The Business

Biocompatibles is a leading medical technology company in the field of drug device combination products. We operate through an Oncology Products Division and two R&D businesses.

Our “Business Model” is to own the most valuable products in our portfolio and pipeline; and to engage with partners where their scale and/or focus offers more effective execution. In this context we have important relationships with some of the world’s most successful healthcare companies, including Medtronic, AstraZeneca, Bayer and Eisai.

We consider ourselves to be the leader in the field of Drug-Eluting Beads for the treatment of cancer and amongst the leaders in the field of stem cell derived therapies for the brain. Our task is to develop these leading technology positions into really attractive market positions or valuable licence agreements.
 

The Vision

Our Vision for Biocompatibles remains the development of a high margin, high growth, financially strong business based on a range of valuable drug device combination products.

The Vision of the Oncology Products and Drug Delivery businesses is also unchanged - the creation and leadership of a market for Drug-Eluting Beads and the recognition of our products as a Gold Standard treatment for Hepatocellular Carcinoma and Metastatic Colo-Rectal Cancer. CellMed’s Vision is still to be first to market with an engineered stem cell product - the Drug-Eluting CellBead for the treatment of stroke. We believe that in 2008 we took substantial steps towards the realisation of these visions.
 

Building Value

Biocompatibles’ financial profile is improving with the growth in sales and gross margin; but the Group is not yet profitable. We address this situation by committing to a clear medium-term vision, described above, along with annual goals that mark the route; to committing to financial guidance on the level of sales and cash consumption; and to committing to the exploration of opportunities for accelerating the delivery of value to shareholders. This approach was taken in 2002 with the sale of the cardiovascular stent and contact lens businesses, and the subsequent return to shareholders of £123m of capital.

It was consistent with this philosophy that the Company announced in May that, commencing in the first half of 2009, it intended to pay a dividend funded out of royalty income received from its out-licensed technologies (the Royalty Dividend). The Board expects to continue to pay the Royalty Dividend annually for as long as Medtronic sustains an appropriate level of sales of its Endeavor Drug-Eluting Stent, on which Biocompatibles earns a 1.5% royalty. The Board also intends that thereafter the Company would pay a dividend from profits though, at this time, there can be no certainty that this transition can be achieved as planned.

The rationale for the Royalty Dividend is that it enables shareholders to benefit from the cash that is being received by the Company from its cardiovascular business to the extent that it is not required for building the sustainable and profitable business that is the focus of the Company’s business plan because of our prudent cash position.
 

 Acquisition and Business Development Activity

The Board monitors a short list of acquisition and in-licensing opportunities; and in August we completed the acquisition of BrachySciences, which we expect to be a valuable strategic investment. BrachySciences’ products are a local treatment for a locally-dominant cancer delivered under image-guidance, which is the same concept as Biocompatibles’ Drug-Eluting Bead products. BrachySciences’ seeds deliver radiation; Biocompatibles’ Beads deliver drugs.

A central conviction underpinning Biocompatibles’ oncology strategy is that the core approaches to cancer treatment, namely systemic drug administration and surgery, can and will be supplemented by much wider use of minimally-invasive local treatments for locally-dominant disease. The rationale behind locally-delivered therapy is to achieve a better side-effect profile, lower cost and potentially improved survival. BrachySciences’ products are in this category.

The Company will continue actively to review acquisitions and in-licensing opportunities that would strengthen the Company’s competitive position and accelerate progress to profitability.
 

Corporate Governance

The Directors place a high priority on maintaining high standards of corporate governance and rigorous management systems, and the Company complies with the Combined Code on Corporate Governance. Biocompatibles’ quality management system incorporates a number of relevant provisions from the Code (and the Turnbull Guidance), including those relating to risk management and internal control. The internal control risk review ensures that, as the Group and its technology evolves, its approach to risk keeps pace. The Company’s continued accreditation to the ISO 9001-2000 quality standard represents independent verification of the Company’s compliance with some of the key elements of corporate governance.

Since 2001, the Company has also held the Investor in People accreditation. This recognises the Group’s dedication to employee development.

Memorandum and Articles of Association
 

Management of Risk

The Biocompatibles’ share price is more volatile than the average share on the London stock market, not least because the Company is part of a volatile sector - of small/mid size healthcare technology companies; and although the sector performed poorly in 2008, Biocompatibles’ stock held up better than most. Nevertheless, the Directors continue to take the view that the Company’s investors are aware of this “sector risk” and that they are looking for the exceptional returns that can be achieved when healthcare technology is successfully commercialised. The Directors therefore focus their review of risk on the issues that can cause projects to be delayed, as well as on those that can cause projects to fail.
 

Outlook

In summary, the Board considers that its current strategy is delivering. Sales are growing, market acceptance is increasing, the clinical data is good and we are developing new commercial relationships with large pharmaceutical companies.

The economic environment and the capital markets remain challenging - especially for smaller emerging healthcare companies - but we believe that our relative financial strength,the sales momentum and the competitive advantage of our products will enable us to take advantage of any opportunities that present themselves in difficult times and that we can offer attractive returns for our shareholders.
 

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