Avacta Group Plc (LON:AVCT) is a life science company providing high quality and highly specific tools to the biopharmaceutical industry to help in the diagnosis and treatment of humans and animals. The group’s Affimer technology is a revolutionary alternative to the established antibody technology which dominates the drug industry despite its limitations. Following the Placing early in the current fiscal year to fund an in-house therapeutic Affimer programme, this has added a significant new element to the R&D spend which means that it is necessary for the company to change the method by which certain R&D investment is accounted for.
► Strategy: To commercialise its Affimer technology through a combination of bespoke research tools, collaborative deals and by identifying and developing its own proprietary therapeutic Affimer lead compounds. With about £20.0m on deposit, the company has the resource to deliver on its stated strategy.
► Capitalised R&D: Historically, Avacta has invested exclusively in Affimer R&D with a high probability of being embodied in commercial products, in the form of a reagent or diagnostic, in the near or medium term. Therefore, its policy has been to capitalise R&D and amortise this investment once commercialised.
► Therapeutic R&D: Following the £25m Placing earlier in fiscal 2016, Avacta has been able to execute on its strategy to develop a pipeline of therapeutic Affimers. This carries a much greater risk that a commercial product might not be achieved. Therefore, Avacta has taken the prudent view that therapeutic R&D should be written-off each year.
► Financial impact: This accounting change has no impact on cashflow. Our original forecast assumed that R&D investment of £3.8m would be capitalised. The accounting change means that £2.8m will continue to be capitalised and the £1.0m spent on therapeutic R&D will be written-off through the P&L account.
► Investment summary: Given that a putative drug in pre-clinical development has <1% probability of commercialisation, management is taking the prudent view that all its R&D investment in therapeutics should be written-off in the year in which the expenditure is incurred. This brings Avacta Group Plc in-line with normal pharmaceutical industry practice and has no effect on cashflows.
