ML Laboratories PLC
 
 Preliminary Audited Results for the Year Ended 30 September 2003
 
 CHAIRMAN'S STATEMENT
 
Having effectively completed the refocusing of the Group and the associated
divestment of our non-core activities by the interim reporting stage I am
pleased to inform you that, in the subsequent period, we have benefited from our
much simplified group structure and the resulting significantly reduced cost
base.
 
Throughout the period under review, namely, the financial year ended 30
September 2003 and the subsequent period to date, we have continued to progress
the development and commercialisation of our portfolio of pharmaceutical
products and technologies which is our primary objective.
 
We have today announced our preliminary results for the year ended 30 September
2003 which show turnover of GBP6.5m and a loss for the financial year of GBP2.6m.
The financial results are fully described in the Financial Review which forms
part of this preliminary announcement.
 
On 21 January 2004, we announced that the Company had reviewed its current
working capital requirements and, as a result of the delays in receipt of
milestone income, had concluded that it could no longer have a reasonable
expectation that anticipated milestone income in the short term would be
sufficient to fund its existing development plans and that it had therefore
concluded that it should explore ways of raising additional funds.
 
We are therefore pleased to announce an underwritten Rights Issue, and an Issue
for cash, (together 'the Issues') to raise GBP14.3m, net of expenses, The Company
is of the opinion that, taking into account the net proceeds of the Issues, the
working capital available to the Group is sufficient for its present
requirements, that is, for at least the next twelve months from the date of this
document.
 
Full details of the Issues are set out in a document sent to Shareholders today.
 
Divestments
In April 2003 we completed the disposal of our Icodextrin manufacturing business
for a gross consideration of GBP6.8m which produced net proceeds of GBP5.7m.
The turnover and profit before tax attributable to that business in the previous
financial year to 30 September 2002 were GBP2.9m and GBP0.4m respectively and the
net assets at that date were GBP1.5m. Consequently we consider the sale proceeds
achieved for the business represent acceptable value. The operating results of
that business in the financial year under review have been included in the
financial statements in discontinued activities.
 
In May 2003 we were presented with the opportunity to reduce our 46%
shareholding in Cobra Biomanufacturing PLC ('CBM'), our former biological
manufacturing business, which we divested by flotation on AIM in June 2002. The
shareholding has been subject to the lock-in arrangement that we entered into on
flotation which restricted the timing and quantum of disposals until June 2004.
We disposed of approximately 83% of our holding realising gross disposal
proceeds of GBP4m before expenses.
 
The aforementioned disposals produced a combined profit on divestments in the
period of GBP5.7m.
 
The balance of the holding of one million CBM shares has been sold since the end
of the financial year realising a further GBP1.2m, net of expenses. This increases
the total gross sum realised from the divestment of non-core manufacturing
businesses to circa GBP15m. In addition to generating working capital the
divestments have relieved the Group of the requirement to incur the capital
expenditure necessary to further develop those businesses.
 
Research refocusing
In February 2003 we completed the downsizing of our early stage research
activities as part of the implementation of our strategy to focus research on
the development of products and technologies with the potential to produce
income in the relatively near term. This resulted in a reduction in research
department headcount of approximately 50% and a consequent annual saving of
circa GBP1m in personnel costs and other costs associated with the research
activity. The output of our research effort is monitored against performance
targets which are regularly reviewed.
 
Clinical and regulatory progress
In the period under review the principal achievements were:
 
• Extraneal
The worldwide licensee of our dialysis solution, Baxter Healthcare, launched the
product in the US in the period and subsequently in Japan. Launch in these two
large markets offers the prospect of significant royalty income and has resulted
in Extraneal being commercially available in the world's major pharmaceutical
markets.
 
• ADEPT
In August 2003, following a review of the data at the defined interim stage of
the pivotal Phase III US multi-centre clinical trial of our adhesion reduction
therapy, the independent Data Monitoring Committee reported that there were no
concerns related to the safety of ADEPT and recommended continuation of the
study through to completion. The data from the remaining patient set are
required to confirm the safety profile of ADEPT and to provide evidence of
efficacy to the satisfaction of the US regulatory authorities. 80% of the total
number of patients have been entered into the study which is expected to report
in Q3 2004.
 
• Phosphate binder
Our collaboration with Ineos Silicas Limited to develop their patented compound
for the treatment of hyperphosphataemia in kidney failure patients saw the Phase
I clinical study completed in which it was demonstrated that healthy volunteers
were able to tolerate the drug in doses sufficient to result in a significant
reduction in phosphate absorption from the diet, which is an important measure
of clinical efficacy.
 
The results of the study were presented at the November 2003 meeting of the
American Society of Nephrology and generated considerable interest. The plans
for the Phase II studies have been finalised and the process of recruiting
patients has commenced.
 
• CTL 102
In November 2003 we announced that our Phase II study to evaluate the efficacy
and safety of our novel treatment of prostate cancer had entered the treatment
phase. The trial is the first of its kind in prostate cancer in the UK and we
anticipate reporting the outcome in H2 2005.
 
• CTL 901
In December 2003 the first patient was entered into the Phase I clinical trial
of our treatment of skin cancer (advanced melanoma). The product is comprised of
the patient's own dendritic cells, a component of their immune system, which
have been modified by our proprietary gene delivery system, CL22. We consider
that CL22 is a platform technology which could potentially be used to modify
dendritic cells for the treatment of other advanced forms of cancer for which no
effective treatments are available.
 
• Formoterol CLICKHALER
The filing of the application for marketing authorisation in Europe in November
2002, which triggered a significant milestone receipt from our licensee, was
followed by the filing for marketing authorisation with the Canadian regulators
in November 2003. European marketing approval and launch of this product are
anticipated in H2 2004, both of which will trigger further significant milestone
receipts, as will the launch of the product in Canada which is anticipated in H2
2005.
 
• Budesonide CLICKHALER
The application for European marketing authorisation was filed in November 2003
triggering a significant milestone receipt from our licensee. European marketing
approval and launch of this product are anticipated in H1 2005, both of which
will trigger further significant milestone receipts.
 
Commercialisation progress
 
Innovata Biomed ('IB'), our respiratory drug delivery subsidiary, achieved
several successes in the period:
• In March 2003 IB granted Otsuka Pharmaceutical Co. Ltd., a leading
Japanese healthcare company, an exclusive licence to deliver Meptin in
CLICKHALER in Japan and Spain. In consideration, IB becomes entitled to
milestone receipts and further revenue from supplying CLICKHALERs to Otsuka. The
product is currently in the clinic generating the data necessary to file an
application for marketing approval with the Japanese regulators during H1 2004,
with launch anticipated in 2005. Whilst this agreement adds further
accreditation to CLICKHALER generally, it does so particularly in Japan as
evidenced by the increased level of enquiries from other potential licensees of
CLICKHALER in that country.
 
• In December 2003 IB entered into an agreement with Pliva, a
multi-national pharmaceutical company, to develop a novel asthma medication
based on Pliva's new chemical entity ('NCE') steroid and CLICKHALER. In
consideration, IB will receive development fees, milestone receipts and
royalties on sales and, in addition, IB will supply CLICKHALERs on commercial
terms. This agreement is significant in that it represents the first agreement
for an NCE to be delivered in CLICKHALER and sets IB on the pathway to achieve
its objective of becoming a leading independent provider of dry powder
inhalation technologies for the delivery of NCE respiratory compounds.
 
Panos acquisition
Our interest in DEVACADE, our product for enhancing the pain relief produced by
morphine, is licensed from Panos Therapeutics Limited ('Panos') under a
collaborative agreement for the joint development and marketing of the product,
entered into in 1998.
 
We have agreed an arrangement whereby we may, in due course, acquire Panos for a
consideration of 15.7m, (subject to adjustment), ordinary shares in ML. This
acquisition, if completed, would mean that the whole of Panos' interest in
DEVACADE, which Panos has licensed from Merck & Co. Inc, and Panos' potential
income from its commercialisation, would be brought into the Group and ML would
be relieved from the requirement to pay future milestone payments to Panos, as
provided for in the 1998 agreement.
 
Co-founders' shareholding
In October 2003 we were pleased to announce that our brokers had successfully
placed with institutional investors 54.4m of a block of 56.6m shares, formerly
held by a company owned by ML's founders, which had been under the control of a
creditor bank for over a year. Subsequently the remaining 2.2m shares of that
block have also been sold. Those transactions finally removed the overhanging
uncertainty surrounding that very large block of shares and, as a result,
provided ML with a broader investor base. Many of the participating
institutional investors are new shareholders in ML and we look forward to
working with them over the long term.
 
Prospects
ML is a business already generating income from products we have successfully
developed and licensed to other pharmaceutical companies. Following the
restructuring of the Group, we have focused our core skills in clinical
development, regulatory affairs and product commercialisation on the development
of our portfolio of pharmaceutical products in both early and late stages of
development.
 
Our potential for growth is supported by our established track record of
sourcing a development pipeline through in-house initiatives, in-licensing and
joint development agreements, all of which we will continue actively to pursue.
In view of the above we believe that the business is capable of achieving
profitability in the near term and delivering value to shareholders over the
long term.
 
The Directors continue to believe that the Group's products and technologies
have an acceptable risk profile and accordingly have a reasonable probability of
being successful in the clinic and with regulators and licensees in generating
income for the Group. Therefore, the Directors view the future prospects of the
Group with confidence.
 
S.W. Sim
Executive Chairman
28 January 2004
 
 OPERATIONAL REVIEW
 
OPERATIONAL STRUCTURE
 
The Group's activities are organised into two principal operations - ML
Pharmaceuticals and Innovata Biomed, the Group's respiratory subsidiary.
 
ML Pharmaceuticals is a pharmaceutical product development business with a track
record of successful clinical development, regulatory approval and licensing of
pharmaceutical products and a development pipeline of future products targeted
at specialist markets. Its activities are supported by revenue streams from
products which have been successfully developed and licensed to other
pharmaceutical companies. The business also generates income by licensing
patented technologies resulting from its research to third parties for use in
the discovery and manufacture of biotechnology products.
 
Innovata Biomed designs and develops technologies for delivering compounds to
the lung for licensing to third parties. Existing licence agreements generate
royalty income together with milestone receipts which provide support for the
business's ongoing development programmes.
 
Both businesses operate as separate divisions with their own research, clinical
development and business development capabilities, supported by centrally
provided services which include regulatory affairs, intellectual property
management, finance and administration.
 
PRODUCT DEVELOPMENT REVIEW
 
ML PHARMACEUTICALS
 
EXTRANEAL - an Icodextrin solution for use in Peritoneal Dialysis
 
Icodextrin solution is used in peritoneal dialysis ('PD') for the treatment of
renal failure patients, wherein waste products and excess fluid pass from the
patient's blood into a dialysis solution infused into the abdominal cavity, all
of which is subsequently drained out. ML holds patents in all major
pharmaceutical markets over Icodextrin, the active ingredient.
 
The product has been licensed to Baxter Healthcare on an exclusive worldwide
basis. Baxter, a market leader in renal disease treatments, has launched the
product under its trade name, Extraneal, firstly in the UK in 1996 and
subsequently in a further 31 countries. Currently more than 10,000 patients
worldwide are using the solution on a daily basis.
 
Extraneal received US marketing approval in December 2002 and was launched in
that market in April 2003. Japanese approval was received in April 2003 and the
product was launched in that country later that year. Extraneal is now
commercially available in all of the world's major pharmaceutical markets.
Sales of Extraneal in the major US and Japanese markets are expected to have a
significant impact on our future royalty income.
 
ADEPT - an Icodextrin solution for the reduction of post-operative adhesions
 
Adhesions are a serious and frequent complication following abdominal and
gynaecological surgery and are acknowledged as a major surgical problem.
Adhesions are expensive to treat, often requiring further surgery and
hospitalisation. Currently available treatments are both more expensive and
difficult to administer than ADEPT. ADEPT offers significant advantages in that
it is an easy to use, low viscosity solution which can be delivered via a
laparoscope in minimally invasive (keyhole) surgery and is readily incorporated
into routine surgical procedures. Furthermore, we anticipate ADEPT will be
significantly less expensive.
 
In October 2001 the exclusive right to manufacture and sell ADEPT throughout
Europe was licensed to Shire Pharmaceuticals PLC ('Shire'), who, following our
initial launch of the product in the UK in 2000, completed launches in the other
main EU countries (France, Spain, Italy and Germany). Shire is now achieving
widespread use of this product with gynaecologists and with general surgeons
carrying out colorectal operations.
 
The clinical development of ADEPT has been concentrated in the US where we are
carrying out a pivotal Phase III clinical trial, the PAMELA study, to determine
the efficacy and safety of ADEPT in the reduction of post surgical adhesions
after laparoscopic surgery. The PAMELA study is a clinical evaluation of ADEPT
solution as an adjunct to adhesiolysis surgery, being conducted in 15
gynaecology units in the US. The total proposed patient number (410) is based on
statistical analysis of a previous five centre Phase II study. PAMELA is a
double blind comparison of ADEPT and Ringer's lactate solution.
 
The protocol of the PAMELA study included a provision for an independent interim
analysis of the data after completion of 50% (205) of the patients. This
analysis was conducted by an independent external organisation and passed, with
the appropriate information blinded, to an independent Data Monitoring Committee
('DMC').
 
The DMC completed its evaluation of the data in August 2003 when it reported
that there were no concerns relating to the safety of ADEPT and recommended that
the study should continue.
 
The data from the remaining patient set are required to confirm the safety
profile of ADEPT and to provide sufficient evidence to demonstrate its efficacy
to the satisfaction of the FDA. The study is anticipated to complete in Q3 2004.
We anticipate appointing a licensee for the US market in the event of a
successful outcome to the US trial and we are in discussion with potential
licensees for the Japanese and other Asian markets. We consider it is likely
that Japanese marketing approval will be facilitated by positive data generated
by our US study. Our estimated earliest launch date of the product in the US is
2007.
 
Our view is that uptake of the available treatments has been hampered by their
complexity of use and cost. Consequently we are excited by the prospects for
ADEPT in this market where we consider it has the potential to become a leading
product due to its safety profile, ease of use and price advantage and, as such,
it could be used routinely in all abdominal surgery.
 
EMMELLE - an Icodextrin based intra-vaginal gel to prevent HIV transmission
 
The majority of new HIV infections occur in women and the transfer of virus
during sexual intercourse is the major cause of such infection. The availability
of a barrier microbicide such as EMMELLE, which is self-administered, would put
prevention under the control of women. Female controlled microbicide products
such as EMMELLE gel are considered a vital part of the worldwide effort to
minimise the spread of HIV. EMMELLE has been the subject of a number of Phase II
safety clinical investigations, both in Europe and Africa, and we consider it to
have the potential to provide women with protection against viral transfer.
 
In February 2002 the Department for International Development ('DFID') and the
Medical Research Council ('MRC') jointly announced a GBP16m microbicide
development programme in which EMMELLE would be one of only two late stage
products to be evaluated in a large Phase III clinical trial to be conducted in
Africa, under MRC supervision. The trial is in the final stages of planning
under the direction of an international committee of experts. If the results of
the trial are successful, ML will be able to use the data as part of the
application for marketing authorisation in all of the major pharmaceutical
markets.
 
The low probability for the development of effective vaccines in the near future
has increased the public health need for rapid development of products such as
EMMELLE, which could limit the spread of HIV disease in developing countries and
at the same time fulfil the potential requirement for products for personal
protection in developed markets. The requirement for such a product has been
receiving increasing publicity and independent surveys have concluded that the
market could be very large. Our estimated earliest launch date is 2010.
 
We are also considering the application of EMMELLE in the prevention of other
important sexually transmitted diseases and we have commenced in vitro studies
of its potential in the prevention of chlamydia infection.
 
DEVACADE - for enhancing the pain relief produced by morphine
 
Pre-clinical studies with DEVACADE demonstrated that this new chemical entity
has the ability to enhance the pain relieving properties of drugs such as
morphine without increasing the disturbing and dangerous side-effects
experienced with such drugs. The double blind crossover dose response Phase II
clinical study which we conducted in patients with severe neuropathic pain
demonstrated that DEVACADE offers beneficial levels of pain reduction for
patients on maximum doses of strong opioid analgesics and other ancillary
analgesic agents when given as an adjunct to those drugs. Many of these patients
are very long term pain sufferers. As well as reducing their pain levels,
patients also reported reduced levels of sleep disturbance from their pain and
reduced interference in activities owing to pain.
 
We continue actively to seek a licensee who is able to complete the required
clinical programme and market this product. A Phase III programme has been
designed to provide more extensive safety and efficacy data to meet the
requirements of the regulatory authorities and to provide data to expedite the
commercialisation of the product. We anticipate this study would take
approximately two years and our estimated earliest launch date is 2007.
 
PHOSPHATE BINDER - Treatment of Hyperphosphataemia
 
Abnormally high and damaging levels of phosphate in the blood occur when damaged
kidneys are unable to rid the body of excess phosphate absorbed from food.
Patients suffering from end-stage renal failure usually need to take a phosphate
binding product to prevent absorption of phosphate and reduce blood
concentrations. The novel compound we are co-developing with Ineos Silicas
Limited has been shown in pre-clinical tests to have substantial phosphate
binding activity. Furthermore, the product does not contain aluminium or calcium
ions which could cause safety concerns in long term use and may therefore also
render it applicable for use in pre-dialysis renal failure patients.
 
This product meets our product selection criteria ideally, as its efficacy can
be readily demonstrated in a relatively small number of kidney failure patients,
which is a body of patients of whom we gained considerable experience during the
successful development of our kidney dialysis solution.
 
A Phase I study has demonstrated that healthy volunteers were able to tolerate
the drug in doses sufficient to cause a significant reduction in phosphate
absorption from the diet, which is an important measure of clinical efficacy.
The results of this study were presented at the November 2003 meeting of the
American Society of Nephrology in San Diego where it generated considerable
interest.
 
The clinical development plans for Phase II trials have been finalised and the
process of recruiting patients has commenced. We anticipate completing the study
in early 2005 and our estimated earliest launch date is 2007.
 
We are excited by the prospects for this product in this rapidly growing market
segment.
 
Gene Therapy Cancer Products
 
• CTL102 in Prostate Cancer
The mode of action of this product is the delivery of the gene for a bacterial
enzyme, nitroreductase, to cancer cells such that a separately administered,
relatively harmless drug, CB1954, will be activated in the tumour to kill the
cancer cells. Having demonstrated gene expression in prostate tumours, we
determined to concentrate exclusively on developing a treatment for prostate
cancer, as we will be able to deliver multiple injections of CTL102 to the
tumours and to monitor effects on tumour size by measuring an established serum
marker, prostate specific antigen.
 
In November 2003 we announced the commencement of the treatment stage of our
Phase II clinical trial in prostate cancer, which is the first of its kind in
the UK. The purpose of the trial is to determine whether the treatment is both
safe and efficacious. We expect to report the outcome of the trial in H2 2005
and our estimated earliest launch date is 2009.
 
We are hopeful that the novelty of the product could establish a marketable
platform from which gene therapy products can be developed by third party
licensees for the treatment of other tumours.
 
• CTL901 in Melanoma
A Phase I clinical trial is being conducted by our collaborators at the Cancer
Research UK Institute for Cancer Studies at Birmingham University on our
treatment for malignant melanoma. This treatment is based on the delivery of
genes encoding tumour associated antigens to antigen presenting cells known as
dendritic cells. In the trial, dendritic cells isolated from the patients' blood
are modified using our proprietary antigen delivery system, CL22. The modified
dendritic cells are returned to the patients by injection in order to induce the
patients' immune system to attack tumour cells. Pre-clinical data suggest that
this treatment will specifically attack skin cancers as well as the cancerous
cells which leave the tumour and spread the disease throughout the body. We
consider that our CL22 system is a platform technology that may prove to be
capable of being used to modify dendritic cells for the treatment of other
advanced forms of cancer. We estimate the earliest launch date is 2012.
 
Gene Expression Technology
 
Agreements continue to be signed with a number of biotechnology and
pharmaceutical companies to evaluate the UCOE technology for facilitating gene
expression and thereby increasing the efficiency of therapeutic protein
production. In addition we have an agreement with Medarex to apply our UCOE gene
expression technology for antibody production.
 
Polymer Drug Delivery
 
We have been applying our expertise and patented technology in the field of
glucose polymers to several applications which result in improved drug efficacy:
 
 •Our DEXEMEL solution, which has been approved for marketing in Europe, has been 
 shown to provide anti-cancer drugs with prolonged and more extensive coverage 
 of the abdominal cavity.
 
 •In conjunction with our research partner, Canji Inc, a subsidiary of 
 Schering-Plough, we have demonstrated that gene vector stability is maintained 
 in an Icodextrin solution.
 
Each of the above is the basis for patent applications and is potentially
applicable to a wide variety of existing and novel drug therapies. It is our
intention to commercialise them by partnering with other pharmaceutical
companies using their novel compounds.
 
INNOVATA BIOMED
 
CLICKHALER - a fast-to-market dry powder inhaler for new asthma therapies.
 
CLICKHALER is a proven, industrialised dry powder inhaler ('DPI') with many
established advantages over standard asthma inhalers. CLICKHALER has been
extensively studied and shown to be highly acceptable to patients, regulators
and potential licensees. Furthermore, it is marketed by Celltech PLC with
standard asthma therapies (salbutamol and beclomethasone) in the UK, Ireland and
France,
 
In September 2002 we announced that we had entered into an exclusive licence
agreement with a major global pharmaceutical group for the rights to market the
two asthma therapy molecules, budesonide and formoterol, in CLICKHALER in Europe
and a number of other territories. This agreement provides for the payment to
Innovata Biomed of up to GBP10m in access fees and milestone receipts plus double
digit royalties on future product sales.
 
In November 2002 the first application for marketing authorisation for
formoterol CLICKHALER in Europe was submitted, which was followed by application
to the Canadian regulators in November 2003. We anticipate reaching the European
and Canadian markets though IB's licensee in 2004 and 2005 respectively. The
application for European marketing authorisation for budesonide CLICKHALER was
filed in November 2003 with launch expected in 2005 and we anticipate our
licensee filing in Canada in 2004, with a launch two years later. Revenues from
both budesonide and formoterol CLICKHALER are expected to flow from sales for
the commercial life of the products.
 
Negotiations were completed in March 2003 for the delivery of Otsuka
Pharmaceutical Company's established drug, Meptin, using IB's CLICKHALER, in
Japan and Spain. This drug is already being sold by Otsuka in a CFC metered dose
inhaler format and they expect to be able to commence substitution of sales of
their existing product with CLICKHALER once approval is granted by the Japanese
regulators. The product is currently in the clinic generating the necessary data
for marketing approval with filing expected in 2004 and launch anticipated in
2005.
 
In December 2003 an agreement was entered into with Pliva to develop a novel
asthma medication based on Pliva's NCE steroid and CLICKHALER. The agreement is
significant as it represents the first agreement for an NCE in CLICKHALER which
sets IB on the pathway to becoming a leading independent provider of DPI
technologies for the delivery of NCE respiratory compounds. Our estimated
earliest launch date is 2010.
 
In addition, further formulation and clinical studies have been undertaken by
IB, both alone and with potential partner companies, to evaluate the performance
of CLICKHALER in the laboratory and in the clinic with compounds for asthma and
other indications. These studies include the assessment of novel and established
molecules as well as new formulation technologies designed to enhance the
performance of the device with certain drugs. IB continues to build a library of
data on the capabilities of its own device and formulation technologies, as well
as third party formulation technologies, to enable it to provide an enhanced
offering to the global pharmaceutical industry.
 
These platform technologies are the subject of negotiations and feasibility
studies with a number of companies for delivery of their existing and pipeline
products.
 
C200 Device - building on the CLICKHALER technology
 
IB has recognised the tremendous opportunity offered by developments in the
treatment of asthma by combining two drugs in the same inhaler.
 
Patents have already been published on the C200 device, which is a novel
adaptation of the proven dose-metering 'engine' of CLICKHALER, whereby, in the
same device, two drug reservoirs feed two drug formulations to separate metering
chambers from which they are delivered to the patient in the same breath.
 
The development of this novel approach to the delivery of inhaled drugs has been
facilitated by the expertise of IB's in-house development team in Tewkesbury.
 
The ability to formulate the drugs separately permits optimisation of each
individually, thereby offering the potential to overcome significant formulation
challenges.
 
This technology is designed to help speed a number of established and new drugs
to compete in the lucrative combination inhaled drug sector using device and
formulation technologies being developed by IB. During the period under review,
IB has worked with a number of drug formulations and device iterations in order
to be able to complete the necessary pre-clinical work towards using the device
in human clinical trials in early 2005. Our estimated earliest launch date is
2008.
 
Innovata Biomed's growing library of CLICKHALER-compatible formulations make
this a low risk, versatile and fast-to-market delivery option.
 
We believe that this advance in the core technology offering of IB presents an
exciting opportunity to partner companies by providing a device which can
deliver either more or larger doses or can deliver a novel molecule in
combination with an established drug to address the rapidly growing inhalation
market.
 
 
P.J. Shennan
Chief Operating Officer and Finance Director
28 January 2004
 
 FINANCIAL REVIEW
 
 For the Year Ended 30 September 2003
 
The operating results of the Group for both the year and the comparative year
have been analysed in the consolidated profit and loss account between
continuing activities and those discontinued as a result of divestments, namely,
the Icodextrin and DNA manufacturing businesses disposed of in April 2003 and
June 2002 respectively.
 
Turnover and gross profit
Turnover includes income from royalties and pharmaceutical product sales - which
are stated net of the entitlements of Paul Capital Royalty Acquisition Fund
('PCRAF') where appropriate - and fee income from licensing, evaluation and
development agreements.
 
Total turnover in the year was GBP6.5m (2002 : GBP13.2m) of which GBP1.6m (2002 :
GBP3.6m) related to discontinued businesses. The reduction in turnover from
continuing activities was due principally to a decrease in licensing, evaluation
and development fees which were GBP0.9m (2002 : GBP5.0m). These milestone receipts
are typically triggered by regulatory or commercial events and as such are
irregular in timing and subject to substantial variation from one period to
another. Royalty income, which was adversely affected by movements in the $/GBP
exchange rate, was GBP2.0m (2002 : GBP2.1m). Pharmaceutical product sales were GBP2.2m
(2002 : GBP4.5m), reflecting the effect of the discontinued activities.
 
The reduction in turnover resulted in a decrease in gross profit to GBP3.9m (2002
: GBP8.8m) again reflecting principally the reduction in licensing, evaluation and
development fees.
 
Operating costs
Research and development expenditure at GBP10.9m (2002 : GBP10.8m) was at a similar
level to the comparative year as were selling, marketing and distribution costs
of GBP0.5m (2002 : GBP0.6m). Administrative expenses were reduced to GBP8.5m (2002 :
GBP11.4m) reflecting reductions in the Group's cost base.
 
Other operating income of GBP7.3m (2002 : GBP5.6m) included the release to the
consolidated profit and loss account of GBP5.0m of PCRAF funding received during
the year ended 30 September 2002, following the satisfaction of an outstanding
condition relating to its potential repayment. The balance represents the
release of the relevant portion of the deferred element of funds received from
PCRAF in the year ended 30 September 2001 and which specifically related to the
clinical development of ADEPT in the US. The comparative year included amounts
receivable in connection with the termination or amendment of licensing
agreements, together with the relevant portion of the deferred element of funds
received from PCRAF.
 
Loss for the year before taxation
The operating loss was GBP8.7m net of a profit of GBP0.2m on the discontinued
activities (2002 : loss of GBP8.3m inclusive of a loss on discontinued activities
of GBP0.7m). The profit on divestments of GBP5.7m arose on the disposal of the
Icodextrin manufacturing business and the sale of five million of the Group's
holding of six million Cobra Biomanufacturing Plc ('CBM') shares. The profit on
divestments in the comparative year arose on the deemed disposal of the DNA
contract manufacturing business of Cobra Therapeutics Limited. After net
interest income the loss before tax was GBP2.8m (2002 : GBP5.3m).
 
Taxation
Tax credits in relation to eligible research and development expenditure
estimated to be receivable in respect of the year, less withholding taxes
suffered, were GBP0.2m. Tax credits recognised in 2002 of GBP2.8m comprised both tax
credits receivable in respect of the year to 30 September 2002 and the tax
credits in respect of prior years not previously recognised.
 
Loss after taxation
The loss for the financial year after taxation was GBP2.6m (2002 : GBP2.4m). This
represents a loss per ordinary share of 1.64p (2002 : 1.53p).
 
Net assets
Net assets at 30 September 2003 were GBP7.6m, reduced from GBP10.2m at 30 September
2002 as a result of the loss for the financial year.
 
Intangible assets comprise goodwill which continues to be amortised over 20
years.
 
Expenditure on tangible fixed assets was GBP0.9m. After taking into account the
net book value of fixed assets divested on the disposal of the Icodextrin
manufacturing business of GBP1.2m, depreciation of GBP1.1m and other disposals, the
net book value of fixed assets reduced to GBP1.9m from GBP3.3m.
 
Stocks reduced to GBP0.7m from GBP1.2m principally as a result of the disposal of
the Icodextrin manufacturing business. The decrease in debtors to GBP3.9m (2002 :
GBP8.3m) included the effects of the disposal of the Icodextrin manufacturing
business, the receipts of accrued tax credits and of a significant amount due
under an agreement with a third party as at 30 September 2002. The decrease in
creditors due within one year to GBP8.2m from GBP15.1m reflected the release of the
PCRAF GBP5m, referred to above, and the effects of the disposal of the Icodextrin
manufacturing business net of the inclusion of a potentially repayable milestone
receipt received prior to 30 September 2003. The reduction in creditors due
after more than one year to GBP0.2m from GBP0.8m arises from net repayments of
finance leases, including those repaid on the disposal of the Icodextrin
manufacturing business.
 
Deferred income of GBP0.8m includes GBP0.5m in respect of monies received from PCRAF
to be released to the consolidated profit and loss account as our spending
obligation on the US clinical development of ADEPT is met, as explained above.
 
Cash balances and cash flow
Cash consumed in the year by operations (excluding milestone receipts), capital
expenditure and net finance lease repayments, offset by net interest income,
amounted to GBP17m. This was offset by cash received in the year from milestone
receipts of GBP3.9m (which forms part of the Net Cash Outflow from Operating
Activities in note 11 to the financial statements), divestment proceeds of GBP9.6m
and tax credits of GBP0.8m which totalled GBP14.3m, resulting in a net outflow of
cash of GBP2.7m. We ended the year with net cash balances of GBP6.6m (2002 : GBP9.3m).
 
 
P.J. Shennan
Chief Operating Officer and Finance Director
28 January 2004
 
 - Ends -
 
Enquiries:
  
 
ML Laboratories PLC (28/01/04) 020 7067 0700
Peter Shennan, Chief Operating Officer (Thereafter) 01925 844 700
Stuart Sim, Executive Chairman  
 
Weber Shandwick Square Mile 020 7067 0700
 
 
 
ML Laboratories Plc
Audited Preliminary Results
Consolidated Profit & Loss Account
For The Year Ended 30 September 2003
 
  NOTES 2003 2003 2003 2002 2002 2002
 Continuing Discontinued Total Continuing Discontinued Total
 GBP GBP  GBP GBP GBP GBP
 
Turnover 4 4,927,801 1,602,254 6,530,055 9,639,471 3,610,345 13,249,816
Cost of sales (1,183,922) (1,416,408) (2,600,330) (1,592,053) (2,837,635) (4,429,688)
--------------------------------------------------------------------------------------------------------
 
Gross profit 3,743,879 185,846 3,929,725 8,047,418 772,710 8,820,128
 
Research and
 development
 expenditure (10,913,662) - (10,913,662) (10,092,810) (752,360) (10,845,170)
 
Selling,
 marketing and
 distribution
 costs (466,577) (13,113) (479,690) (515,184) (51,485) (566,669)
 
Administrative
 expenses (8,535,739) - (8,535,739) (10,663,486) (697,295) (11,360,781)
 
Other
 operating
 income 5 7,345,806 - 7,345,806 5,623,796 - 5,623,796
--------------------------------------------------------------------------------------------------------
 
Operating
 (loss)/profit (8,826,293) 172,733 (8,653,560) (7,600,266) (728,430) (8,328,696)
 ======================== ========================
 
Profit on
 divestments 3 5,685,849 2,873,899
-------------------------------------------------------------------------------------------------------- 
 
Loss before
 interest (2,967,711) (5,454,797)
Interest
 receivable 254,166 431,926
Interest
 payable (116,511) (238,066)
-------------------------------------------------------------------------------------------------------- 
 
Loss on
 ordinary
 activities
 before
 taxation (2,830,056) (5,260,937)
Taxation 6 234,091 2,837,891
-------------------------------------------------------------------------------------------------------- 
 
Loss on
 ordinary
 activities
 after taxation (2,595,965) (2,423,046)
Minority  - -
 interests
-------------------------------------------------------------------------------------------------------- 
 
Loss for
 financial year 9 (2,595,965)  (2,423,046)
-------------------------------------------------------------------------------------------------------- 
 
Loss per
ordinary share 10 (1.64)p (1.53)p
-------------------------------------------------------------------------------------------------------- 
 
There were no recognised gains or losses other than those shown in the above
profit and loss account and therefore no separate statement of total recognised
gains and losses has been presented.
 
There is no difference between the loss on ordinary activities before taxation
and the loss for the year stated above, and their historical cost equivalents.
 
ML Laboratories Plc
Audited Preliminary Results
Consolidated Balance Sheet
At 30 September 2003
 
 NOTES 2003 2002
 GBP GBP
Fixed Assets
 Intangible assets  7 3,300,444 3,500,471
 Tangible assets 1,884,961 3,286,839
 Investments 8 476,555 2,859,331
------------------------------------------------------------------------------
 5,661,960 9,646,641
------------------------------------------------------------------------------
Current Assets
 Stocks 736,645 1,217,388
 Debtors 3,853,818 8,343,840
 Investments 1,039 1,039
 Cash and short term deposits 6,580,678 9,748,370
------------------------------------------------------------------------------
 11,172,180 19,310,637
------------------------------------------------------------------------------
Current Liabilities
 Creditors: amounts falling due within one year (8,165,674) (15,118,568) 
------------------------------------------------------------------------------ 
Net Current
 Assets 3,006,506 4,192,069
------------------------------------------------------------------------------
Total Assets
 less Current
 Liabilities 8,668,466 13,838,710
 Creditors: amounts falling due after more 
 than one year (233,037) (767,684)
------------------------------------------------------------------------------
 8,435,429 13,071,026
 
 Deferred income  (814,609) (2,854,241)
------------------------------------------------------------------------------
Net Assets 7,620,820 10,216,785
------------------------------------------------------------------------------
Capital and Reserves
 Share capital 9 1,581,686 1,581,686
 Share premium account 9 36,502,990 36,502,990
 Merger reserve  9 8,335,897 8,335,897
 Profit and loss account 9 (38,799,753) (36,203,788)
------------------------------------------------------------------------------
 
Equity Shareholders' Funds 9 7,620,820  10,216,785
 Minority interests - -
------------------------------------------------------------------------------
 7,620,820 10,216,785
------------------------------------------------------------------------------
 
ML Laboratories Plc
Audited Preliminary Results
Consolidated Cash Flow Statement
For The Year Ended 30 September 2003
 
 NOTES 2003  2002
 GBP GBP
Net Cash (Outflow)/Inflow from
 Operating Activities 11 (11,277,009) 678,668
------------------------------------------------------------------------------
Returns on Investments and Servicing
 of Finance
 Interest received 289,669 396,545
 Interest paid (10,435) (16,502)
 Interest paid on finance leases (106,052) (222,636)
------------------------------------------------------------------------------
Net Cash Inflow from Returns on
 Investments and Servicing of
 Finance 173,182 157,407
------------------------------------------------------------------------------
Taxation
 UK Corporation tax recovered 805,675 787,315
------------------------------------------------------------------------------
Capital Expenditure and Financial
 Investment
 Purchase of tangible fixed assets (919,824) (2,534,650)
 Disposal of fixed asset investment - 125,058
 Receipts from sale of tangible  
 fixed assets 90,817 147,655
------------------------------------------------------------------------------
Net Cash Outflow for Capital Expenditure
 and Financial Investment  (829,007) (2,261,937)
------------------------------------------------------------------------------
Disposals
 Net proceeds from disposal of 
 manufacturing business 3 (a) 5,735,689 -
 Net proceeds from disposal of 
 shares 3 (b) 3,850,594 -
 Disposal of subsidiary 
 undertaking - settlement of
 overdraft 3 (c) - 3,000,000
------------------------------------------------------------------------------
Net Cash Inflow from Disposals 9,586,283 3,000,000
------------------------------------------------------------------------------
Net Cash (Outflow)/Inflow before
 Management of Liquid Resources and
 Financing (1,540,876) 2,361,453
------------------------------------------------------------------------------
Management of Liquid Resources
 Withdrawals from short term 
 deposits 3,503,753 243,000
------------------------------------------------------------------------------
Net Cash Inflow from Management of
 Liquid Resources  3,503,753 243,000
------------------------------------------------------------------------------
Financing Capital element of
 finance lease rental payments (1,432,620) (1,658,229)
Lease finance acquired 332,768 1,105,234
Capital element of unsecured loan
 payments (78,951) (67,728)
Unsecured loan received - 38,550
------------------------------------------------------------------------------
Decrease in debt and lease
 financing 13 (1,178,803) (582,173)
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Net Cash Outflow from Financing (1,178,803) (582,173)
------------------------------------------------------------------------------
Increase in Net Cash in Year 13 784,074 2,022,280
------------------------------------------------------------------------------
 
ML Laboratories Plc
Audited Preliminary Results