Peptech to step up R&D after profit boost

Sydney-based Peptech (ASX:PTD) expects to boost its R&D spend in the next year, in the wake of a net profit of AUD$25.7 million for the year ended September 30.

Peptech executive chairman Mel Bridges said that the increase in profits, which exceeded previous forecasts of between $22-24 million, was due to a better-than-expected combination of revenue from licenses and sales of animal health products.

Also, Bridges said, the company's R&D spend was lower than originally forecasted. The amortisation of Peptech's Domantis research program costs was completed in April 2004, so there was no expense in the 2005 financial year as compared with an expense of $5.3 million in 2004.

However, Peptech increased its external research and development (R&D) spending on its human and animal health programs from $500,000 to $2 million.

Bridges said R&D expenditure for the year was lower than expected because the company had built internal capability and increased efficiencies in the biological area, which had cut down on the costs of outsourcing.

Revenues, which reflected the settlement of a long-running dispute with Johnson & Johnson over licence fees associated with J&J's blockbuster Centocor, were up by 2.4 per cent to $48.9 million and profit before tax increased 19.7 per cent to $36.1 million.

Peptech's tax expense increased from $1.8 million to $10.4 million, lowering the company's net profit after tax by 9 per cent to $25.7 million. This was due to Peptech's 2005 results being subject to full tax accounting following the utilisation of all tax losses. "The company's profitable, so it's paying the full tax rate, less the R&D allocation," said Bridges.

The company's legal and professional costs of $3.5 million (2004: $5 million) were lower than last year following the settlement of the Centocor dispute in November 2004.

Cash of $39.7 million (2004: $37.6 million) increased during the period, reflecting funds received from the settlement of the Centocor dispute.

Peptech invested $7.6 million in UK-based drug discovery company Domantis in the 2004/05 financial year, maintaining its 36.1 per cent (32.8 per cent fully diluted) ownership.

Peptech also paid a special on-off fully franked dividend of $0.08 per share during the year, with a total distribution of $12.9 million. But Bridges said Peptech would not be paying another special dividend this year.

"We did pay the special one-off dividend after the settlement of the Centocor dispute but we see the use of funds we'd want to invest into increasing the product pipeline and therefore shareholder value rather than a capital management program," said Bridges.

The company also increased its fixed assets during the year from $400,000 to $3.1 million after spending on its new leased premises at Macquarie Park in Sydney. Peptech intends to obtain US Food and Drug Administration accreditation within the next six months for the manufacture of mare implant Ovuplant and pet contraceptive Suprelorin at the facilities.

Animal health sales increased from $0.7 million to $1.3 million, with Suprelorin achieving first sales in Australia and the launch of Ovuplant and its first sales in the UK.

Peptech is conducting a share buy-back to acquire up to 8.1 million shares and at the end of September 2005, 2 million shares at a cost of $2.9 million had been acquired.

Peptech's R&D spending is likely to increase substantially in the coming year, as the company advances its anti-inflammatory and cancer drug development programs. "The focus going forward is really now aggressively growing the product pipeline and future revenue past 2010," said Bridges.

"The major focus is to grow our product pipeline, both through new projects internally as well as from Domantis, but also in licensing opportunities or through merger and acquisitions building the product pipeline," he said.

"Anti-inflammatory, autoimmune and oncology areas will still remain a major focus but we will look a little bit further abroad if we find the right targets and the right leads."