement

for the six month period ended 31 January 2016

* On 26 January 2016, following approval by shareholders at the Annual General Meeting on 25 January 2016, Avacta Group plc completed a share consolidation, creating 1 new ordinary share of 10p each for every 100 existing ordinary shares of 0.1p each.

Condensed consolidated statement of changes in equity

as at 31 January 2016

Condensed consolidated balance sheet

at 31 January 2016

Total equity is wholly attributable to equity holders of the parent Company.

Condensed consolidated cash flow statement

for the six month period ended 31 January 2016

Unaudited notes

Basis of preparation and accounting policies

Avacta Group plc is a company incorporated in England and Wales under the Companies Act 2006.

The condensed financial statements are unaudited and were approved by the Board of Directors on 22 April 2016.

The interim financial information for the six months ended 31 January 2016, including comparative financial information, has been prepared on the same basis of preparation and using the same accounting policies as set out in the last annual report and accounts and in accordance with International Financial Reporting Standards ('IFRS'), including IAS 34 (Interim Financial Reporting), as issued by the International Accounting Standards Board and adopted by the European Union.

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 amounts of assets, liabilities, income and expense. Actual results may subsequently differ from those estimates. In preparing the interim financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same, in all material respects, as those applied to the consolidated financial statements for the year ended 31 July 2015.

The Group experiences no material variations in performance arising due to seasonality.

Information extracted from 2015 Annual Report

The financial figures for the year ended 31 July 2015, as set out in this report, do not constitute statutory accounts but are derived from the statutory accounts for that financial year.

The statutory accounts for the year ended 31 July 2015 were prepared under IFRS and have been delivered to the Registrar of Companies. The auditors reported on those accounts. Their report was unqualified, did not draw attention to any matters by way of emphasis and did not include a statement under Section 498(2) or 498(3) of the Companies Act 2006.

The Board confirms that to the best of its knowledge:

The condensed set of financial statements has been prepared in accordance with IAS34 'Interim Financial Reporting' as adopted by the EU;

The interim management report includes a fair review of the information required by:

DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

DTR4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that coulddo so.

Loss per share

* On 26 January 2016, following approval by shareholders at the Annual General Meeting on 25 January 2016, Avacta Group plc completed a share consolidation, creating 1 new ordinary share of 10p each for every 100 existing ordinary shares of 0.1p each.

Following the share consolidation, the Company had a total of 67,462,959 ordinary shares of 10 pence each in issue.

Adoption of FRS 101 for the year ended 31 July 2016

In 2012, the FRC, being the standard setting body in the UK, published FRS 101 'Reduced Disclosure Framework'. This outlines a reduced disclosure framework available to qualifying entities and all UK companies will be required to adopt this or an alternative standard for accounting periods commencing on or after 1 January 2015. Avacta Group plc intends to prepare its accounts under FRS 101 for the year ending 31 July 2016 and to take advantage of the permitted disclosure exemptions allowed. Following adoption of FRS 101, the financial position of the parent company, and the related disclosures after taking the possible exemptions permitted under FRS 101, are expected to be the same as, or follow closely, those reported under previous UK GAAP. The consolidated accounts for the Group will continue to be prepared under full IFRS and are unaffected by this new accounting framework.

The Board considers that it is in the best interests of the Group for Avacta Group plc to adopt FRS 101 'Reduced Disclosure Framework' and the Company's decision to adopt FRS 101 for its parent company's financial statements does not require shareholder approval. However, a shareholder or shareholders holding in aggregate five per cent or more of the total allotted shares in Avacta Group plc may serve objections to the use of the disclosure exemptions on Avacta Group plc, in writing, to its registered office (Unit 651, Street 5, Thorp Arch Estate, Wetherby LS23 7FZ) not later than 25 May 2016 and, if so received, Avacta Group plc may not use these disclosure exemptions.

By Order of the Board

Avacta Group plc issued this content on 25 April 2016 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 25 April 2016 09:16:09 UTC

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