13 September 2022

Oxford Nanopore Technologies plc

Interim results for the six months ended 30 June 2022

Strong growth in core LSRT business; re-affirming full year guidance

Oxford Nanopore Technologies plc (LSE: ONT) ("Oxford Nanopore" or the "Group"), the company behind a new generation of molecular sensing technology based on nanopores, today announces its interim results[1] for the six months ended 30 June 2022.

Summary financial performance

£ million Unless otherwise stated	HY 2022	HY 2021	Change reported
Revenue	122.3	59.0	+107%
Life Science Research Tools (LSRT) revenue	70.6	52.6	+34%
Non-recurring COVID-19 testing revenue[2]	51.8	6.4	+709%
Gross profit	78.0	30.2	+158%
Gross margin	63.7%	51.2%	+12.5pts
LSRT Gross margin	54.8%	51.1%	+3.7pts
Adjusted EBITDA[3]	(34.6)	(19.2)	(15.4)
Loss for the period	(30.2)	(44.8)	14.6

 

Financial highlights; strong underlying revenue growth in core business

·      LSRT revenue increased by 34% to £70.6 million, (HY2021: £52.6million), primarily driven by increasing customer numbers, across a breadth of applications and growth in consumables sales, which includes higher than anticipated contribution from COVID-19 sequencing.

·      Excluding the impact of FX, revenue from COVID-19 sequencing and revenue from the Emirati Genome Program (EGP), LSRT revenue grew by approximately 30% year-on-year.

·      Group revenue increased to £122.3 million (HY2021: £59.0 million), reflecting an £18.0 million increase in LSRT revenue and non-recurring revenue of £51.8 million following the conclusion of the Group's COVID-19 testing contract with the Department of Health and Social Care (DHSC), as previously announced.

·      LSRT Gross profit margin increased to 54.8% (HY2021: 51.1%), predominantly driven by automation, recycling of electronic components and improvements in manufacturing techniques.

·      Adjusted EBITDA loss of £(34.6) million (HY2021: £(19.2) million); higher LSRT Gross profit offset by increased operating expenses, reflecting investment in commercial and marketing teams, to support long term sustainable growth.

·      Reduction in Loss for the period to £(30.2) million (HY2021: £(44.8) million), driven by the higher LSRT Gross profit, the settlement of the DHSC contract and the decrease in the provision for employers social security taxes on pre-IPO share awards, partly offset by higher operating expenses.

·      Cash and cash equivalents and Treasury deposits of £602.6 million[4], compared to £618.2 million as of 31 December 2021.

Business highlights

Continued innovation driving sustainable growth

·      Introduction of "best of both" sequencing chemistry, combining the latest R10.4.1 flow cells with the latest Kit 14 to deliver high-accuracy, high-output sequencing data, achieving 99.6% accurate single molecule raw-read simplex data and 99.92% duplex data, with tunable runs for further flexibility and optimisation.

·      First early access shipments of the palm-sized PromethION 2 (P2) solo device, a high output, low cost nanopore sequencer, designed to make high-throughput sequencing more accessible.

·      Release of Remora, a tool to enable real time, high-accuracy epigenetic insights with nanopore sequencing, making Oxford Nanopore the most comprehensive technology for characterising methylation.

·      Release of Short Fragment Mode to enable nanopore sequencing of fragments as short as 20 bases; only technology on the market capable of directly sequencing short to ultra-long reads in a single technology.

Continued growth in customers and scientific impact

·      Continued increase in the user base and utilisation of nanopore sequencing in life science research; an increase of 990 active customer accounts in the period, taking total active accounts to more than 7,300[5] at 30 June 2022.

·      More than 3,500 papers published by the Nanopore community to date[6] (31 December 2021: 2,466), highlighting applications across a number of scientific research areas including human, cancer, animal, plant, pathogen and environmental genomics.

Investment in people to support growth strategy

·      Increased global headcount to more than 900 (31 December 2021: 803), including key hires in senior sales, marketing and support leadership.

·      Duncan Tatton-Brown appointed as Non-executive Chairman, adding extensive experience as an executive and Non-Executive Director of FTSE companies.

 

Financial guidance

Trading year to date is in line with expectations and the Group continues to expect full year 2022 LSRT revenue to be in the range of £145 million to £160 million, reflecting growth and diversification of the user base.

 

Full year 2022 revenue guidance accounts for an expected tapering of COVID-19 sequencing revenue in the second half of 2022 and expected Emirati Genome Program (EGP) revenue of £15 million to £20 million, lower than previously anticipated.

 

All other guidance remains unchanged. Further details on page 7.

 

Gordon Sanghera, Chief Executive Officer, commented:

"Oxford Nanopore continues to make significant progress, with another period of strong growth in core revenue. We are seeing increasing demand around the world for our unique offering and are hugely proud of the new ground that our customers are breaking with the aid of our technology, in areas spanning population genomics, viral surveillance, neurological disorders, cancer and environmental conservation.

 

"This breadth underlines the scale of the opportunity we see ahead, as we seek to enable the analysis of anything, by anyone, anywhere. We have a clear strategy to achieve this mission and I'm delighted with what we've achieved over the last six months: we have continued to invest in innovation, further enhancing the performance and accessibility of our technology; we have further scaled our commercial team and manufacturing processes to meet growing demand and are pleased to see our focus on innovative and sustainable manufacturing driving increasing margins.

 

"While we remain mindful of the macroeconomic environment, this progress, coupled with our strong balance sheet, gives us confidence as we look ahead."

 

Presentation of results

Management will host a conference call and webcast today at 12:00pm GMT/ 7:00am ET.

For details, and to register, please visit https://nanoporetech.com/about-us/investors/reports. The webcast will be recorded and a replay will be available via the same link shortly after the presentation.

 

For further details please contact [email protected].

 

 

[ENDS]

 

For further information, please contact:

Oxford Nanopore Technologies plc

Investors:          [email protected]

Media:              [email protected]

 

 

Tulchan Group (communications adviser to the Company)

Tom Murray, Olivia Peters, Deborah Roney

+44 (0) 20 7353 4200

[email protected]

About Oxford Nanopore Technologies plc:

Oxford Nanopore Technologies' goal is to bring the widest benefits to society through enabling the analysis of anything, by anyone, anywhere. The company has developed a new generation of nanopore-based sensing technology that is currently used for real-time, high-performance, accessible, and scalable analysis of DNA and RNA.  The technology is used in more than 120 countries, to understand the biology of humans, plants, animals, bacteria, viruses and environments as well as to understand diseases such as cancer.  Oxford Nanopore's technology also has the potential to provide broad, high impact, rapid insights in a number of areas including healthcare, food and agriculture. 

 For more information please visit: www.nanoporetech.com

 

Forward-looking statements

This announcement contains certain forward-looking statements. For example, statements regarding expected revenue growth and profit margins are forward-looking statements. Phrases such as "aim", "plan", "expect", "intend", "anticipate", "believe", "estimate", "target", and similar expressions of a future or forward-looking nature should also be considered forward-looking statements. Forward-looking statements address our expected future business and financial performance and financial condition, and by definition address matters that are, to different degrees, uncertain. Our results could be affected by macroeconomic conditions, the COVID-19 pandemic, delays in our receipt of components or our delivery of products to our customers, suspensions of large projects and/or acceleration of large products or accelerated adoption of pathogen surveillance. These or other uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements.

Business Review[7]

 

Performance summary

 

The Group delivered strong performance in the first half of 2022. Revenue in our core Life Science Research Tools (LSRT) business grew 34% year-on-year on a reported basis. Excluding the impact of FX, revenue from COVID-19 sequencing and revenue from the Emirati Genome Program (EGP), LSRT revenue grew by approximately 30%. This growth stems from our diverse user base, of over 7,300 active customer accounts, an increase of over 990 active customers[8].

 

The continued increase in the user base and utilisation of nanopore sequencing was reflected in a 36% year-on-year increase in consumables revenue, which accounted for 67% of LSRT revenue in the period. From a customer group perspective, the S2 and S3 groups[9] were other core drivers of LSRT revenue growth. S3 revenue, excluding EGP, increased by 94% year-on-year to £18.8 million and revenue from the S2 customer group increased by 36% year-on-year to £24.4 million.

 

Total revenue in the period increased to £122.3 million, reflecting growth in LSRT revenue and non-recurring revenue of £51.8 million following the conclusion of our COVID-19 testing contract with the Department of Health and Social Care (DHSC) in March 2022.

 

LSRT gross margin increased by 3.7pts year-on-year to 54.8%, predominantly driven by automation, improvements in manufacturing techniques and the recycling of electronic components in our hardware and consumables.

 

For LSRT at a regional level, we delivered 56% growth in the Americas and 34% growth in Europe, reflecting our increased commercial capacity in these regions. APAC[10] revenue increased by 79%, driven by strong growth in China. UAE revenue declined by 33%, reflecting a £4.0 million decrease in revenue from the EGP, in part due to phasing of flow cell delivery in the fourth quarter of 2021, which was previously expected in the first quarter of 2022.

 

Loss for the period was £30.2 million, a decrease of £14.6 million compared to the prior half year period. At 30 June 2022, cash and cash equivalents and treasury deposits totalled £602.6 million, compared to £618.2 million at 31 December 2021.

 

Our mission

 

Our mission is to bring the widest benefits to society through enabling the analysis of anything, by anyone, anywhere. We believe that we can enable greater democratisation of access to biological information with our disruptive technology platform and highly differentiated business model.

 

The reach and application of our products continues to expand in places and ways not previously conceivable, addressing some of the most pressing local and global issues in human health and environmental sciences.

 

We continue to see a rapid increase in the number of publications citing our technology. More than 3,500 papers have been published by the Nanopore community to date[11], up from 2,466 at 31 December 2021. These publications highlight the diversity of research applications that our technology is currently supporting from environmental conservation projects to human genetics, neurological disorders, rare disease and cancer. These landmark publications lay a strong foundation for continued growth as users turn these discoveries into everyday tools.

 

Execution against our strategy

 

Execution and delivery of our innovation pipeline

Our commitment to continuous innovation is central to our strategy for growth. In the first half of 2022 we continued to drive performance improvement through new product releases, including the early access release of Kit 14 and flow cells containing the new R10.4.1 nanopore. The move to R10.4.1 and Kit 14 chemistry combines the very high accuracy of Kit 12 and the high output of R9.4.1 flow cells and older chemistries, to deliver high-accuracy, high-output sequencing data. These upgrades allow users to achieve 99.6% accurate single molecule raw-read simplex data and 99.92% duplex data with tunable runs for further flexibility and optimisation.

 

In line with our mission to make DNA sequencing accessible to anyone, anywhere, we expanded our device range with the first early access shipments of the PromethION 2 (P2) solo device. The P2 solo is designed to make high-throughput sequencing more accessible to users with lower sample processing requirements. The P2 allows customers to conduct rapid, competitively priced sequencing of whole human genomes, transcriptomes, single cells, plants, animal or highly multiplexed targeted samples or pathogens. We believe that this will drive the creation of new user types for high-output sequencing.

In the first six months of the year, we released Short Fragment Mode (SFM) to enable nanopore sequencing of fragments as short as 20 bases. This latest release enables users to generate highly accurate information-rich data, in real time, on any molecule from 20 bases to millions of bases long, making Oxford Nanopore the only company capable of directly sequencing short to ultra-long reads in a single technology.

SFM will enable customers to deploy nanopore sequencing in exciting areas such as liquid biopsy research, while benefitting from our existing capabilities, such as: highly scalable outputs, amplification-bias free workflows and the detection of methylation without additional preparation.

During the period, we further enhanced our ability to deliver richer data with the release and integration of Remora, a tool to enable high-quality, real-time methylation analysis at no extra cost.

Methylation detection has traditionally been done using short-read bisulphite sequencing. Whilst this method led to the initial discovery of methylation sites, it also has limitations and increases the cost and complexity of sequencing, owing to the requirement to repeat the run for essential comparison. Additionally, bisulphite sequencing cannot easily differentiate between methylation types such as 5mC and 5hmC, or other types of modification.

In contrast, nanopore sequencing does not require additional, complex sample preparation and epigenetic modification analysis can be performed across the whole genome during the experiment, without the need for additional toxic chemistry. Using Remora, nanopore sequencing can also differentiate between modifications such as 5mC and 5hmC and other novel modifications, ensuring a complete methylation picture from a single experiment, significantly more methylation events than detected by bisulphite and with a simpler experimental process. Oxford Nanopore is now the most comprehensive technology for characterising methylation, achieving 99.8% accuracy for 5mC in CpG contexts.

Manufacturing scale-up to meet increasing demand

Our commitment to innovation extends to our in-house developed manufacturing processes. This production model delivers low-cost, high-volume manufacturing capabilities for our sequencing platforms, kits and flow cells. The production model is a mix of internally and/or externally manufactured components that are assembled, quality controlled (QC), packaged and shipped from our UK site. 

We continue to invest in scaling-up the manufacturing operations and the supporting supply chain to ensure that production volumes can be scaled rapidly when required. In the first half of 2022, we separated our tech transfer operation from production, for greater resilience.

Like many businesses, we experienced strains on our supply chain this year, with increasing costs of product supplies, particularly generic electronic components. We continue to plan ahead to meet our future growth needs by working closely with suppliers and maintaining high levels of inventory.

Despite a challenging macroeconomic backdrop, LSRT gross margin increased to 54.8% in the period, reflecting increased automation, improvements in manufacturing techniques and the recycling of electronic components in our hardware and consumables.

Differentiated commercial strategy driving uptake and utilisation

We have developed a highly differentiated commercial model in order to ensure early adoption of our products. Our 'capital free' go-to-market strategy is designed to break down traditional barriers to entry. Customers are offered 'Starter Packs' of consumables, which come with the provision of the device at no extra cost, removing the need to purchase or rent equipment in order to start using the technology. We also offer a CapEx alternative for those customers who have funding for traditional systems and restrictive spending of this funding.

In the first half of 2022, revenue increased in all three of our customer groups (S1, S2 and S3), driven by the deployment and execution of our innovation pipeline and expanding commercial capacity. We continue to make good progress on the commitment we made to double our commercial team in the 18 months following the IPO. As at 30 June 2022, commercial team headcount had increased by approximately 60% since 30 June 2021.

Our S1 customers generate revenue up to $25,000 per year per account. These are typically MinION users that are key to providing new insights in biology, exploiting the unique richness and rapidity of nanopore sequence data, or everyday users of sequencing technology for routine analyses. We drive sales in this customer group primarily through digital marketing. Customers in this group tend to purchase our technology, using our digital resources and e-commerce platform or, more recently, through our global distributor, Avantor. The total number of active customer accounts in this group reached 6,350 at 30 June 2022[12] (5,501 for FY2021). Revenue in S1 group increased by 16% in the first half of 2022, compared to the prior year period.

Our S2 customers generate between $25,000 and $250,000 per year per account and are predominantly GridION users. These customers are often experienced users of genomics technology, typically research teams or smaller university departments. In some cases, these customers have an existing sequencing platform and are taking their first steps into nanopore based sequencing, to add greater biological value to their projects or services. In other cases, these are accounts that do not have access to large capital budgets, typically sending samples out to service providers. These customers benefit from our affordable, plug- and-play platforms to generate real-time sequencing data as part of their workflow.

The S2 category was a key driver of revenue growth in the period. Total active customer accounts in this group reached 912 at 30 June 2022[13] (782 for FY2021). Revenue in the S2 group increased by 36% in the first half of 2022, compared to the prior year period. Looking ahead, we expect our P2 devices a be a key growth driver for our S2 group, creating new user types for high-output sequencing.

Our S3 customers generate revenue greater than $250,000 per year per account. These customers are typically the established large, centralised sequencing researchers and service providers. Our growth in this group is driven by our PromethION 24 and 48 devices. A key part of this market is Population Genomics where thousands of samples are sequenced for novel insights at scale. We have key partnerships with customers including G42 in the EGP, and other high-throughput human genomics projects including Genomics England with a cancer screening project, and National Institutes of Health (NIH) in the USA, which are using our information-rich data at scale for neurodegenerative screening.

The total number of active accounts in this group reached 69 at 30 June 2022[14] (56 for FY2021). Revenue in the S3 group, excluding EGP, increased by 94% in the first half of 2022, compared to the prior year period. Strong underlying growth in a diverse range of S3 customers was offset by a £4.0 million decline in revenue from the EGP compared to the prior year period. This was due in part to the phasing of flow cell delivery in the fourth quarter of 2021, previously expected in the first quarter of 2022.

 

Outlook and guidance

We remain focused on our mission to bring the widest benefits to society through the analysis of anything, by anyone, anywhere. The continuous strengthening of our team, the establishment of strategic partnerships across the globe, together with significant investment in platform development, bespoke electronics, IP and infrastructure, combined with the strength of our balance sheet, puts us in a strong position to achieve this goal.

 

We see significant opportunities ahead, reflected both in the progress we have made in the current research market and in the preparations that we are making to address many potential uses for our technology in applied markets, from infectious disease to agricultural optimisation. In the near term, we remain strategically focused on driving growth in our core LSRT business and continue to expect our S2 and S3 customer groups to be key drivers of revenue growth in 2022 and 2023.

 

The current macroeconomic environment remains challenging and we continue to work closely with our key suppliers to mitigate future risks to supply.

 

Guidance

Trading year to date is in line with expectations and we continue to expect full year 2022 LSRT revenue to be in the range of £145 million to £160 million.

 

Full year 2022 LSRT revenue guidance accounts for an expected tapering of COVID-19 sequencing revenue in the second half of 2022 and expected EGP revenue of £15 million to £20 million, lower than previously anticipated. Full year 2022 revenue reflects the continued growth and diversification of the broader user base.

 

Over the medium term, we continue to anticipate revenue growth at a compound annual growth rate of more than 30% and gross margins greater than 65%.

 

In the shorter term, we remain vigilant regarding the current macroeconomic environment. For full year 2023 we continue to expect LSRT revenue to be in the range of £190 million to £220 million. Our full year 2023 gross margin target of greater than 60% also remains unchanged.

 

The Company is in a strong financial position, with £602.6 million of cash and cash equivalents and treasury deposits at 30 June 2022. We are still targeting a breakeven adjusted EBITDA by 2026.

Financial review[15]

 

Delivering top-line growth 

In HY22, we delivered strong financial results, with £122.3 million of total revenue. This includes a 34% increase in our core LSRT revenue to £70.6 million (HY21: £52.6 million) and £51.8 million from COVID-19 testing (HY21: £6.4 million).

 

Results - at a glance

 

£million	HY22	HY21	Change
Revenue
LSRT revenue	70.6	52.6	+34%
COVID-19 testing revenue	51.8	6.4	+709%
Total revenue	122.3	59.0	+107%
Gross profit	78.0	30.2	+158%
Gross margin (%)	63.7%	51.2%	+12.5pts
Adjusted operating loss	(45.9)	(31.0)	(14.9)
Adjusted EBITDA	(34.6)	(19.2)	(15.4)
Loss for the period	(30.2)	(44.8)	14.6
£million	30 June 2022	31 December 2021	Change
Cash and Cash Equivalents and Treasury deposits	602.6	618.2	(3)%

                                   

Revenue grew by 107% from £59.0m to £122.3m. The principal drivers of the growth related to:

·      34% growth in LSRT revenue from £52.6m to £70.6m, driven by both increasing customer numbers and growth in consumables sales; and

·      The contractual settlement with the DHSC on 31 March 2022, in relation to a COVID-19 testing contract, resulting in £51.8 million of non-recurring COVID-19 testing revenue in the period.

 

 

All prices are available to view on our online store https://store.nanoporetech.com.

 

Revenue by LSRT customer group & operating segment is shown below:

 

£million	HY22	HY21	% Change
S1	14.0	12.1	+16%
S2	24.4	18.0	+36%
S3	24.6	19.5	+26%
Indirect	7.5	3.0	+150%
Total LSRT revenue	70.6	52.6	+34%
COVID-19 testing revenue	51.8	6.4	+709%
Total revenue	122.3	59.0	+107%

 

Our growth in LSRT revenue in the first half of 2022 reflects our continued strategy of growing the numbers of customers, as well as increasing the spend of customers in the larger S2 and S3 customer groups.

 

Looking at our S1 customers which comprise our core user base, total revenues for the period were £14.0 million, representing growth of 16%. These direct sales include the revenues from our new long term distribution partnership with Avantor.

 

The S2 customer group revenue in HY22 was £24.4 million, growth of 36% compared to HY21, broadly in line with the overall growth rate.

 

Revenue from our S3 customer group grew by 26% compared to HY21. This is despite a decline on EGP revenue from £9.8 million in HY21 to £5.8 million in HY22, in part to the phasing of flow cell delivery in the fourth quarter of 2021 previously expected in the first quarter of 2022. Excluding EGP, the revenue in HY22 was £18.8 million (HY21: £9.7 million), representing significant growth of 94%.

 

Indirect sales in the period grew significantly, representing sales through distributors in particular to certain parts of China, South Korea and India. 

 

Geographical trends 

The Group aims to make its technology available to a broad range of scientific users, and currently supports users in more than 120 countries. In some territories the Group works with distributors to achieve or enhance its own commercial presence. 

 

In HY22, the Group experienced significant growth in all territories compared to HY21, except for the United Arab Emirates. The revenue in this region is dominated by the EGP, which as discussed above was £4.0 million lower in HY22 compared to HY21.

 

 

£million	HY22	HY21	% Change
Americas	23.3	14.9	+56%
Europe & United Kingdom	21.4	16.0	+34%
China	8.5	3.8	+124%
United Arab Emirates	6.9	10.3	-33%
Asia Pacific and Japan	7.8	5.3	+47%
Emerging markets	2.7	2.3	+17%
Total LSRT revenue	70.6	52.6	+34%

 

 

Our Gross profit increased to £78.0 million (HY21: £30.2 million), an increase of 158%, which has been positively impacted by the settlement with DHSC, net of impairment of associated inventory.

 

%	HY22	HY21	Change
LSRT Gross margin %	54.8%	51.1%	+3.7pts

 

LSRT gross margin improved from 51.1% in HY21, to 54.8% in HY22. This is in line with expectations and driven by automation, improvements in manufacturing techniques and recycling of electronic components in our hardware and consumables. LSRT Gross profit contribution in HY22 was £38.7 million, a growth of 44% from £26.9 million in HY21.

 

Our Adjusted operating loss increased to £(45.9) million from a loss of £(31.9) million in HY21.

 

£million	HY22  Reported	1	2	3	Sub total	HY22 Adjusted
Revenue	122.3	-	-	(51.8)	(51.8)	70.6
Gross profit	78.0	-	-	(39.3)	(39.3)	38.7
Research and development expenses	(25.2)	-	(9.4)	-	(9.4)	(34.6)
Selling, general and administrative expenses	(75.7)	35.4	(11.0)	1.4	25.8	(49.9)
Operating expenses	(100.9)	35.4	(20.4)	1.4	16.4	(84.5)
Loss from operations	(23.0)	35.4	(20.4)	(37.9)	(22.9)	(45.9)

 

£million	HY21  Reported	1	2	3	Sub total	HY21 Adjusted
Revenue	59.0	-	-	-	-	59.0
Gross profit	30.2	-	-	-	-	30.2
Research and development expenses	(30.6)	-	6.4	-	6.4	(24.2)
Selling, general and administrative expenses	(42.8)	0.9	4.0	-	4.9	(37.9)
Operating expenses	(73.4)	0.9	10.4	-	11.3	(62.1)
Loss from operations	(43.2)	0.9	10.4	-	11.3	(31.9)

 

Adjusting items include:

1.   Share-based payment expense on founder Long Term Incentive Plan (LTIP)

2.   Employers' social security taxes on pre-IPO share awards

3.   Revenue and costs associated with the settlement of the COVID-19 testing contract with DHSC

 

Operating expenses increased by 37% to £100.9 million (HY21: £73.4 million). Excluding the adjusted items shown in the above table, the underlying operating expenses increased by 38% to £84.5 million (HY21: £61.2 million).

 

Impact of headcount 

 

Average headcount (FTEs)	HY22	HY21	% Change
Research and development	358	267	+34%
Production	150	116	+29%
Selling, general & administration	358	260	+38%
Total	866	643	+35%

 

In HY22, the Group increased its average number of employees by 35% from HY21. This increase was across all departments and functions, but particularly in the commercial and marketing teams.  

 

The Group invested in bringing onboard new research and development staff to support the research phase into early product release across its disruptive platform. Our research and development teams work on fundamental research for novel sensing applications, membrane chemistry, sequencing chemistry, nanopores, enzymes, algorithms, software electronics and arrays to deliver future platforms and improvement on current products. As a result, high calibre scientists and researchers have been attracted to join the company with the goal to realise Oxford Nanopore's vision. 

 

As the Group's manufacturing expanded to cater for increased demand from a growing client base a significant number of staff were added to production, covering all manufacturing stages and processes. The ability of the Group's manufacturing facilities to support modular expansion made it easy to grow the production teams without facing any problems.  

 

The largest increase in the Group's average headcount took place in the selling, general and administration functions including legal functions and corporate executives. The significant expansion of the commercial teams in key geographic regions supports the Group's business growth objectives globally. In addition, the investment in in-field and customer support teams was necessary to maintain and increase customer loyalty and customer retention. The increased investment in IT and building facilities, including laboratories, was catalytic in supporting the Group's innovation engine.  

 

Operational expenditure 

The Group's total operating expenses increased by £27.5 million, or 37% from £73.4 million in HY21 to £100.9 million in HY22: 

 

£million	HY22	HY21	% Change
Research and development expenses	25.2	30.6	(17)%
Selling, general & administrative expenses	75.7	42.8	+77%
Total operating expenses	100.9	73.4	+37%

 

The operating expenses as reported under IFRS are significantly impacted by the following:

·      Share based payment charge on founder LTIPs

·      Employers' social security taxes on pre-IPO share awards

We have adjusted for these items as well as operating costs associated with the settlement of the COVID-19 testing contract with the DHSC to show the underlying operating expenses of the business.

   

Research and development expenses 

The Group's research and development expenditure is recognised as an expense in the period as it is incurred, except for the development costs that meet the criteria for capitalisation as set out in IAS 38 (intangible assets). Capitalised development costs principally comprise qualifying costs incurred in developing the Group's core technology platform and sequencing kits.

 

In HY22 total Adjusted Research and development expenditure plus capitalisation of development costs increased by 53% to £43.6 million, compared to HY21 (£28.5 million).

  

£million		HY22	HY21	% Change
	Adjusted Research and development expenses[16]	34.6	24.2	+43%
	Capitalised development expenses	9.0	4.3	+109%
	Total R&D and capitalised development expenses	43.6	28.5	+53%
	Adjusting items:
	Employers' social security taxes on pre-IPO share awards	(9.4)	6.4
	Less:
	Capitalised development expenses	(9.0)	(4.3)
	Research and development expenses (as reported)	25.2	30.6	(18)%

 

This increase in Adjusted Research and development expenses was principally due: 

·    to a 34% increase in average headcount coupled with inflationary pressures of salaries; and

·    an increase in materials and infrastructure costs associated with the increase in headcount e.g. IT spend, supporting long term sustainability. 

 

The provision for Employers' social security taxes on pre-IPO shares decreased in HY22 because of a downward movement in the share price from 31 December 2021, resulting in a credit to the income statement of £9.4 million.

 

Capitalised development expenses increased by £4.7 million to £9.0 million in HY22, due primarily to significant work undertaken to support our key focus of achieving Q20+ accuracy as well as the development of our PromethION marathon flow cells.

Selling, general and administration costs 

		HY22	HY21	% Change
	Adjusted Selling, general and administrative expenses[17]	49.9	37.9	+32%
	Adjusting items:
	Share based payments expense on Founder LTIP	35.4	0.9
	Employers' social security taxes on pre-IPO share awards	(11.0)	4.0
	Expenses associated with the settlement of the COVID-19 testing contract with DHSC	1.4	-
	Selling, general and administrative expenses (as reported)	75.7	42.8	+77%

 

The Group's Adjusted Selling, general and administrative expenses increased by £12.0 million in HY22 to £49.9 million, principally due to: 

·    a 40% increase in average headcount of staff within the Group's sales, marketing and distribution functions and salary increases to align to listed company pay and inflationary pressure on salaries. This is in line with our plan to expand our global sales team; 

·    increasing sales, marketing and travel spend increase due to more face-to-face meetings;

·    a 26% increase in average headcount of staff within the Group's HR, finance, central administration, legal, applied functions and certain corporate executives to support business growth and salary increases to align to listed company pay; 

·    an increase in infrastructure costs associated with the increase in headcount and the costs of being a public listed company;

·    an increase in depreciation of £1.3 million to £5.6 million[18] in HY22; and

·    an increase in amortisation of £1.5 million to £6.1 million in HY22.

 

Total share-based payment charge included in Selling, general and administrative expenses increased by £36.4million in HY22 compared to HY21, primarily driven by an increase in the Founder LTIP charge (an increase of £34.5 million on HY21). The provision for Employers' social security taxes on pre-IPO shares decreased in HY22 because of a downward movement in the share price from 31 December 2021, resulting in a credit to the income statement of £11.0 million.

 

With the increasing levels of capitalised development expenses over the last few years, the subsequent amortisation charge has increased in HY22.

 

Adjusted EBITDA

 

£million	HY22	HY21
Loss for the period	(30.2)	(44.8)
Income tax expense	2.5	0.4
Finance income	(0.9)	(0.1)
Loan interest	0.1	0.1
Interest on lease	0.6	0.3
Depreciation and amortisation	16.1	12.0
EBITDA	(11.7)	(32.0)
Adjusting items:
Share based payments expense on Founder LTIP	35.4	0.9
Employers' social security taxes on pre-IPO share awards	(20.4)	11.3
Settlement of COVID-19 testing contract	(37.9)	-
Impairment of investment in associate	-	0.5
Adjusted EBITDA	(34.6)	(19.2)

 

Adjusted EBITDA losses increased from £19.2 million to £34.6 million. This was primarily driven by increasing operational expenses associated with the increase in headcount and the expenses of being a public listed company, partly offset by an increase in LSRT gross profit.

 

Exchange gains and losses

 

As the Group receives a significant amount of revenue in US Dollars, we seek to reduce the exposure of the Group to fluctuations in currency by entering into a range of derivative forward contracts. During the period, the US Dollar rate increased in strength resulting in a derivative contract loss of £4.8 million (HY2021: loss of £0.2 million), presented in Other gains and losses. In the same period, assets held by the group in US Dollars strengthened in value when translated into GBP, resulting in unrealised exchange gains of £4.3 million (HY2021: loss of £0.1million).

 

Balance sheet 

Key elements of change in the balance sheet during the year comprised the following: 

  

·      As a result of the sale and leaseback of our UK Headquarters on 8 July 2022, the Gosling Building, the asset (£15.6 million) has been reclassified from Property, Plant and Equipment to Assets held for resale within Current Assets. The loan associated with this property has also been reclassified to a current liability - see below for more details;

·      Right of Use assets has increased by £8.6 million (with a similar increase in lease liabilities - £8.7 million) as a result of new properties added to the property portfolio;

·      Inventory of £73.1 million at 30 June 2022 has increased by £10.0 million from £63.1 million at 31 December 2021. In particular, raw materials inventory increased by £7.4 million, as result of our policy to increase our holding of key components; and  

·      Provisions of £15.0 million at 30 June 2022 (31 December 2021: £35.4 million), which primarily relates to a reduction of the provision for employer social security taxes on share awards of £21.0 million, following the decrease in the share price from the end of 2021. 

 

Cash flow 

·      Cash and cash equivalents of £471.6 million and treasury deposits of £131.0 million, decreased by £15.5 million over HY22, due to operating losses partially offset by increased LSRT gross profit and cash proceeds from the DHSC settlement.

 

Manufacturing & operations 

In order to achieve our scaling up goals, we have focussed on continuous improvement ensuring that our platform can be manufactured at high volume and low cost. 

 

As a result, we invested further in extending our manufacturing operations and the surrounding supply chain, with the aim of improving manufacturing automation, manufacturing processes and design. We will continue to bring manufacturing in-house over time to increase margins and to reduce associated risks and costs. 

 

In the first half of 2022 the Group managed to expand production despite a challenging situation in the current macro-economic environment. We continue to work closely with our suppliers to mitigate future risks to supply.

 

Events after the reporting date

On 8 July 2022, Oxford Nanopore completed the sale of its interest in the Gosling Building (the "Property") to The Oxford Science Park (Properties) Limited ("TOSP") for £42.5 million. On completion of the sale, TOSP has immediately granted Oxford Nanopore an occupational lease of the Property for 10 years; at a rent of £1.8 million per annum. The transaction is expected to have resulted in a reduction in PPE by approximately £15.6 million and gain on sale of rights transferred amounting to £18.6 million. The bank loan of £9.5m was discharged and a right-of-use asset and related lease liability recognised.