Alliance Pharma
Annual Report 2012

Plain-text annual report

ALLIANCE PHARMA plc Annual Report and Accounts for the year ended 31 December 2012 Contents Business Summary* Highlights Our Products Our Business Model Acquisition Timeline Questions and Answers 01 02 04 06 08 Report of the Directors Business Review 10 Financial Review 14 Board of Directors Corporate Governance Directors’ Remuneration Other matters 16 18 20 22 Financial Statements Independent Auditor’s Report to the Members of Alliance Pharma plc 25 Consolidated Income Statement 26 Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Company Balance Sheet Consolidated Statement of Changes in Equity Company Statement of Changes in Equity Consolidated and Company Cash Flow Statements 27 28 29 30 31 32 Notes to the Financial Statements 33 Supplementary Information* Shareholder Information Five Year Summary Advisors 67 68 69 *Unaudited information. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Alliance Pharma plc is an AIM listed speciality pharmaceutical company Alliance has a strong track record of acquiring the rights to established niche products and owns or licences the rights to more than 60 pharmaceutical products and continues to explore opportunities to expand the range. The group commenced trading in 1998 and has since grown to an annual turnover of £45m. Alliance has its headquarters in the UK at Chippenham, Wiltshire. Highlights Business Summary 01 Key Numbers 2012 Key Facts Sales £44.9m Profit before tax £10.8m Free cash flow £11.0m 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 21.8 31.2 5.7 49.9 46.0 44.9 10.7 10.8 2.4 2.5 7.3 8.4 12.2 11.0 Dividend 0.825p Interim Final 2008 0 2009 0.07 0.23 2010 0.17 0.40 Debt to EBITDA* 1.3 2011 2012 2008 2009 2010 2011 2012 0.25 0.275 0.50 0.55 4.0 1.9 0.8 1.3 1.3 Two acquisitions with combined annual profit of £3.2m Underlying sales growth of 13%** Hydromol sales growth of 29% to £4.7m 12.9 Operating profit 27% of sales Further £10m of financing agreed to fund acquisitions Full year dividend up 10% to 0.825p per share (2011: 0.75p per share) Free cash flow of £11.0m up 31% R E H T R U F M OF FINANCING AGREED 0 TO FUND 1 £ ACQUISITIONS *EBITDA based on bank covenants definition. **Excluding Deltacortril and ImmuCyst. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 02 Our Products Other products 31.9% Symmetrel 2.3% Naseptin 2.5% Vitamin E 2.8% Deltacortril 3.7% Buccastem 4.4% Anti malarials 4.5% * PROFORMA 2012 SALES B Y B R A N D Hydromol 9.5% Other Dermatology 6.9% Opus stoma Products 8.2% Nu-Seals 8.0% Promoted Portfolio Forceval 10.0% Other Secondary Care 5.3% Alliance promotes products in two areas of specialisation, Dermatology and Secondary Care. Selective promotional investment of products enables effective use of marketing resources. Dermatology Products in the portfolio The Hydromol range grew by 29% to £4.7m (2011: £3.6m) supported by a small field force. The remainder of the portfolio grew by 2%, on a like-for- like basis. The total portfolio had sales of £10.1m (2011: £9.0m). Pentrax Hydromol Acnisal Alphaderm Isotretinoin Permitabs Quinoderm Aquadrate Atarax Timodine Dermamist Meted Naseptin Occlusal Secondary Care Products in the portfolio We were delighted to add the Opus stoma care products, acquired in 2012, to our Secondary Care portfolio. The stoma care products added £0.7m in 2012 and have annual sales of £3.8m. Gelclair, now a £1m, brand delivered growth of 9%. Absorbagel Clearway Deogel Gelclair ImmuCyst Naturcare La Vera Lift Lift plus SkinSafe Ultracleanse *Includes full year figures for products acquired during 2012. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Business Summary 03 International 2012 Geographical Distribution n UK £36.7m n EU (excluding UK) £5.1m n Rest of the World £3.2m During 2012 Alliance was pleased to welcome Philippe Pasdelou as our Country Manager in France and Lars Boerger as our Country Manager in Germany, Austria and Switzerland. Both are skilled and experienced pharmaceutical professionals. Philippe will manage the sales of our anti-malarial products, acquired during the year, in Europe and our export markets including francophone Africa. Annual sales of these products are circa £1m, which provide a foundation on which to build our European infrastructure. This will change our presence in Europe from using distributors to selling direct to market. Our presence in France and Germany is already increasing the number of acquisition opportunities we see. The intention is to replicate the successful Alliance business model in Europe. In non-European markets we continue to sell via our distributor network and will build on this where opportunities arise. We continue to learn about the Chinese market. This will stand us in good stead as we continue to study this market for opportunities. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 04 Our Business Model Strategy Alliance’s strategy is to acquire established, niche pharmaceutical products within key European markets by acquisition or licence. Acquisitions of products are typically financed by a combination of bank debt and equity in a ratio that optimises earnings per share whilst maintaining acceptable levels of gearing. Surplus cash generated after providing for debt servicing and the operational needs of the business is then available for dividend payments. Within the product portfolio, brands are selected for promotional investment where management’s forecasts suggest an increased return on investment. Non promoted products are managed to maximise their contribution, taking advantage of market opportunities when they occur. Labour and capital intensive activities, such as manufacturing, warehousing and distribution are outsourced so that new products may be quickly integrated into the Alliance portfolio with minimal increase in overheads. Outsourcing enables management to concentrate on key decisions and act quickly to take advantage of opportunities as they arise. The Acquisition Process Identify Negotiate Acquire l Pharmaceutical products in our key markets l Niche brands with limited competition l Brands with history of sustainable sales l Product fit l Payback period l Price l Intellectual property l Cost effective manufacturing l Financing l Timing We have proven ability, having completed 23 deals in 15 years. Our current Business Development team has been involved in the last 13 deals. The project teams used for due diligence and integration cover all core competencies and have a wide range of industry experience. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2  RISK W O L STABLE SALES LIMITED COMPETITION Business Summary 05 Product Selection Product life-cycle: Alliance products are usually at least 10 years post patent expiry, low volume with stable sales history and limited or no direct competition. Patent protection l High price/short life l Big Pharma l Heavy marketing l Volume risk ++ Higher volume – generic competition l Very price competitive l Price risk ++ Lower volume – typically no competition T I M E l Limited or no competition l 10+ years out of patent l Stable sales l Low risk H S A C Development Biotechs l Development risk +++ Plan Integrate Maximise Detailed integration plans are created during the due diligence process ensuring a smooth transition into our operational systems once the deal has been signed. Our internal organisational structure is designed to allow us to quickly incorporate new products with minimal disruption. l Transfer manufacturing to one of Alliance’s contract manufacturers l Incorporate into Alliance’s existing brand portfolios l Integrate into our European operations Market growth strategies including selective promotion, brand extensions and new territories are used to build on the profitability and value of the acquired assets. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 06 Acquisition Timeline Alliance has a strong track record of successful acquisitions and has considerable expertise in selecting acquisition targets, negotiating the acquisitions and integrating products. 23 deals in 15 years Over 60 products Building operations in France and Germany Hydromol from Ferndale Pharmaceuticals Atarax, Deltacortril & Terra-cortril from Pfizer Syntometrine from Novartis Permitabs from Derma UK Dermamist from Caraderm £7.4m Forceval (excluding China) from Unigreg Periostat from CollaGenex 4 dermatology products from DermaPharm £9.7m Nu-Seals from Eli Lilly & Co Alphaderm & Aquadrate from Procter & Gamble £11.1m S U A C C Q C E X P U E E R S I S I T I O T I S S F U L E N STARGETS RECORD STRONG TRACK e u l a v t n e m t s e v n I Symmetrel & Slow-K from Novartis Distamine from Eli Lilly & Co £4.5m 4 products from Bioglan Labs £2.1m 1999 2001 2002 2004 2006 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Business summary 07 Avloclor, Paludrine & Savarine from AstraZeneca 8 products from Opus £12.8m Anbesol & Ashton & Parson from Reckitt Benckiser 6 products from Beacon Pharmaceuticals Quinoderm and Ceanel from Ferndale Pharmaceuticals £6.5m Y SEARCHING FOR ACQUISITIONS L E V I T C A 18 products from Cambridge Laboratories £16.4m Buccastem & Timodine from Reckitt Benckiser £7.5m Forceval China from Unigreg £1.95m Pavacol-D from William Ransom & Son £0.6m 2007 2008 2009 2010 2011 2012 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 08 Questions and Answers with John Dawson, Chief Executive Officer Q How are you managing key risks in your business? The Board reviews, on a monthly basis, key risks and the actions being taken to mitigate those risks. For example, we have increased the size of our product portfolio to help mitigate reliance on a few key products. Our reliance on the majority of sales in the United Kingdom is being reduced by the appointment of our Country Managers in France and Germany to increase our European sales. This has already been achieved in 2012 as we are already selling anti-malarial products in France and francophone Africa. There was the risk that the shortage of credit that has affected many organisations would affect Alliance, as our business model is mainly acquisitive. We have maintained throughout the period a strong relationship with our banker from whom we obtained a further £10m revolving credit facility in January 2013. The supply side risk continues to be actively managed – for example we streamlined the supply chain this year by outsourcing hospital distribution and adopting a reduced wholesaler model. In 2013 we will continue to develop and invest in the supply chain team n Hydromol sales 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 m £ Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Q How is price regulation likely to affect Alliance over the next few years? 82% of our sales are based in the UK. Sales of branded products in the UK are subject to the Pharmaceutical Price Regulation Scheme (PPRS), the latest version of which came into force at the start of 2009 and runs for five years. Negotiations have started for any amendments to the existing scheme from 2014. We maintain an involvement in industry affairs in order to influence these negotiations as far as is possible n Q Alliance completed two acquisitions in 2012. How do these fit into the existing portfolio? In August 2012 Alliance completed the acquisition of anti-malarial products from AstraZeneca, This included sales in France and to francophone Africa, which opened new territories to Alliance, and provides critical mass for our new operations in France. Our acquisition of Opus Group Holdings Limited is an acquisition of established products in the UK and Ireland that fits neatly with our existing dermatology and secondary care portfolios n Q How do you promote your branded products? We use small dedicated sales teams to promote products in two areas of specialisation, dermatology and secondary care. Hydromol our lead dermatology brand continues to grow strongly, achieving 29% growth in 2012, as illustrated by the graph left. ImmuCyst was growing at 18% prior to the supply issues and Gelclair grew at 9% in 2012 to reach a £1m brand n 3 1 0 2 N I WE WILL CONTINUE TO DEVELOP AND INVEST IN THE SUPPLY CHAIN M A E T A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Business Summary 09 Q How is Alliance managing international growth? The organisation has re-structured to two directorates. The UK directorate is headed by Peter Butterfield who will concentrate on maintaining UK market share and UK expansion. The International Directorate, headed by Tony Booley, is focused on creating critical mass in Europe and looking for suitable worldwide opportunities. Alliance is expanding international sales by supporting the Country Managers from the Company’s headquarters, to control start-up costs and use our existing expertise n Q Is there any news on ImmuCyst? The impact of the loss of ImmuCyst has been fully explained in the business review. Looking forward, we continue to work closely with Sanofi Pasteur to expedite the return of this important bladder cancer treatment for UK patients. We have been told by Sanofi Pasteur that the product should return to market in early 2014 n Q How does the size of acquisition opportunity impact Alliance? With our growing portfolio, infrastructure and capability Alliance is now able to consider larger acquisition opportunities than before. The emphasis remains on ensuring the acquisition fits our stringent criteria rather than simply adding sales volume n Q How are you preparing your people for the growth of the business, particularly expansion into Europe? Alliance employs many people who have previous experience of large pharmaceutical or global companies. This brings a wealth of experience and an in-depth knowledge of the industry, both within and outside the UK. By developing these people further and also recruiting additional expertise, for example, in France and Germany, we are continuing to build the capability we need for the future n ALLIANCE IS EXPANDING INTERNATIONAL S A L E S Q How have your non- promoted products been performing? Our core brands, excluding Deltacortril, have continued to grow over the last 10 years which demonstrates the sustainability of these products, as illustrated by the graph below n Like-for-like sales growth of core brands 200 150 x e d n I 100 50 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Q What will be the impact of the maturity of the Convertible Unsecured Loan stock (”CULs”)? The CULs will mature in November 2013. After this we will not be required to pay 8% interest on the outstanding stock. The interest payment in 2012 was £0.3m. The remaining stock holders have a choice of converting to shares at a rate of 21p per ordinary share or redemption on the nominal value of the loan stock. If the remaining stock holders convert to shares (which is our expectation) there will be an additional 18.1m shares issued (as at 19 March 2013) n Q How do you build staff motivation? As soon as anyone joins Alliance, they undergo a comprehensive induction programme so that they fully understand our business and can contribute best to the team effort. We have a proven set of corporate values that are reinforced on a regular basis by personal awards for exemplary performance and behaviour. We have monthly question and briefing meetings for all office-based people where they can build their understanding of our products, projects and business progress. Similar meetings also occur for field-based staff n A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 10 Business Review John Dawson, Chief Executive Officer Our underlying performance in 2012 was robust, with good organic sales growth from our promoted products and a small increase in pre-tax profits. There was a substantial sales contribution from the five acquisitions made over the past two years. This was more than enough to offset the expected decline of Deltacortril sales, which resulted from the launch of a second generic competitor and changing clinical preferences. However, sales growth was affected by a setback in the summer, when Sanofi Pasteur suspended production of the ImmuCyst bladder cancer treatment until late 2013 because of regulatory issues at its manufacturing facility. TO ADD IMPETUS TO OUR GROWTH IN THE UK WE ALSO ACQUIRED OPUS GROUP IN OCTOBER 2012 Important developments in 2012 that have prepared the ground for renewed growth include the launch of new operations in France and Germany, where we have recruited Country Managers. We have already commenced sales in France, following our acquisition in August 2012 of the anti-malarial brands Paludrine™, Avloclor™ and Savarine™ from AstraZeneca. These brands are sold in a number of countries but mainly in the UK and France. As well established and well known products they are sold over the counter as well as on prescription, and come with around £1.1m per annum of EBITDA. To add impetus to our growth in the UK we also acquired Opus Group in October 2012. This business sells products for stoma care, including skin creams and cleansers, and has been growing strongly: sales rose 14% in 2012. The main influences of its sales are the hospital units already served by our secondary care sales force, which has capacity to give it particularly strong support during the ImmuCyst supply hiatus. We expect Opus to add around £2m to annual operating profit initially. Financial performance Sales were impacted by the loss of ImmuCyst from May onwards and the diminished contribution from Deltacortril. However, these negative effects were largely offset by growth in the rest of the business as we benefited from two acquisitions in the second half and further strong growth in Hydromol sales. The net effect was a 2% reduction in sales to £44.9m (2011: £46.0m) although the underlying performance, excluding Deltacortril and ImmuCyst, was 13% growth. It is worth noting that our 2012 sales still represent a 45% increase over the past three years. This demonstrates the effectiveness of our acquisition strategy, and the Group’s resilience in the face of A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 THE BOARD’S CONFIDENCE Y C IN THE BUSINESS IS REFLECTED I L O IN OUR PROGRESSIVE DIVIDENDP short-term headwinds. The temporary boost that Deltacortril provided in 2010 and 2011 has enabled us to fund acquisitions to provide a sustainable business. Despite the slight reduction in sales, pre-tax profit edged ahead to £10.8m (2011: £10.7m). This reflected a substantial strengthening of the gross margin to 55.9% (2011: 53.3%), due largely to changes in the sales mix and our successful efforts to reduce distribution costs. In cash terms the gross margin was £0.6m higher than 2011 at £25.1m (2011: £24.5m). The uplift in cash margin was offset by a £0.6m increase in administration and marketing costs. A large proportion of this increase was due to investment in establishing our presence in France and Germany. Some cost savings were realised, offsetting the impact of inflation. Borrowing rose over the year as we spent some £12.8m on acquisitions. However, with strong cash generation, net debt rose only £3.4m to £21.8m at the year-end (2011: £18.4m). As both acquisitions were completed in the second half, the average debt over the year was lower; helping to reduce financing costs slightly to £1.5m (2011: £1.6m). We also continued to benefit from investors demonstrating their confidence in the business by switching their convertible loan stock into equity. The total amount of convertible loan stock outstanding reduced to £4.2m at the year-end (2011: £4.5m), and has since fallen to £3.8m. The option to convert remains open until November 2013. The ratio of bank debt to EBITDA (including annualised EBITDA from acquisitions) remains very comfortable at 1.3 times (2011: 1.3 times). Dividend The Board’s confidence in the business is reflected in our progressive dividend policy. We are recommending a final dividend of 0.55p per ordinary share (2011: 0.50p), making a total for the year of 0.825p (2011: 0.75p), a 10% increase. At this level, the dividend is covered 4.4 times by after-tax earnings (2011: 4.8 times). Strategy Alliance acquires and licenses established products with stable sales in niche areas. While most of these require little or no promotional support, we actively market a number of products with clear growth potential. These promoted products account for around a fifth of our sales. We have two UK field forces, one focused on dermatology and the other focused on specialist hospital products, and have scope for economies of scale when we bring in products that these teams can promote alongside the existing ones. Report of the Directors 11 Michael Gatenby, Chairman ESTABLISHED PRODUCTS WITH STABLE SALES IN NICHE AREAS A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 12 Business Review continued IN 2012 WE APPOINTED TWO COUNTRY MANAGERS We currently generate just under a fifth of our sales outside the UK, and aim to diversify the business by increasing this proportion – primarily through increased sales in Western Europe. For most of our existing portfolio, the opportunities for expanding international sales are limited; so our international strategy is to replicate the successful UK model by acquiring established products in overseas markets. Our research indicates that other Western European countries are well suited to this approach. In 2012 we appointed two Country Managers to drive the acquisition and development of product portfolios in Western Europe. Dr Philippe Pasdelou has this role in France, and Lars Börger covers Germany, Switzerland and Austria. Having a presence on the Continent has already increased the flow of opportunities available to us. Marketing We now have a portfolio of over 60 products. Organic sales growth in 2012 was led by the Hydromol dermatology range, which achieved a record £1.1m increase – up 29% on the previous year. Hydromol is now almost a £5m brand and one of our largest. Customers like the products, the pricing is competitive, and we continue to invest in the brand. (Hydromol is one of the fastest growing brands in the emollient market). With a share of less than 3% in a fragmented market, there is still plenty of scope for future growth. Our toxicology product was on the upswing of its 30 month sales cycle in 2012, and sales rose by £0.6m to £2.1m. Sales will reach their peak level in the first half of 2013, giving a useful boost to turnover. Hydromol is one of the fastest growing brands in the emollient market. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Report of the Directors 13 Team Outlook Apart from the appointment of our two European Country Managers, staff numbers were stable in 2012. However, some additional recruitment is taking place in 2013 to strengthen the support functions in anticipation of further growth. In particular, we need to maintain effective control of the supply chain as our product range expands: the number of stock keeping units has increased to over 230. We therefore intend to appoint an Operations Director to oversee the supply chain and we are planning to upgrade our systems to more efficiently integrate our operations overall. Charity We continue to donate about £20,000 worth of products a year to International Health Partners, a charity that distributes medicines to doctors in the world’s neediest areas. We look forward with confidence to growth in 2013. In addition to the underlying strength of our portfolio we can expect a full year’s contribution from our 2012 acquisitions and a top- of-cycle contribution from our toxicology product. We aim to supplement this growth with further acquisitions, and look to maintain or increase our deal rate. We are exploring opportunities in the UK and continental Europe and in December we agreed with our bankers a £10m extension to our acquisition facility. This gives us headroom on the current acquisition facilities of £13.5m, which will be further augmented by continuing strong cash generation during the year. SHEADROOM ON THE CURRENT ACQUISITION FACILITIES OF £13.5M U S E V I G S H T I Gelclair™ was another growth story in 2012 as sales reached £1.0m for the first time. This product, acquired alongside ImmuCyst from Cambridge Laboratories, relieves oral mucositis, a painful and debilitating side effect of cancer chemotherapy and radiotherapy. We are seeing good results from our marketing support and clinicians are recognising the clear benefits for their patients. Sales of ImmuCyst had been growing well until production was suspended in June, and the moving annual sales total had reached £4.4m. The competitor is likely to gain some ground during the hiatus, pending ImmuCyst’s return to the market, which is still expected at the beginning of 2014. As predicted, our Nu-Seals™ enteric- coated low-dose aspirin, sold mainly in the Irish Republic, suffered from the arrival of two new generic competitors. Sales fell 25% to £4.0m, and we expect a further reduction this year as the Irish government enacts long-anticipated legislation to introduce both reference pricing and generic substitution. To mitigate the impact we have been strengthening relationships with pharmacists through a contracted field force. As previously announced, a group of nine products which Alliance has distributed on behalf of Novartis for many years is being transferred back to Novartis. Between them these products have been generating a combined gross margin of about £0.5m a year. When we acquired Ashton & Parsons from Reckitt Benckiser in 2011 we cautioned that this infant teething product’s sales would be limited initially by unresolved manufacturing issues. We are now implementing a solution which should relieve volume constraints, unlocking the prospect of significant sales growth. We expect the higher production volumes to commence in the second half of 2013. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 14 Financial Review THE ANTI-MALARIAL 2 1 PORTFOLIO ADDED 0 2 SALES OF £1.6M N I Richard Wright, Finance Director Revenue 2012 has been an important year for Alliance. Strong growth of 29% in our leading dermatology brand Hydromol, acquisition of our anti-malarials and stoma care products and the full year effect of acquisitions made in 2011 largely offset the headwinds from the supply issues affecting ImmuCyst, the slowdown in Deltacortril and generic competition for Nu-Seals. Total turnover for the year was £44.9m (2011: £46.0m). The acquisition of stoma care products and the anti-malarial portfolio added sales of £1.6m in 2012 and the full year effect of 2011 acquisitions was an additional £2.1m of sales. Profit and other key performance indicators Operating profit, a key metric, was £12.3m (2011: £12.3m). As a percentage of sales this remains strong at 27.4% (2011: 26.8%). Profit before tax increased to £10.8m from £10.7m. Gross profit increased by £0.6m to £25.1m, while gross margins improved from 53.3% to 55.9%. The improvement in gross margins reflected a change in sales mix, partly as a result of the acquisitions. Administration and marketing expenses were £11.9m, an increase of £0.6m on 2011. These costs include the addition of our two Country Managers and the strengthening of infrastructure in preparation for European expansion. Amortisation costs have fallen from £0.7m to £0.6m. The ImmuCyst licence renewal in 2011 for a further 7 years extends the period over which it is amortised, reducing the annual cost. Finance costs and funding Interest payable in the year fell slightly to £1.5m (2011: £1.6m). Net bank debt at the year end was £21.8m (2011: £18.4m). The increase of £3.4m was after funding two acquisitions in the year for £12.8m. At the end of 2012, net bank debt stood at £21.8m (2011: £18.4m). We were pleased that Lloyds Banking Group agreed to provide an additional £10.0m Revolving Credit Facility in December 2012. This increased headroom to £13.5m on the acquisition facilities. Our previous interest rate hedges have expired and so since the year end we have put in place new interest rate swaps fixing the LIBOR element of our debt costs at 1.24% on £18m of our debt for the next 5 years. This means that approximately 80% of current bank debt is hedged at a very low rate. The Convertible Unsecured Loan Stock (“CULS”) carries a fixed interest rate of 8% and can be converted at any time until 30 November 2013 at 21p per share. CULS not converted at this date are due to be redeemed at par. During the year £0.3m (2011: £0.4m) nominal value of CULS were converted resulting in £4.2m outstanding as at 31 December 2012 and since the year end a further £0.4m have converted. Covenants The main financial covenants applying to the facilities with our Bank are that leverage (the ratio of net bank debt to EBITDA) should not exceed 2.0 times, interest cover (the ratio of EBITDA to finance charges) should be no less than 3.0 times, and operating cash flows must exceed debt service cash flows. The Group continues to comply comfortably with these covenants. Net bank debt at the year end was £21.8m (2011: £18.4m) and the net bank debt to EBITDA ratio was 1.7 times, though as measured for the bank covenant (including pro forma EBITDA of recent acquisitions) the ratio was just 1.3 times. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Report of the Directors 15 TRADING CASHFLOW IMPROVED £2.7M TO £14.4M Earnings per share and dividends Basic EPS was virtually unchanged at 3.61p (2011: 3.62p), while diluted EPS was 3.40p (2011: 3.39p). During 2012 the number of shares in issue increased from 240.1m to 243.0m. A total of 1.4m shares were issued on the conversion of £0.3m nominal of the CULS and a further 1.5m were issued on the exercise of employee share options. Since the year end a further 1.9m shares have been issued on conversion of CULS. If all the remaining CULS convert by the 30 November 2013 the issued share capital will increase by 18.1m shares or 7%. As a result of the strong underlying performance of the business and strong cash generation an interim dividend of 0.275p was paid on 15 January 2013 and the Board is recommending a final dividend of 0.55p, which would make a total dividend for the year of 0.825p, a 10% increase on the prior year. The final dividend will be paid, subject to shareholder approval, on 11 July 2013 to shareholders on the register at 14 June 2013. Cashflow Trading cashflow improved £2.7m to £14.4m, reflecting an improvement in working capital. Free cash flow in turn improved by £2.6m to £11.0m. Corporation tax paid during the period was £2.0m (2011: £1.5m). The Group continues to benefit from tax relief on most of its intangible assets. The effective cash rate of tax for 2012 was 18.3%. £12.8m was used to fund acquisitions in 2012. Hence the majority of the investment in acquisitions was funded from cash generation in the year. The overall increase in net bank debt was just £3.4m, to £21.8m. Assets and working capital Additions to intangibles totalled £14.3m, virtually all of which was due to the two acquisitions during the year. The net book value of intangible assets stands at £79.9m at the year end (2011: £66.1m). Working capital balances continue to be carefully managed and controlled. Inventory on hand at December 2012 represents a ratio of 3.2 months, a slight increase on the 2011 ratio of 3.1 months, due to the additional stock acquired in October for the stoma care products. The Group’s net assets stood at £51.8m at December 2012, £7.7m higher than December 2011. Managing Capital Our objective in managing the business’ capital structure is to ensure that Alliance has the financial capacity, liquidity and flexibility to support the existing business and to fund acquisition opportunities as they arise. The business is profitable and cash generative. In line with the bank covenants, the business is managed to ensure that it is sufficiently cash generative to meet debt servicing needs and dividend payments. Smaller acquisitions are typically financed purely with bank debt, while larger acquisitions typically involve a combination of bank debt and additional equity. The mixture of debt and equity is varied, taking into account the desire to maximise shareholder returns while keeping gearing at comfortable levels. Risk Management To reduce the risk arising from changes in interest rates, the Group uses interest rate swaps, where appropriate, and the CULS pay a fixed coupon. The Group’s main transactional currencies are Sterling and Euro, with the majority of income and expenditure in Sterling. The Euro-denominated income matches the Euro-denominated expenditure quite closely and so the Group has limited exposure to exchange rate movements. SMARGINS S IMPROVED O FROM 53.3% R TO 55.9% G A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 16 Board of Directors Directors who held office at the date of this report are set out below. All were Directors throughout 2012. Michael Gatenby – Chairman 136 Michael joined the Board of Alliance as non-executive Chairman in 2004. He had a successful career in corporate finance for over 25 years, having been a director of Hill Samuel and Co and vice-chairman of Charterhouse Bank. Michael graduated in Law from Trinity Hall, Cambridge in 1966 and qualified as a Chartered Accountant in 1969 with Peat, Marwick, Mitchell (now KPMG LLP). John Dawson – Chief Executive Officer 4 John founded Alliance in 1996. He gained multi-disciplinary experience in the pharmaceutical industry over thirty years. John held various senior roles at Sandoz (now Novartis AG) as director of finance and administration and deputy managing director. John has a BSc (Pharmacy) and an MSc (Finance) from the London Business School. Richard Wright – Finance Director Richard joined the Board of Alliance in 2007. He is a Chartered Accountant with over 20 years of experience in financial roles across a variety of sectors. Richard read Mathematics at Robinson College, Cambridge and qualified as an accountant with Ernst & Young LLP before joining Somerfield plc. More recently, he held senior finance positions at FirstGroup plc and Parragon Publishing. Tony Booley – Executive Director Tony joined Alliance in 1998. He has had around 30 years experience in the pharmaceutical and healthcare industries, with positions at Leo Pharma, Glaxo Wellcome (now GlaxoSmithKline “GSK”) and Getinge Industrier AB. His senior management experience includes positions in the UK and internationally. Tony graduated in Physiology, has an MBA from Warwick and is a Chartered Marketer. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Report of the Directors 17 Peter Butterfield – Executive Director Peter joined the board of Alliance in February 2010 following the acquisition of Cambridge Laboratories, where he spent five years, latterly as UK Commercial Director. He is a Board Member of the Association of the British Pharmaceutical Industry ("ABPI") and is chairman of the ABPI Small Companies Forum. Prior to joining Cambridge Laboratories, Peter spent six years at GlaxoSmithKline. He holds an honours degree in Pharmacology from the University of Edinburgh. Thomas Casdagli – Non-Executive Director 4 Thomas joined the board of Alliance as a non-executive director on 3 March 2009. He is a partner at MVM Life Science Partners LLP, a life science venture capital fund. He has been an active investor in life sciences since joining MVM in 2002. Before joining MVM, Thomas worked at PricewaterhouseCoopers LLP where he qualified as a Chartered Accountant. Thomas graduated in Molecular and Cellular Biochemistry from the University of Oxford in 1998. Paul Ranson – Non-Executive Director 245 Paul joined Alliance as a non-executive director in 2003. He has worked in a legal capacity in the pharmaceutical sector for over 25 years. He spent the early years of his career as an in-house lawyer for Smith Kline & French and Merck. Paul specialises exclusively in the commercial and regulatory aspects of life sciences and he was a partner in the international law firm Fasken Martineau LLP before his move to Pinsent Masons LLP in 2013. Andrew Smith – Non-Executive Director 246 Andrew joined the Board of Alliance in 2006. He has held various senior positions in the pharmaceutical industry in the UK and USA having been managing director and senior vice-president of SmithKline Beecham Pharmaceuticals (now GSK), chief executive of Cerebrus plc until its sale and president international medical marketing services with Parexel International. Andrew is a founder of Navitas BioPharma Consulting. He graduated in Natural Sciences from the University of Cambridge. 1 Chairman Audit Committee, 2 Audit Committee member, 3 Chairman Nomination Committee, 4 Nomination Committee member, 5 Chairman Remuneration Committee, 6 Remuneration Committee member. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 18 Corporate Governance Introduction Alliance Pharma plc is an AIM listed company and the Board is committed to achieving good standards of corporate governance, integrity and business ethics. There is a list of matters reserved for the Board which may be updated by the Board and approved by the Board only. Reporting Structure Committees The Chairman is responsible for leading the Board, facilitating the effective contribution of all members and ensuring that it operates effectively in the interests of the shareholders. The Chief Executive Officer is responsible for the leadership of the business and implementation of the strategy. The Company Secretary is responsible, on behalf of the Chairman, for ensuring that all Board and Committee meetings are conducted properly, that the Directors receive the appropriate information prior to the meeting, for ensuring that governance requirements are considered and implemented and for accurately recording each meeting. The Directors may have access to independent professional advice, where needed, at the Group’s expense. Management Teams During 2012 the Board delegated management of the business to the Corporate Organisation Team and the UK and International Review and Planning Teams. The Executive Team, which comprises the Executive Directors is the chief operating decision maker and attends the Corporate Organisation Team and Review and Planning team meetings. The Board has an Audit Committee, a Nominations Committee and a Remuneration Committee, each with written terms of reference. The terms of reference are available on the Group’s website. Meetings The Board meets regularly on pre- determined dates and has a strategy meeting each year consisting of the Board and other Senior Managers, the purpose of which is to discuss progress on the strategy, to review the long term strategy and develop the strategic framework for the achievement of the Group’s targets. During 2012 the Board held ten scheduled meetings and all members of the Board attended all of those meetings. In addition there were a number of ad-hoc meetings. Non-Executive Directors The role of the non-executive directors is to: l Challenge constructively and help develop proposals on strategy l Satisfy themselves as to the financial integrity of the financial information l Satisfy themselves as to the robustness of the controls l Ensure that the systems of risk management are robust and defensible l Review management performance and the monitoring and reporting of such performance. Governance Review A review of governance was undertaken in 2011 which concluded that the Company has in place the most appropriate governance methods based on its corporate culture, size, and business complexity. The governance review recommended that during 2012 a Nominations Committee is formed to ensure that there is an appropriate balance of skills, experience, knowledge and independence. Accordingly, the new Nominations Committee has been constituted. The 2011 governance review also recommended a Board evaluation; this was conducted in 2012 and the results considered by the Board. A further governance review will be undertaken in 2013 to maintain the development and enhancement of governance methods to suit the Company as it grows. Responsibilities of the Board The Board is responsible to the shareholders for: l Setting the Group’s strategy l Maintaining the policy and decision- making process around which the strategy is implemented l Ensuring that necessary financial and human resources are in place to meet strategic aims l Monitoring performance against key financial and non-financial indicators l Providing leadership whilst maintaining the controls for managing risk l Overseeing the system of risk management l Setting values and standards in corporate governance matters. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 They have a role in determining the pay and benefits of the Executive Directors, to play a key role in the appointment and, if necessary, removal of Executive Directors and Board succession. Risk Management The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. This includes having an ongoing process in place for identifying, evaluating and managing significant risks. The Group’s established internal procedures include the following: l The Management Team meetings cover in detail most, if not all, of the significant risks to which the Group is exposed, these deliberations are reported to the Board and further discussion considered l A table of significant risks has been prepared for the Board, splitting the categories by l Trading – Significantly between Sales and Supply Chain l Financial – In particular the integrity with which the Group is viewed by lenders and investors as a public company and exposure to liquidity and interest and exchange rates l General – Such as legal risk, the ability to recruit quality staff and the workload pressures existing on the current team l The Group prepares an annual budget, developed through a comprehensive strategic and operational process prior to commencement of the financial year. A revised forecast is also prepared each month, including a projection of performance against bank covenants, and is reviewed by the Board. The Board and management teams monitor the actual monthly performance of the Group against budget and forecasts with any significant variances highlighted and explained. Relations with Shareholders At each meeting, the Board is updated on the meetings and communications with the shareholders and an analysis of the shareholder base is presented. Research notes by brokers are circulated to all Board members. Throughout the year the Chief Executive Officer and Finance Director meet with the large, institutional shareholders who hold the majority of the shares. Regular feedback is given to the Board following meetings with the shareholders from the financial PR advisors, and from the shareholders via the brokers. The Group recognises that whilst the majority of the shares are held by large institutions, attention should be paid to the private shareholders and the Investor Relations section of the Group’s website is regularly updated and amended with the aim being to provide good information to all shareholders, particularly private Report of the Directors 19 investors. The website provides a facility to receive email alert notifications of Group news and stock exchange announcements. In addition the Chief Executive Officer and Finance Director regularly present at conferences attended by many potential and current private shareholders and meet with Private Client Fund Managers representing the interests of private investors following which feedback is given to the Group. At the Annual General Meeting the Chairman issues a statement on current trading. All Directors are available following the meeting to answer questions and for informal discussions. The results of the proxy votes are announced at the meeting, including the abstentions and these are published on the website following the meeting. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 20 Directors‘ Remuneration Remuneration Committee The members of the Remuneration Committee are: Paul Ranson (Chairman of the Remuneration Committee) Michael Gatenby Andrew Smith The Company Secretary attends the meetings of the Remuneration Committee as secretary to the Remuneration Committee. The Chief Executive Officer and the Human Resources Director are also invited to attend certain meetings of the Remuneration Committee. Role of the Remuneration Committee The Remuneration Committee reviews and determines on behalf of the Board and shareholders of the Company the pay, benefits and other terms of service of the Executive Directors of the Company and the broad pay strategy with respect to senior Company employees. Remuneration Policy The objective of the Company’s remuneration policy is to attract and retain the directors and senior executives needed to run the Company in a cost-effective manner. The remuneration policy of the Company has four principal components: 1. Basic Salaries and Benefits in Kind – Basic salaries are determined by the Remuneration Committee bearing in mind the salaries paid in AIM-listed and other small market capitalisation healthcare companies. Within that frame of reference, it is intended that pay should be at or near the median level. Benefits in kind include the provision of company cars (or a salary alternative). 2. Bonuses – Bonuses are payable to staff according to the achievement by the Group of certain pre-determined earnings targets. The level of bonuses payable on achievement of the targets is set at the level perceived appropriate to provide the necessary incentives for Executive Directors and senior managers. There are appropriate adjustments to the bonus payable in the event of over- or under-achievement of the Group against those targets. In addition, bonuses are adjusted for personal performance and the amount of bonus paid will reflect any substantial periods of absence or unavailability of the employee. 3. Share Options Scheme – The Company has in place a share option scheme covering all employees, under which share options are normally granted once a year. The exercise price of the options granted under the scheme is set equal to the market value of the company’s shares at the time of grant. The share option scheme is overseen by the Remuneration Committee which shall determine the terms under which eligible individuals may be invited to participate. The scheme is normally an HMRC approved scheme but may be unapproved in relation to certain individuals. 4. Pensions – There is a defined contribution scheme for all Executive Directors and employees. Only basic salaries are pensionable, except in the case of Tony Booley, whose bonus is also pensionable. Directors’ Remuneration The aggregate remuneration, excluding pension contributions, payable to the directors during the period was as follows: Total remuneration 2012 Share-based payments1 £ Year ended Year ended 31 December 31 December 2011 £ 2012 £ 186,123 194,805 - 256,015 72,573 32,736 33,676 185,106 13,014 104,780 - - - - - 13,115 199,137 299,585 - 256,015 72,573 32,736 33,676 198,221 197,714 462,241 - 254,194 69,322 31,560 31,560 195,899 Other 1,932 469 - 4,503 648 - 940 1,732 10,224 961,034 130,909 1,091,943 1,242,490 Salary Bonuses Relocation expenses Tony Booley Peter Butterfield Thomas Casdagli John Dawson Michael Gatenby Paul Ranson Andrew Smith Richard Wright 149,074 148,536 - 202,900 71,925 32,736 32,736 148,536 35,117 43,896 - 48,612 - - - 34,838 786,443 162,463 1 Share based payment is the IFRS2 charge recognised in the period - 1,904 - - - - - - 1,904 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Report of the Directors 21 The Group operates a defined contribution pension scheme. The aggregate contributions payable by the Group (not included in remuneration above) in respect of the period were as follows: Year ended Year ended 31 December 31 December 2011 £ 2012 £ Tony Booley Peter Butterfield John Dawson Richard Wright 17,544 13,834 10,000 13,834 55,212 18,770 13,549 10,000 13,333 55,652 Directors’ Service Contracts All Executive Directors are employed under service contracts. The services of all Executive Directors may be terminated by the provision of a maximum of 12 months’ notice by the Company. Directors’ Share Options Details of options for the directors who served during the year are as follows: Tony Booley Peter Butterfield Richard Wright 31 December 2011 Number Granted Number Exercised Number 31 December 2012 Number Exercise price Pence Date from which exercisable 110,000 116,500 130,000 - 1,000,000 115,000 1,130,000 - 649,376 113,000 118,650 130,000 - - - - 140,000 - - - 140,000 - - - - 140,000 - - - - - - - - - - - - - 110,000 116,500 130,000 140,000 1,000,000 115,000 1,130,000 140,000 649,376 113,000 118,650 130,000 140,000 7.75 34.25 34.12 29.25 33.25 34.25 34.12 29.25 8.50 7.75 34.25 34.12 29.25 13/04/12 29/04/13 28/04/14 19/10/15 26/03/13 29/04/13 28/04/14 19/10/15 23/04/11 13/04/12 29/04/13 28/04/14 19/10/15 Expiry date 12/04/19 28/04/20 27/04/21 18/10/22 25/03/20 28/04/20 27/04/21 18/10/22 22/04/18 12/04/19 28/04/20 27/04/21 18/10/22 The market price of ordinary shares at 31 December 2012 was 31.75 pence and the range during the period was from 23.00 pence to 31.87 pence. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 22 Other Matters Principal activities The principal activity of the Group is the acquisition, marketing and distribution of pharmaceutical products. The principal activity of the Company is to act as a holding company. Directors The following table shows the beneficial interests of the Directors (and their spouses and minor children) in the shares of the Company: Tony Booley Peter Butterfield Thomas Casdagli John Dawson Michael Gatenby Paul Ranson Andrew Smith Richard Wright Beneficial interest Number 4,610,723 - 20,947 40,036,402 350,000 48,000 200,000 190,768 Ordinary shares Non- beneficial interest At end of year Number Number At start of year or subsequent appointment Number - - 19,281,197 20,000,000 - - - - 4,610,723 - 19,302,144 60,036,402 350,000 48,000 200,000 190,768 6,810,723 - 19,300,000 62,261,402 350,000 48,000 200,000 190,768 Directors’ Responsibilities Statement The directors are responsible for preparing the Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have to prepare the Group financial statements and have elected to prepare the Company financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the company and group for that period. In preparing these financial statements, the directors are required to: l select suitable accounting policies and then apply them consistently; l make judgements and accounting estimates that are reasonable and prudent; l state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; l prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: l in so far as each of the directors is aware there is no relevant audit information of which the company’s auditor is unaware; and l the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Report of the Directors 23 Principal risks and uncertainties The Group’s principal risks and uncertainties are outlined below. Sales volumes being affected by a change in demand Changes in demand for pharmaceutical products could be caused by a number of factors, such as changes in the competitive environment. Key criteria when Alliance selects products to add to its portfolio are that the products are in niche areas, with the majority requiring little or no promotional support, and that the products have many years of steady sales history before acquisition. Sales volumes being affected by supply chain constraints Issues within the supply chain can interrupt supply leading to insufficient stock being available to meet demand. Over the last few years Alliance has taken a number of measures to strengthen its supply chain. These include where possible strengthening the supply chain team within the business, dual sourcing of some key products and some key ingredients, holding larger buffer stocks of selected products and improved communication with suppliers. Sales pricing being reduced by regulatory action The Pharmaceutical Price Regulation Scheme (PPRS) is the UK Government’s tool for controlling pricing for the NHS. Alliance is a member of the ABPI and other industry bodies which are consulted by the Government on changes to PPRS. The latest scheme commenced in 2009 and runs for five years. Cost price inflation affecting gross margins Increases in the cost of goods could erode gross margins. In a number of cases Alliance has arrangements with suppliers which either fix prices or limit price increases over the next few years. At the expiry of such arrangements, prices are tested against prevailing rates in the market. Alliance also looks for improvements in production techniques to reduce the cost of manufacturing. Other risks and uncertainties are explained in the Business Review and Financial Review. Supplier payment policy The payment policy for the Company and the Group is to set the terms of payment with suppliers when agreeing the terms of the transaction and to comply with those terms. Group and Company trade creditors at the period end amounted to 13 days (2011: 16 days) and nil days (2011: nil days) respectively of average supplies for the year, which is consistent with contractually agreed terms. Financial risk management objectives and policies The Group monitors credit risk closely and considers that its current policies of credit checks meets its objectives of managing exposure to credit risk. The Group’s other financial risk management policies and objectives are detailed in note 21 of the financial statements. Disabled employees Applications for employment by disabled persons are fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. Employee information and consultation The Group continues to involve its staff in the future development of the business. Information is provided to employees through the Group’s website, intranet site and by regular briefing meetings. The Group operates a Group Personal Pension Plan and a Stakeholder Pension Plan which is available to all employees. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 24 Other Matters continued Going concern As explained in the Financial Review, the current rate of cash generation by the Group comfortably exceeds the capital and debt servicing needs of the business (though there cannot, of course, be absolute certainty that the rate of cash generation will be maintained). The Board remains confident that all the bank covenants will continue to be met. The Group has an £8m Working Capital Facility which is largely undrawn and which the Board believes should comfortably satisfy the Group’s working capital needs for at least the next 12 months. After making enquiries, the directors have formed a judgement that there is reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements. Political and charitable donations Charitable donations totalling £19,151 (2011: £41,753) were made during the year. There were no political donations made during the period. Auditor A resolution to re-appoint Grant Thornton UK LLP as auditor for the next year will be proposed at the annual general meeting in accordance with section 489 of the Companies Act 2006. Annual General Meeting The 2013 Annual General Meeting of the Company will be held on 22 May 2013, the business of which is set out in the Notice of Meeting. On behalf of the Board Sarah Robinson Company Secretary 20th March 2013 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Independent Auditor’s Report to the Members of Alliance Pharma plc Financial Statements 25 We have audited the financial statements of Alliance Pharma plc for the year ended 31 December 2012 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated and parent company balance sheet, the consolidated and parent company statement of changes in equity, the consolidated and parent company cash flow statements and the notes to the financial statements. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: l the financial statements give a true and fair view of the state of the Group's and of the parent company's affairs as at 31 December 2012 and of the group's profit for the year then ended; l the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; l the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and l the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: l adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or l the parent company financial statements are not in agreement with the accounting records and returns; or l certain disclosures of directors’ remuneration specified by law are not made; or l we have not received all the information and explanations we require for our audit. Tracey James Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Bristol 20 March 2013 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s 44,897 (19,779) 25,118 (11,856) (573) (369) (12,798) 45,957 (21,469) 24,488 (11,235) (735) (179) (12,149) 12,320 12,339 (1,541) - 30 (1,511) 10,809 (2,119) 8,690 3.61 3.40 (1,600) 2 (29) (1,627) 10,712 (2,076) 8,636 3.62 3.39 26 Consolidated Income Statement Revenue Cost of sales Gross profit Operating expenses Administration and marketing expense Amortisation of intangible assets Share-based employee remuneration Operating profit Finance costs Interest payable and similar charges Interest income Other finance income/(charges) Profit on ordinary activities before taxation Taxation Profit for the year attributable to equity shareholders Earnings per share Basic (pence) Diluted (pence) Note 3 6 5 5 5 4 7 9 9 All of the activities of the Group are classed as continuing. The accompanying accounting policies and notes form an integral part of these financial statements. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Consolidated Statement of Comprehensive Income Financial Statements 27 Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Profit for the period Interest rate swaps – cash flow hedge Deferred tax on interest rate swaps Total comprehensive income for the period 8,690 6 (2) 8,694 8,636 22 (6) 8,652 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 28 Consolidated Balance Sheet Note 10 11 13 14 15 25 Assets Non-current assets Intangible assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity Ordinary share capital Share premium account Share option reserve Reverse takeover reserve Other reserve Retained earnings Total equity Liabilities Non-current liabilities Long term financial liabilities Convertible debt Other liabilities Derivative financial instruments Deferred tax liability Provisions for other liabilities Current liabilities Cash and cash equivalents Financial liabilities Convertible debt Corporation tax Trade and other payables Derivative financial instruments Provisions for other liabilities 18 18,19 20 22 23 24 15 18 18,19 17 22 24 Total liabilities Total equity and liabilities 31 December 31 December 31 December 31 December 2011 £000s 2012 £000s 2012 £000s 2011 £000s 1 January 2011 £000s 1 January 2011 £000s 79,890 564 5,393 10,145 4,634 2,430 25,297 792 (329) - 23,658 20,225 - 20 - 6,124 364 1 6,250 4,189 1,322 10,086 - 197 66,130 765 60,287 888 80,454 66,895 61,175 20,172 100,626 15,391 82,286 5,652 8,660 1,079 2,401 24,866 423 (329) (4) 16,771 4,544 9,690 1,989 2,361 24,331 244 (329) (20) 9,494 16,223 77,398 51,848 44,128 36,081 15,225 4,460 40 - 4,064 510 26,733 24,299 1 4,250 - 1,046 8,367 6 189 22,045 48,778 100,626 13,859 38,158 82,286 15,000 4,822 60 13 3,803 641 - 4,001 - 721 11,869 15 372 24,339 16,978 41,317 77,398 The financial statements were approved by the Board of Directors on 20 March 2013. John Dawson Director Richard Wright Director The accompanying accounting policies and notes form an integral part of these financial statements. Company number 04241478 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Company Balance Sheet Financial Statements 29 Assets Non-current assets Investment in subsidiaries Current assets Trade and other receivables Cash and cash equivalents Total assets Equity Ordinary share capital Share premium account Share option reserve Retained earnings Total equity Liabilities Non-current liabilities Convertible debt Note 12 14 15 25 31 December 31 December 31 December 31 December 2011 £000s 2012 £000s 2012 £000s 2011 £000s 1 January 2011 £000s 1 January 2011 £000s 37,618 10,021 182 2,430 25,297 792 14,719 36,402 32,260 37,618 36,402 32,260 10,203 47,821 2,020 77 2,401 24,866 423 6,028 2,097 38,499 7,086 25 2,361 24,331 244 7,202 7,111 39,371 43,238 33,718 34,138 18,19 - 4,460 4,822 - 4,460 4,822 Current liabilities Convertible debt Corporation tax Trade and other payables 18,19 17 4,189 4 390 - - 321 - 95 316 Total liabilities Total equity and liabilities 4,583 4,583 47,821 321 4,781 38,499 411 5,233 39,371 The financial statements were approved by the Board of Directors on 20 March 2013. John Dawson Director Richard Wright Director The accompanying accounting policies and notes form an integral part of these financial statements. Company number 04241478 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 30 Consolidated Statement of Changes in Equity Ordinary share capital £000s Share premium account £000s Share option reserve £000s Reverse takeover reserve £000s Other reserve £000s Retained earnings £000s (329) (20) Balance 1 January 2011 2,361 24,331 Issue of shares Dividend paid Share options charge Transactions with owners Profit for the period Other comprehensive income Interest rate swaps – cash flow hedge Deferred tax on interest rate swaps Total comprehensive income for the period Balance 31 December 2011 Balance 1 January 2012 Issue of shares Dividend paid Share options charge Transactions with owners Profit for the period Other comprehensive income Interest rate swaps – cash flow hedge Deferred tax on interest rate swaps Total comprehensive income for the period 40 - - 40 - - - - 2,401 2,401 29 - - 29 - - - - 535 - - 535 - - - - 24,866 24,866 431 - - 431 - - - - 244 - - 179 179 - - - - 423 423 - - 369 369 - - - - - - - - - - - - (329) (329) - - - - - - - - Total equity £000s 36,081 575 (1,359) 179 (605) 8,636 22 (6) 9,494 - (1,359) - (1,359) 8,636 - - 8,636 8,652 16,771 44,128 16,771 - (1,803) - (1,803) 8,690 - - 44,128 460 (1,803) 369 (974) 8,690 6 (2) 8,690 8,694 23,658 51,848 - - - - - 22 (6) 16 (4) (4) - - - - - 6 (2) 4 - Balance 31 December 2012 2,430 25,297 792 (329) The balance on the share premium account may not be legally distributed under section 831 of the Companies Act 2006. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Company Statement of Changes in Equity Financial Statements 31 Balance 1 January 2011 Issue of shares Dividend paid Share options charge Transactions with owners Profit for the period Balance 31 December 2011 Balance 1 January 2012 Issue of shares Dividend paid Share options charge Transactions with owners Profit for the period Ordinary share capital £000s Share premium account £000s 2,361 24,331 40 - - 40 - 535 - - 535 - 2,401 2,401 24,866 24,866 29 - - 29 - 431 - - 431 - Share option reserve £000s Retained earnings £000s 7,202 - (1,359) - (1,359) 185 6,028 6,028 - (1,803) - (1,803) 244 - - 179 179 - 423 423 - - 369 369 - Total equity £000s 34,138 575 (1,359) 179 (605) 185 33,718 33,718 460 (1,803) 369 (974) 10,494 10,494 Balance 31 December 2012 2,430 25,297 792 14,719 43,238 The balance on the share premium account may not be legally distributed under section 831 of the Companies Act 2006. The profit for the year dealt with in the financial statements of the parent company was £10,494,000 (2011: £185,000). As permitted by section 408 of the Companies Act 2006, no separate income statement is presented in respect of the parent company. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 32 Consolidated and Company Cash Flow Statements Group Company Note 27 10 10 11 10 Cash flows from operating activities Cash generated from operations Tax paid Cash flows from operating activities Investing activities Interest received Dividend received Payment of deferred consideration Development costs capitalised Net proceeds from sale of intangible assets Net assets acquired in Opus, net of cash Purchase of property, plant and equipment Purchase of other intangible assets Net cash (used in)/ received from investing activities Financing activities Interest paid and similar charges Loan issue costs Proceeds from exercise of share options Dividend paid Transfer from subsidiary undertakings Receipt from borrowings Repayment of borrowings Net cash received from/(used in) financing activities Net movement in cash and cash equivalents Cash and cash equivalents at the beginning of the period Exchange gains/(losses) on cash and cash equivalents Cash and cash equivalents at the end of the period 15 Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2011 £000s 2012 £000s 2012 £000s 2011 £000s Year ended 14,417 (1,982) 12,435 - - (20) (107) - (422) (73) (12,377) (12,999) (1,198) (100) 190 (1,803) - 10,000 (3,000) 4,089 3,525 1,078 30 4,633 11,654 (1,496) 10,158 2 - (2,120) (203) 102 - (140) (6,475) (8,834) (1,439) (65) 182 (1,359) - 6,475 (6,000) (2,206) (882) 1,989 (29) 1,078 (1,437) 4 (1,433) 1,310 2,000 - - - - - - 3,310 (352) - 164 (1,803) 219 - - (1,772) 105 77 - 182 (4,915) (94) (5,009) 1,096 5,000 - - - - - - 6,096 (358) - 182 (1,359) 500 - - 1,035 52 25 - 77 The accompanying accounting policies and notes form an integral part of these financial statements. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Notes to the Financial Statements for the year ended 31 December 2012 Financial Statements 33 1. General information Alliance Pharma plc (‘the Company’) and its subsidiaries (together ‘the Group’) acquire, market and distribute pharmaceutical products. The Company is a public limited company incorporated and domiciled in England. The address of its registered office is Avonbridge House, Bath Road, Chippenham, Wiltshire, SN15 2BB. The Company is listed on the AIM stock exchange. These consolidated financial statements have been approved for issue by the Board of Directors on 20 March 2013. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 2.1 Basis of preparation These financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention. A summary of the more important Group and Company accounting policies are set out below. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions in these statements, particularly in relation to determining the useful economic life of assets, that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. 2.2 Consolidation The consolidated balance sheet includes the assets and liabilities of the company and its subsidiaries which are made up to 31 December 2012. Entities over which the Group has the ability to exercise control are accounted for as subsidiaries. Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal. Balances between Group companies are eliminated; no profit is taken on sales between Group companies. Goodwill arising on the acquisition of interests in subsidiaries, representing the excess of purchase consideration over the Group's share of the fair values of identifiable assets, liabilities and contingent liabilities acquired, is capitalised as a separate item. An entity is treated as a joint venture where the Group holds a long term interest and shares control under a contractual agreement. In the Group accounts, interests in joint ventures are accounted for using the proportionate consolidation method of accounting. The consolidated income statement includes the Group’s share of the joint ventures’ turnover and includes the Group’s share of the operating results, interest, pre-tax results and attributable taxation of such undertakings. 2.3 Judgements and estimates The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’. Critical estimates and assumptions that are applied in the preparation of the consolidated financial statements include: Depreciation and amortisation The Group exercises judgement to determine useful lives and residual values of intangibles, computer equipment, and fixtures, fittings and equipment. The assets are depreciated down to their residual values over their estimated useful lives. Impairment The value in use calculation uses cash flow projections based on financial forecasts for the next two years approved by management covering the lower of useful economic life and extrapolated for a 15 year period. In each case it is assumed there will be no growth beyond 2014 and the cash flows of each acquisition are discounted at a rate of 10%, which approximates to the Group’s weighted average cost of capital. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 34 Notes to the Financial Statements continued for the year ended 31 December 2012 2. Summary of significant accounting policies continued Provisions Provisions have been made for onerous leases and associated costs (see note 24) and for slow moving and obsolete stock. These provisions are estimates and the actual costs and timing of future cash flows are dependent on future events. The difference between expectations and the actual future liability will be accounted for in the period when such determination is made. Deferred consideration The Company determines that where there is an obligation to pay consideration dependent on the sale of a product, and the Company can control whether the product is sold or not, the consideration is only recognised once a sale is made. Consolidation of Joint Venture The Group owns 60% of the issued share capital of Unigreg Limited. The Group considered the existence of substantive participating rights held by the minority shareholder which provide that shareholder with a veto right over the significant financial and operating policies of Unigreg Ltd and determined that, as a result of these rights, the Group does not have control over the financial and operating policies of Unigreg Ltd, despite the Group's 60% ownership interests and consequently the company is integrated with proportionate consolidation. 2.4 Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, estimated returns, rebates and discounts and after eliminating sales within the Group and represents amounts invoiced to third parties in relation to the Group’s sole principal activity namely the distribution of pharmaceutical products. Revenue is recognised when a Group entity has delivered products to the customer. 2.5 Foreign currency transactions The consolidated financial statements are presented in sterling, which is the presentational currency of the Group and the functional currency of the parent Company. Foreign currency transactions by Group companies are booked at the exchange rate ruling on the date of the transaction. Foreign currency monetary assets and liabilities are retranslated into local currency at the rate of exchange ruling at the balance sheet date. Exchange differences are booked to the income statement. 2.6 Property, plant and equipment Computer equipment, fixtures, fittings and equipment are stated at the cost of purchase less any provisions for depreciation and impairment. The rates generally applicable are: Computer equipment Fixtures, fittings and equipment 33.3% per annum, straight line 20% – 33.3% per annum, straight line Material residual value estimates are updated as required, but at least annually, whether or not the asset is revalued. 2.7 Leases Leasing agreements which transfer to the Group substantially all the benefits and risks of ownership are treated as finance leases, as if the asset had been purchased outright. The assets are included within computer equipment, fixtures, fittings and equipment and the capital element of the leasing commitments are shown as obligations under finance leases. Assets held under finance leases are depreciated on a basis consistent with similar owned assets or the lease term if shorter. The interest element of the lease rental is included in the income statement. All other leases are considered operating leases and the annual rentals are included in the income statement on a straight line basis over the lease term. 2.8 Goodwill Goodwill represents the excess of the consideration of acquisition over the fair value of the Group’s share of the identifiable net assets acquired. Goodwill is reviewed for impairment at least annually by assessing the recoverable amount of each acquisition, considered to be a cash-generating unit, to which the goodwill relates. The recoverable amount is the higher of fair value less costs to sell and value in use. When the recoverable amount of the cash-generating unit is less than the carrying amount an impairment loss is recognised. Any impairment is recognised immediately in the Consolidated Income Statement and is not subsequently reversed. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 35 2. Summary of significant accounting policies continued 2.9 Intangible assets Acquired intangible assets Intangible assets are stated at the lower of cost less provision for amortisation and impairment or the recoverable amount (explained further in note 10). Technical know-how and trademarks are deemed to have an indefinite useful life and are tested for impairment annually. Distribution licences are amortised over the current life of the licence on a straight line basis and are tested for impairment annually, if the licence period can be extended the useful life of the intangible asset shall include the renewal period only if there is evidence to support renewal by the entity without disproportionate cost. In determining the useful economic life of distribution rights each acquisition has been reviewed separately and consideration given to the period over which the Group expects to derive economic benefit. Internally-generated intangible assets –Research and development expenditure Research expenditure is charged to the Consolidated Income Statement in the period in which it is incurred. Development expenditure is capitalised when it can be reliably measured and the project it is attributable to is separately identifiable, is technically feasible, demonstrates future economic benefit, and will be used or sold by the Group once completed. The capitalised cost is amortised over the period during which the Group is expected to benefit and begins when the asset is ready for use. Development costs are reviewed at least annually for impairment by assessing the recoverable amount of each cash-generating unit, to which the development costs relate. The recoverable amount is the higher of fair value less costs to sell and value in use. When the recoverable amount of the cash-generating unit is less than the carrying amount an impairment loss is recognised. Any impairment is recognised immediately in the Consolidated Income Statement and is not subsequently reversed. Development costs not meeting the recognition criteria are expensed as incurred. Impairment For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash- generating unit level. Goodwill, other individual assets or cash-generating units that include goodwill, other intangible assets with an indefinite useful life, and those intangible assets not yet available for use are tested for impairment at least annually. An impairment loss is recognised for the amount by which the asset's or cash-generating unit's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use based on an internal discounted cash flow evaluation. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash generating unit. With the exception of goodwill and development costs, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. 2.10 Inventories Inventories are included at the lower of cost less any provision for impairment or net realisable value. Cost is determined on a first- in-first-out basis using the weighted average cost. 2.11 Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit reported in the income statement because the former excludes items of income or expense that are either taxable or deductible in other years or that are never taxable or deductible, and it includes tax reliefs that are not included in the income statement. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are provided in full on temporary differences, and deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. Deferred tax is provided using the rates of tax that are expected to apply in the period when the liability is settled or the asset is realised, based on rates that have been substantively enacted by the balance sheet date. Deferred tax assets and liabilities are not discounted. The Group is able to control the sharing of profits in the joint venture and as such no deferred tax has been recognised on temporary differences. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 36 Notes to the Financial Statements continued for the year ended 31 December 2012 2. Summary of significant accounting policies continued 2.12 Derivative financial instruments and hedging activities Derivative financial instruments are used to manage exposure to market risk from treasury operations. The principal financial instrument used by the Group is interest rate swaps. The Group does not hold or issue derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognised in the balance sheet at fair value and then re-measured at subsequent reporting dates. The fair value is calculated by reference to market interest rates and supported by counterparty confirmation. The interest rate swaps are designated as cash flow hedges. The effective portion of changes in the fair value of derivative financial instruments that are designated as cash flow hedges are recognised in other comprehensive income, while the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Changes in the fair value of derivative financial instruments that are not designated as cash flow hedges are recognised in the income statement as they arise. 2.13 Debt instruments Debt instruments are initially stated at their fair value net of issue costs, and subsequently measured at amortised cost using the effective interest rate method. Convertible Unsecured Loan Stock issued by the Company is regarded as compound financial instruments. Compound financial instruments are split and recorded respectively within each of its two components, equity and liability. The fair values of the liability component and the equity conversion component were determined at issuance of the bond. The equity component was determined as nil and the fair value of the liability component, included in long-term borrowings, was calculated using a market interest rate for an equivalent non-convertible bond. 2.14 Trade payables Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method. 2.15 Financial assets – loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. The Group’s loans and receivables comprise ‘trade and other receivables’ and ‘cash and cash equivalents’ in the balance sheet (note 2.16 and 2.17). 2.16 Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of the receivables. 2.17 Cash and cash equivalents For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short-term highly liquid investments, available with no penalty, with original maturities of three months or less, bank overdrafts and working capital facilities. 2.18 Working capital facility The terms of this arrangement are such that the risk and reward of ownership of the trade receivables do not pass to the finance provider. As such the receivables are not de-recognised on funds drawn down against this facility. This facility is recognised as a liability for the amount drawn. 2.19 Employee benefits – share-based compensation The Group operates an equity-settled, share-based compensation plan. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense over the vesting period. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the Consolidated Income Statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 37 2. Summary of significant accounting policies continued 2.20 Equity Equity comprises the following: “Share capital” represents the nominal value of equity shares. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. “Share option reserve” represents equity-settled share-based employee remuneration until such share options are exercised. “Other reserve” represents the fair value of derivative financial instruments at the balance sheet date that are designated as cash flow hedges net of deferred tax. “Retained earnings” represents retained profit. “Reverse takeover reserve” represents the difference between the fair value and nominal value of shares issued on a reverse takeover. 2.21 Investments Investments in subsidiaries included in the Company’s balance sheet are stated at cost less any provision for impairment. 2.22 Provisions Provisions are recognised when there is a present legal or constructive obligation as a result of a past event, for which it is probable that a transfer of economic benefits will be required to settle the obligation and where a reliable estimate can be made of the amount of the obligation. Where material, the provisions have been discounted to their present value. 2.23 Business combinations Business combinations are accounted for using the acquisition accounting method. Identifiable assets, liabilities and contingent liabilities acquired are measured at fair value at acquisition date. The consideration transferred is measured at fair value and includes the fair value of any contingent consideration. The costs of acquisition are charged to the income statement in the period in which they are incurred. 2.24 New standards not yet applied A number of new EU adopted standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2012 and have not been applied in preparing these financial statements. The following list is not comprehensive but includes the most significant to these financial statements: l IFRS11 Joint Arrangements issued in May 2011 (effective date 1 January 2014) supersedes IAS31 Interests in Joint Ventures. The new standard restricts the use of proportionate consolidation, currently used by the Group to account for its joint venture Unigreg Limited, in favour of the equity method of accounting. This will affect the presentation of both the balance sheet and the income statement. The results of Unigreg Limited will be brought into the accounts within one line on the income statement and the investment will be shown as one line on the balance sheet rather than on a line by line basis. l IFRS10 Consolidated financial Statements issued in May 2011 (effective date 1 January 2014) replaces IAS27 Consolidated and Separate Financial Statements which has been renamed IAS27 Separate Financial Statements. IFRS10 changes the definition of control but the core principle remains the same as such no changes in disclosure are expected. l IFRS12 Disclosure of interests in other entities is a new disclosure standard issued in May 2011 and is effective from 1 January 2014. l IAS19 Employee Benefits (amendment) is not anticipated to have any impact since the Group does not operate a defined benefit pension scheme. The Group continually reviews amendments to the standards made under the IASB’s annual improvements project. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 38 Notes to the Financial Statements continued for the year ended 31 December 2012 3. Segmental reporting Operating segments An operating segment is defined as a component of the entity: l that engages in business activities from which it may earn revenues and incur expenses, l whose operating results are regularly reviewed by the entity’s chief operating decision maker (CODM) to make decisions about the resources to be allocated to the segment and assess its performance, and l for which discrete financial information is available. For the year ended 31 December 2012 the Executive Team has been identified as the CODM. Our management information system produces reports for the Executive Team grouping financial performance under the following business areas: l Hydromol l Secondary Care l Community and Consumer Products l Established Products l International All business areas are responsible for developing, marketing and distributing a range of pharmaceutical products. As permitted by IFRS 8, since these business areas are deemed to have similar economic characteristics and are similar, if not the same, in all of the following: l business areas derive their revenue from the supply of pharmaceutical products, l the production and distribution process is the same across all business areas, l business areas supply to similar customers i.e. pharmaceutical distributors or pharmacies, and l all business areas are subject to a similar regulatory environment. The business areas have been aggregated into a single reportable operating segment, namely pharmaceuticals. Each month the CODM is presented with financial information prepared in accordance with IFRS as adopted in the EU and the accounting policies set out in note 2 to these financial statements. As such the financial information provided to the CODM regarding the operating segment has already been disclosed in the financial statements. Geographical information The following revenue information is based on the geographical location of the customer: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s United Kingdom Ireland China Rest of the world All non-current assets are located within the United Kingdom. 36,719 4,288 2,475 1,415 44,897 37,295 5,653 1,812 1,197 45,957 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 39 3. Segmental reporting continued Major customers During the year there were 2 (year ended 31 December 2011: 3) customers who separately comprised 10% or more of revenue. Major customer 1 Major customer 2 Major customer 1 Major customer 2 Major customer 3 4. Profit before taxation Profit before taxation is stated after charging/(crediting): Year ended 31 December 2012 £000s 14,283 10,097 24,380 Year ended 31 December 2011 £000s 9,438 7,855 6,295 23,588 Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable by the Group to the Company’s auditor for other services: – The audit of the Company’s subsidiaries – Other advisory services – Consultancy Amortisation of intangible assets Share options charge Depreciation of plant, property and equipment Operating lease rentals Profit on disposal of intangible assets Loss on foreign exchange transactions 8 40 50 - 573 369 274 97 - 73 8 35 13 2 735 179 263 97 (50) 128 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 40 Notes to the Financial Statements continued for the year ended 31 December 2012 5. Finance costs Interest payable and similar charges On loans and overdrafts Amortised finance issue costs Notional interest Interest income Other finance charges Foreign exchange movement on euro denominated debt Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s (1,466) (26) (49) (1,541) - 30 30 (1,504) (31) (65) (1,600) 2 (29) (29) Finance costs – net (1,511) (1,627) Notional interest relates to the unwinding of the discount applied to the provisions (see note 24). 6. Directors and employees Employee benefit expenses for the Group during the period were as follows: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Wages and salaries Social security costs Other pension costs (note 30) Share-based employee remuneration (note 26) The average number of employees of the Group during the period was: 4,288 566 306 369 5,529 3,760 566 251 179 4,756 Year ended Year ended 31 December 31 December 2011 2012 Management and administration 63 59 Remuneration in respect of Directors was as follows: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Emoluments Relocation expenses 959 2 961 941 194 1,135 Gain on share options recognised by directors during the year was £nil (2011: £349,000). For additional disclosures please refer to Directors’ Remuneration section of the Directors’ Report. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 41 6. Directors and employees continued The amounts set out above include remuneration in respect of the highest paid Director as follows: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Emoluments for qualifying services Relocation expenses 256 - 256 183 194 377 During the period contributions were paid to money purchase schemes for four directors (year ended 31 December 2011: four). Key management of the Group are the Executive Team. For the year ended 31 December 2011 the Corporate Performance Team, consisting of the Executive Team and appropriate Senior Managers was considered the key management of the Group. Benefit expenses in respect of the key management was as follows: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Emoluments Relocation expenses Social security costs Share-based payments Company pension contributions to money purchase schemes 820 2 109 131 55 1,117 1,833 194 306 197 137 2,667 Average number of members of the CODM for the year ended 31 December 2012 was four (the Executive Team) (year ended 31 December 2011: 15 (Corporate Performance Team)). 7. Taxation Analysis of charge in period. United Kingdom corporation tax at 24.5% (2011: 26.5%) In respect of current period Adjustment in respect of prior periods Deferred tax (see note 23) Origination and reversal of temporary differences Taxation Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s 1,910 - 1,910 209 2,119 2,046 (225) 1,821 255 2,076 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 42 Notes to the Financial Statements continued for the year ended 31 December 2012 7. Taxation continued The difference between the total current tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Profit on ordinary activities before tax 10,809 10,712 Profit on ordinary activities multiplied by standard rate of corporation tax in the United Kingdom of 24.5% (2011: 26.5%) Effect of: Non-deductible expenses Attributable to joint venture Impact of reduction in UK tax rate on deferred tax liability Adjustment in respect of prior periods Other differences Total taxation 2,648 21 (189) (353) - (8) 2,119 2,839 (61) (129) (314) (225) (34) 2,076 A number of changes to the UK Corporation tax system were announced in the Finance Act 2012. The main rate of corporation tax was reduced from 26% to 24% from 1 April 2012 and reduced further to 23% from 1 April 2013. Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 22% by 1 April 2014. At the balance sheet date the substantively enacted rate was 23% (2011: 25%). The further 1% reduction has not been substantively enacted at the balance sheet date and therefore not included in these financial statements. The proposed reduction of the main rate of corporation tax by 1% from 1 April 2014 is expected to be enacted during 2013. The overall effect of this change from 23% to 22%, if applied to the deferred tax balance at 31 December 2012, would be to decrease the deferred tax liability by £266,000. 8. Dividends Amounts recognised as distributions to owners in the year Interim dividend for the prior financial year Final dividend for the prior financial year Interim dividend for the current financial year Year ended 31 December 2012 £000s Year ended 31 December 2011 £000s Pence/share Pence/share 0.25 0.50 0.275 600 1,203 1,803 666 0.17 0.40 0.25 401 958 1,359 600 The proposed final dividend of 0.55p per share for the current financial year was approved by the Board of Directors on 20 March 2013 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 31 December 2012 in accordance with IAS 10 Events After the Balance Sheet Date. The interim dividend for the current financial year was paid on 15 January 2013. Subject to shareholder approval, the final dividend will be paid on 11 July 2013 to shareholders who are on the register of members on 14 June 2013. 9. Earnings per share (EPS) Basic EPS is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 43 9. Earnings per share (EPS) continued A reconciliation of the weighted average number of ordinary shares used in the measures is given below: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s For basic EPS calculation Employee share options Conversion of Convertible Unsecured Loan Stock (CULS) For diluted EPS calculation 240,881,464 2,032,846 20,053,595 238,601,884 2,751,890 21,466,690 262,967,905 262,820,464 A reconciliation of the earnings used in the different measures is given below: Year ended Year ended 31 December 31 December 2011 £000s 2012 £000s Earnings for basic EPS Interest saving on conversion of CULS Tax effect of interest saving on conversion of CULS Earnings for diluted EPS The resulting EPS measures are: 8,690 337 (81) 8,946 8,636 361 (94) 8,903 Year ended Year ended 31 December 31 December 2011 Pence 2012 Pence Basic EPS Diluted EPS 10. Intangible assets The Group Cost At 1 January 2012 Additions At 31 December 2012 Amortisation and impairment At 1 January 2012 Amortisation for the year At 31 December 2012 Net book amount At 31 December 2012 At 1 January 2012 3.61 3.40 3.62 3.39 Technical know-how, trademarks Purchased and distribution rights £000s Goodwill £000s Development costs £000s Goodwill on consolidation £000s 1,144 - 1,144 - - - 1,144 1,144 600 1,849 2,449 - - - 2,449 600 65,730 12,377 78,107 1,547 573 2,120 75,987 64,183 203 107 310 - - - 310 203 Total £000s 67,677 14,333 82,010 1,547 573 2,120 79,890 66,130 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 44 Notes to the Financial Statements continued for the year ended 31 December 2012 10. Intangible assets continued Technical know-how, trademarks and distribution rights Acquired trademarks and distribution rights when purchased are assessed to ensure they meet a set of criteria including an established and stable sales history. The products are generally in niche areas where there is limited foreseeable prospect of erosion of sales and they require little or no promotion to maintain sales. The following acquisition activities took place in the year: l On 2 August 2012, the Group acquired the antimalarial brands PaludrineTM, AvloclorTM and SavarineTM from AstraZeneca UK Limited for cash consideration of £4.2m. Dependent upon sales of these brands to specified customers at the discretion of the Group, further consideration may become payable over the next three years of around £0.5m. l On 19 October 2012, the Group acquired Opus Group Holdings Limited for £8.0m plus the net asset value of Opus at completion which was £1.6m. Following the acquisition, the entire trade and assets of Opus Healthcare Ltd (registered in the UK) and Opus Group Holdings Limited were transferred to Alliance Pharmaceuticals Limited. The fair value of the intangible asset acquired was £8.0m included within technical know-how, trademarks and distribution rights. The consideration value for both acquisitions was payable on completion. Both acquisitions were funded by drawing loans from the £20m Revolving Credit Facility ("RCF") that was put in place in November 2010. At the year-end £16.5m (2011: £6.5m) was drawn down on the facility leaving an availability of £3.5m. Purchased goodwill During the year ended 31 December 2010, the Group completed the purchase of the trade and certain assets of Cambridge Laboratories (Ireland) Limited and Cambridge Laboratories Limited. The goodwill of £600k that arose on acquisition reflects Alliance’s entry into the oncology market with an established brand name and sales force. Goodwill of £1.85m arose on the acquisition of Opus Group Holdings Limited (see note 33). Goodwill on consolidation The goodwill on consolidation arose on the acquisition of Dermapharm Ltd, which took place during the year ended 29 February 2004. Impairment As explained in note 2.8 and 2.9 all intangible assets are stated at the lower of cost less provision for amortisation and impairment or the recoverable amount. Goodwill (allocated across cash-generating units that are expected to benefit from it), indefinite life assets and development costs are tested for impairment annually, or more frequently if there are indications that amounts might be impaired. The impairment test involves determining the recoverable amount of the relevant asset or cash-generating unit, which corresponds to the higher of the fair value less costs to sell or its value in use. The value in use calculation considers each asset or cash generating unit on a case by case basis and uses cash flow projections based on financial forecasts for the next two years approved by management covering the lower of useful economic life and extrapolated for a 15 year period. The key assumptions on which cash flow projections are made are: l There will be no growth beyond 2014; l Cash flows are discounted at an appropriate rate. The discount rates consider market information and specific circumstances of each asset or cash-generating unit. A rate of 10%, which approximates to the Group’s weighted average cost of capital and is considered appropriate for all assets; and l The CODM considers 15 years to be a sufficient period to represent the indefinite useful economic lives of the products. The value in use calculations for all assets and cash generating units, when tested with assumptions beyond a reasonable range the recoverable amounts would not fall below their carrying amounts. Development projects are reviewed as to the likelihood of their completion and valued using a discounted cash flow, using appropriate risk factors, to assess whether the project is impaired. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 45 10. Intangible assets continued Unigreg Ltd, the joint venture company of which the Group holds 60%, has applied to China’s State Food and Drug Administration (‘SFDA’) to vary the licence for importing Forceval into China. There is uncertainty about whether or when this variation will be approved. There is a risk that for a period of time Unigreg will be unable to import further product into China. There are a number of measures of mitigation that can be taken to offset this risk. The Board’s view is that these mitigation measures are likely to be sufficient to ensure the continuation of the business in the long term, and that the intangible asset relating to Forceval in China is unlikely to be impaired. The carrying value of the related intangible asset is £1.95m. The Group Cost At 1 January 2011 Disposals Additions At 31 December 2011 Amortisation and impairment At 1 January 2011 Amortisation for the year At 31 December 2011 Net book amount At 31 December 2011 At 1 January 2011 The Group Cost At 1 January 2010 Additions At 31 December 2010 Amortisation and impairment At 1 January 2010 Amortisation for the year At 31 December 2010 Net book amount At 31 December 2010 At 1 January 2010 Technical know-how, trademarks Purchased and distribution rights £000s Goodwill £000s Development costs £000s Goodwill on consolidation £000s 1,144 - - 1,144 - - - 1,144 1,144 600 - - 600 - - - 600 600 59,355 6,475 (100) 65,730 812 735 1,547 64,183 58,543 - 203 - 203 - - - 203 - Technical know-how, trademarks Purchased and distribution rights £000s Goodwill £000s Goodwill on consolidation £000s 1,144 - 1,144 - - - 1,144 1,144 - 600 600 - - - 600 - 43,791 15,564 59,355 - 812 812 58,543 43,791 Total £000s 61,099 6,678 (100) 67,677 812 735 1,547 66,130 60,287 Total £000s 44,935 16,164 61,099 - 812 812 60,287 44,935 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 46 Notes to the Financial Statements continued for the year ended 31 December 2012 11. Property, plant and equipment The Group Cost At 1 January 2012 Additions Disposals At 31 December 2012 Depreciation At 1 January 2012 Provided in the year Eliminated on disposals At 31 December 2012 Net book amount At 31 December 2012 At 1 January 2012 Computer equipment £000s Fixtures fittings and equipment £000s 271 18 (67) 222 127 83 (67) 143 79 144 902 55 (5) 952 281 191 (5) 467 485 621 Total £000s 1,173 73 (72) 1,174 408 274 (72) 610 564 765 The net book amount held under finance leases was £nil (year ended 31 December 2011: £1,000, year ended 1 January 2011: £1,000). Computer equipment £000s Fixtures fittings and equipment £000s 224 83 (36) 271 84 79 (36) 127 144 140 890 57 (45) 902 142 184 (45) 281 621 748 Total £000s 1,114 140 (81) 1,173 226 263 (81) 408 765 888 The Group Cost At 1 January 2011 Additions Disposals At 31 December 2011 Depreciation At 1 January 2011 Provided in the year Eliminated on disposals At 31 December 2011 Net book amount At 31 December 2011 At 1 January 2011 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 11. Property, plant and equipment continued The Group Cost At 1 January 2010 Additions Disposals At 31 December 2010 Depreciation At 1 January 2010 Provided in the year Eliminated on disposals At 31 December 2010 Net book amount At 31 December 2010 At 1 January 2010 12. Investments The Company Cost At 1 January 2012 Additions At 31 December 2012 At 1 January 2011 Additions At 31 December 2011 At 1 January 2010 Additions At 31 December 2010 Financial Statements 47 Computer equipment £000s Fixtures fittings and equipment £000s 176 127 (79) 224 96 67 (79) 84 140 80 116 807 (33) 890 64 111 (33) 142 748 52 Total £000s 292 934 (112) 1,114 160 178 (112) 226 888 132 Investment in subsidiary undertakings £000s 36,402 1,216 37,618 32,260 4,142 36,402 25,538 6,722 32,260 The additions in the year relate to the increased investment the company has made in its subsidiary to support the acquisition of new product licenses and £20,000 to establish Alliance Pharmaceuticals GmbH. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 48 Notes to the Financial Statements continued for the year ended 31 December 2012 12. Investments continued The subsidiary and associated undertakings where the Group held 20% or more of the equity share capital at 31 December 2012 are shown below: Company Alliance Pharmaceuticals Limited Dermapharm Limited Alliance Health Limited Alliance Consumer Health Limited Alliance Generics Limited Alliance Healthcare Limited Caraderm Limited Unigreg Limited Unigreg Worldwide Limited Opus Group Holdings Limited Opus Healthcare Limited Opus Healthcare Limited Alliance Pharmaceuticals GmbH Country of registration or incorporation Shares held Class % owned United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Northern Ireland British Virgin Islands United Kingdom United Kingdom United Kingdom Republic of Ireland Germany Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 60 100 100 100 100 100 Nature of business Pharmaceutical sales Dormant Dormant Dormant Dormant Dormant Dormant Pharmaceutical sales Dormant Dormant Dormant Non-trading Non-trading All subsidiary undertakings prepare accounts to 31 December, except Opus Healthcare Limited (Republic of Ireland) which prepares accounts to 28 February. Alliance Pharmaceuticals Limited and Alliance Pharmaceuticals GmbH are the only investments held directly by Alliance Pharma plc. All other investments are held by Alliance Pharmaceuticals Limited. 13. Inventories The Group Finished goods and materials 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s 5,393 5,652 4,544 Inventory costs expensed through the income statement during the year were £17,062,000 (year ended 31 December 2011: £18,423,000, year ended 1 January 2011: £16,521,000). During the year £41,000 (2011: £1,083,000) was recognised as an expense relating to the write-down of inventory to net realisable value. 14. Trade and other receivables The Group The Company 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s Trade receivables Other receivables Prepayments and accrued income Amounts owed by joint venture 9,583 212 350 - 10,145 8,152 147 331 30 8,660 9,139 55 439 57 9,690 - 10,011 10 - 10,021 - 2,008 12 - 2,020 1 January 2011 £000s - 7,080 6 - 7,086 Dividends declared but not paid between Alliance Pharmaceuticals Limited and the Company of £10m for the year ended 31 December 2012 (for the year ended 31 December 2011: £2m, for the year ended 31 December 2010: £7m) are included within other receivables. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 14. Trade and other receivables continued The ageing of trade receivables at 31 December is detailed below: Not past due Due 30-31 December* Past due 3 days to 91 days Past 91 days Financial Statements 49 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s 5,194 3,732 569 88 9,583 3,858 3,289 782 223 8,152 5,073 3,952 26 88 9,139 * For the year ended 31 December 2012 £3,149,000 was received by the 11 January 2013. For the year ended 31 December 2011 £2,128,000 was received by the 13 January 2012. For the year ended 31 December 2010 £3,381,000 was received by the 11 January 2011. Trade and other receivables are stated net of estimated allowances for doubtful debts. As at 31 December 2012, trade and other receivables of £111,000 (for the year ended 31 December 2011: £63,000) were past due and impaired. Our policy requires customers to pay us in accordance with agreed payment terms. Depending on the geographical location, our settlement terms are generally due within 30 or 60 days from the end of the month of sale and do not bear any effective interest rate. Trade receivables subject to the working capital facility are recognised in the balance sheet until they are settled by the customer. Amounts outstanding from qualifying customers are held as security against the working capital facility. 15. Cash and cash equivalents The Group The Company 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s Cash at bank and in hand Working capital facility 4,634 (1) 4,633 1,079 (1) 1,078 1,989 - 1,989 182 - 182 77 - 77 1 January 2011 £000s 25 - 25 16. Major non-cash transactions Principal non-cash transactions include finance issue costs amortised in the income statement during the year of £26,000 (year ended 31 December 2011: £31,000) and an exchange movement of £30,000 (year ended 31 December 2011: £29,000) (see note 5). Interest rate swaps designated as cash flow hedges resulted in a £6,000 charge (year ended 31 December 2011: £22,000 charge) to other comprehensive income. As a consequence of the onerous contracts a notional interest charge representing the unwinding of the discounted value of the onerous contract provision of £49,000 (year ended 31 December 2011: £65,000) was recognised in the income statement. Amortisation of intangible assets resulted in a charge of £573,000 (year ended 31 December 2011: £735,000) being recognised in the income statement. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 50 Notes to the Financial Statements continued for the year ended 31 December 2012 17. Trade and other payables – current The Group The Company 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s Trade payables Other taxes and social security costs Accruals and deferred income Other payables 902 1,225 7,019 940 10,086 1,194 864 6,168 141 8,367 3,799 1,109 4,841 2,120 11,869 - - 370 20 390 - - 321 - 321 18. Financial liabilities – borrowings The Group The Company Current Bank loans due within one year or on demand Secured (a) Net obligations under finance leases Convertible debt (note 19) Non-current Bank loans: Secured (a) Convertible debt (note 19) 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s 6,250 - 6,250 4,189 10,439 4,250 - 4,250 - 4,250 4,000 1 4,001 - 4,001 - - - 4,189 4,189 - - - - - The Group The Company 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s 20,225 20,225 - 20,225 15,225 15,225 4,460 19,685 15,000 15,000 4,822 19,822 - - - - - - 4,460 4,460 1 January 2011 £000s 7 - 309 - 316 1 January 2011 £000s - - - - - 1 January 2011 £000s - - 4,822 4,822 (a) The bank loans are secured by a fixed and floating charge over the Company's and Group’s assets During the year £10m was drawn down on the revolving credit facility to fund acquisitions in the year. 19. Convertible debt The convertible unsecured loan stock is convertible into ordinary shares at any time between the date of issue and 30 November 2013, unconditionally and at the option of the note holder. The conversion rate is 21p per ordinary share. Interest is charged on the loan stock at a fixed rate of 8% per annum and is paid every six months. During the year, the Company received conversion notices in respect of £296,750 (year ended 31 December 2011: £393,250) nominal value of the Company’s 8% Convertible Unsecured Loan Stock. Accordingly, the Company has allotted 1,413,093 ordinary shares of 1p each in the Company. The fair values of the liability component and the equity conversion component were determined at issuance of the bond. The equity component was determined as nil and the fair value of the liability component, included in long-term borrowings, was calculated using a market interest rate for an equivalent non-convertible bond. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 51 20. Other non-current liabilities The Group The Company 31 December 31 December 2011 £000s 2012 £000s 1 January 31 December 31 December 2011 £000s 2012 £000s 2011 £000s Deferred consideration for acquisitions 20 20 40 40 60 60 - - - - 1 January 2011 £000s - - Deferred consideration of £20,000 (year ended 31 December 2011: £40,000, year ended 1 January 2011: £60,000) relates to the acquisition of Dermapharm Limited which took place in the year ended 29 February 2004. 21. Financial instruments The Group uses financial instruments comprising borrowings, some cash and liquid resources, and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group also has a bank facility denominated in euros. The purpose of this facility is to manage the currency risk arising from the Group's operations. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk and liquidity risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged from the previous year. Interest rate risk The Group finances its operations through a mixture of debt and equity. The Group uses interest rate swaps to reduce the risk arising from changes in interest rates. These swaps are re-measured to fair value at each period end by Lloyds Bank Corporate Markets. The valuations are indicative values based on mid-market levels as at the close of business on the balance sheet date. The Group has in place interest rate swaps with a nominal value of £nil (year ended 31 December 2011: £8m, year ended 1 January 2010: £16m) to convert the floating interest rate charge to a fixed rate interest charge. Since the year end the Group has put in place interest rate swaps with a nominal value of £18m for the 5 years from 11 April 2013. The interest rate exposure of the financial liabilities of the Group at the period end was: At 31 December 2012 Bank loans – sterling denominated Convertible loan stock Sterling subtotal Working capital facility – euro denominated Euro subtotal Total financial liabilities Unamortised issue costs Net book value of financial liabilities Fixed £000s - 4,211 4,211 - - Floating £000s 26,475 - 26,475 1 1 Total £000s 26,475 4,211 30,686 1 1 4,211 26,476 30,687 (22) - (22) 4,189 26,476 30,665 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 52 Notes to the Financial Statements continued for the year ended 31 December 2012 21. Financial instruments continued At 31 December 2011 Bank loans – sterling denominated Convertible loan stock Interest rate hedges Sterling subtotal Working capital facility – euro denominated Euro subtotal Total financial liabilities Unamortised issue costs Net book value of financial liabilities At 31 December 2010 Bank loans – sterling denominated Convertible loan stock Interest rate hedges Total financial liabilities Unamortised issue costs Fixed £000s Floating £000s - 4,508 8,000 12,508 - - 19,475 - (8,000) 11,475 1 1 Total £000s 19,475 4,508 - 23,983 1 1 12,508 11,476 23,984 (48) - (48) 12,460 11,476 23,936 - 4,901 16,000 20,901 (79) 19,000 - (16,000) 3,000 - 19,000 4,901 - 23,901 (79) Net book value of financial liabilities 20,822 3,000 23,822 Fixed rate financial liabilities Weighted average period for which rate is fixed Weighted average fixed rate % 8.00 0.92 years 3.64 1.27 years 2.78 2.14 years At 31 December 2012 Sterling At 31 December 2011 Sterling At 1 January 2011 Sterling A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 53 21. Financial instruments continued The Sterling floating rate borrowings bear interest at rates based on LIBOR. The Group balance sheet also includes financial assets in the form of cash at bank and in hand totalling £4,634,000 (31 December 2011: £1,079,000, 1 January 2011: £1,989,000) which are exposed to floating interest rates based on LIBOR. A 0.5% increase in LIBOR would reduce pre-tax profits by approximately £17,000 in 2013. A 0.5% decrease would have the opposite effect. Currency risk Approximately 10% of the Group's sales are to overseas customers in the EU. These sales are invoiced in euros. Certain expenses of the Group are also in euros. The level of euro expenses broadly matches the level of euro income. All other Group sales and all but a small proportion of other Group expenses are denominated in sterling. A 5% weakening of sterling against the euro would result in a £65,000 decrease in predicted pre-tax profits, while a 5% strengthening of sterling would have the opposite effect. Liquidity risk The Group seeks to manage financial risk, to ensure sufficient liquidity is available to meet the identifiable needs of the Group and to invest cash assets safely and profitably. The Group’s long-term funding is provided by a combination of convertible unsecured loan stock which is convertible into ordinary shares at a conversion rate of 21p per ordinary share up until 30 November 2013 and bank loans with a repayment schedule of £1.25m per quarter from December 2012. The existing bank facilities are due for renewal in November 2014. The Group’s policy is to re-finance the debt well in advance of the term loan expiry. Short-term flexibility is achieved through the use of the working capital facility. Fair value measurement Effective from 1 January 2009, the Group adopted the amendments to IFRS7 for financial instruments that are measured in the Consolidated Balance Sheet at fair value. This requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: l quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); l inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and l inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3). The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 December 2012: Liabilities Derivative financial instruments: Interest rate swaps Level 1 £000s Level 2 £000s Level 3 £000s Total £000s - - - - - - - - The following table presents the Group’s financial assets and liabilities that are measured at fair value at 31 December 2011: Liabilities Derivative financial instruments: Interest rate swaps Level 1 £000s Level 2 £000s Level 3 £000s Total £000s - - 6 6 - - 6 6 The following table presents the Group’s financial assets and liabilities that are measured at fair value at 1 January 2011: Liabilities Derivative financial instruments: Interest rate swaps Level 1 £000s Level 2 £000s Level 3 £000s Total £000s - - 28 28 - - 28 28 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 54 Notes to the Financial Statements continued for the year ended 31 December 2012 21. Financial instruments continued The maturity profile of the Group’s bank loans (capital only) at the year end is as follows: At 1 January 2011 £000s 4,000 4,250 5,000 5,750 19,000 Total £000s 10,106 1 27,703 4,436 561 42,807 Total £000s 8,407 1 21,040 6 5,110 807 35,371 At At 31 December 31 December 2011 £000s 2012 £000s Due within: One year More than one year, not more than two years More than two years, not more than three years More than three years, not more than four years 6,250 20,225 - - 26,475 4,250 5,000 10,225 - 19,475 The maturity profile of the Group’s financial gross liabilities (capital and interest) at the year end is as follows: 31 December 2012 In more than In more than two years, one year, In one year, but not more but not more In more than five years £000s than five £000s than two £000s or less £000s Trade and other payables Working capital facility Bank loans Convertible loan stock Onerous contracts Trade and other payables Working capital facility Bank loans Derivative financial instruments Convertible loan stock Onerous contracts 10,086 1 6,957 4,436 197 21,677 20 - 20,746 - 182 20,948 - - - - 182 182 - - - - - - In more than one year, but not more than two £000s 31 December 2011 In more than two years, but not more than five £000s In more than five years £000s In one year, or less £000s 8,367 1 4,975 6 362 189 20 - 5,546 - 4,748 198 13,900 10,512 20 - 10,519 - - 420 10,959 - - - - - - - A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 55 21. Financial instruments continued Finance leases Trade and other payables Working capital facility Bank loans Derivative financial instruments Convertible loan stock Onerous contracts In more than one year, but not more than two £000s 1 January 2011 In more than two years, but not more than five £000s In more than five years £000s In one year, or less £000s 1 11,869 - 4,740 15 392 372 17,389 - 20 - 4,858 13 393 195 5,479 - 40 - 11,291 - 5,162 398 16,891 - - - - - - 219 219 Total £000s 1 11,929 - 20,889 28 5,947 1,184 39,978 The maturity profile of the Company’s financial gross liabilities (capital and interest) at the year end is as follows: 31 December 2012 31 December 2011 1 January 2011 Trade payables and other £000s Bank borrowings and other loans £000s Trade payables and other £000s Bank borrowings and other loans £000s Trade payables and other £000s Bank borrowings and other loans £000s In one year, or less In more than one year, but not more than two In more than two years, but not more than five In more than five years 390 - - - 390 4,436 - - - 4,436 321 - - - 321 362 4,748 - - 5,110 410 - - - 410 392 393 5,162 - 5,947 The Group had £11,499,000 (31 December 2011: £21,524,000, 1 January 2011: £21,432,000) undrawn committed borrowing facilities available at 31 December 2012. Classification of the Group’s financial instruments is set out below: As at 31 December 2012 Financial assets Cash Trade and other receivables Loans and Non financial assets £000s receivables £000s 4,634 9,795 14,429 - 350 350 Total £000s 4,634 10,145 14,779 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 56 Notes to the Financial Statements continued for the year ended 31 December 2012 21. Financial instruments continued Classification of the Group’s financial instruments is set out below: Held for trading £000s Other financial liabilities £000s Liabilities not within scope of IAS39 £000s - - - - - - - - - - 1 20,225 4,189 20 6,250 8,861 - - - 39,546 - - - - - 1,225 1,225 364 197 3,108 Loans and Non financial assets receivables £000s £000s 1,079 8,329 9,408 - 331 331 Held for trading £000s Other financial liabilities £000s Liabilities not within scope of IAS39 £000s - - - - - - - - - 6 6 1 15,225 4,460 40 4,250 7,503 - - - - 31,479 - - - - - 864 1,046 510 189 - 2,609 Total £000s 1 20,225 4,189 20 6,250 10,086 1,322 364 197 42,654 Total £000s 1,079 8,660 9,739 Total £000s 1 15,225 4,460 40 4,250 8,367 1,046 510 189 6 34,094 As at 31 December 2012 Financial liabilities Cash and cash equivalents Long term financial liabilities Convertible debt Other liabilities Financial liabilities Trade and other payables Corporation tax Onerous contracts – non current Onerous contracts – current As at 31 December 2011 Financial assets Cash Trade and other receivables As at 31 December 2011 Financial liabilities Cash and cash equivalents Long term financial liabilities Convertible debt Other liabilities Financial liabilities Trade and other payables Corporation tax Onerous contracts – non current Onerous contracts – current Derivative financial instruments – current A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 21. Financial instruments continued As at 1 January 2011 Financial assets Cash Trade and other receivables As at 1 January 2011 Financial liabilities Long term financial liabilities Convertible debt Other liabilities Financial liabilities Trade and other payables Corporation tax Onerous contracts – non current Onerous contracts – current Derivative financial instruments – non current Derivative financial instruments – current Classification of the Company’s financial instruments is set out below: As at 31 December 2012 Financial assets Cash Trade and other receivables As at 31 December 2012 Financial liabilities Convertible debt Trade and other payables Corporation tax Financial Statements 57 Loans and Non financial assets receivables £000s £000s 1,989 9,251 11,240 - 439 439 Held for trading £000s Other financial liabilities £000s Liabilities not within scope of IAS39 £000s - - - - - - - - 13 15 28 15,000 4,822 60 4,001 10,760 - - - - - 34,643 - - - - 1,109 722 641 372 - - 2,844 Loans and Non financial assets £000s receivables £000s 182 - 182 - 10,021 10,021 Other financial liabilities £000s Liabilities not within the scope of IAS39 £000s 4,189 390 - 4,579 - - 4 4 Total £000s 1,989 9,690 11,679 Total £000s 15,000 4,822 60 4,001 11,869 722 641 372 13 15 37,515 Total £000s 182 10,021 10,203 Total £000s 4,189 390 4 4,583 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 58 Notes to the Financial Statements continued for the year ended 31 December 2012 21. Financial instruments continued Loans and Non financial assets receivables £000s £000s 77 - 77 - 2,020 2,020 Other financial liabilities £000s 4,460 321 4,781 Loans and Non financial assets receivables £000s £000s 25 - 25 - 7,086 7,086 Other financial liabilities £000s Liabilities not within scope of IAS39 £000s 4,822 316 - 5,138 - - 95 95 Total £000s 77 2,020 2,097 Total £000s 4,460 321 4,781 Total £000s 25 7,086 7,111 Total £000s 4,822 316 95 5,233 As at 31 December 2011 Financial assets Cash Trade and other receivables As at 31 December 2011 Financial liabilities Convertible debt Trade and other payables As at 1 January 2011 Financial assets Cash Trade and other receivables As at 1 January 2011 Financial liabilities Convertible debt Trade and other payables Corporation tax A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 22. Derivative financial instruments Interest rate swap – cash flow hedge Current portion Non current portion Financial Statements 59 31 December 31 December 2011 Liabilities £000s 2012 Liabilities £000s 1 January 2011 Liabilities £000s - - - - 6 6 6 - 28 28 15 13 The cash flow hedges were tested for effectiveness during the year and were found to be highly effective. The ineffective element was immaterial. The hedge and interest on the bank debt are settled on a quarterly basis on the same date and measured against the same benchmark, namely 3 month sterling LIBOR. The amount recognised through the income statement in respect of interest rate swaps during the year was a charge of £6,000 (year ended 31 December 2011: £47,873 charge). 23. Deferred tax asset/(provision) The Group Accelerated capital allowances Accelerated allowances on intangible assets Initial recognition of intangible from business combination Interest rate hedge Deferred tax asset Deferred tax provision Reconciliation of deferred tax movements: 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s (4) (4,271) (1,849) - (6,124) - (41) (4,025) - 2 (4,064) - (86) (3,725) - 8 (3,803) - (6,124) (4,064) (3,803) The Group Non-current assets Intangible assets Initial recognition of intangible from business combination Property, plant and equipment Current Liabilities Derivative financial instruments Recognised as: Deferred tax asset Deferred tax liability Recognised in other Recognised 31 December comprehensive in the income statement £000s income £000s 2011 £000s Recognised on business 31 December 2012 combination £000s £000s (4,025) - (41) 2 (4,064) - (4,064) - - - (2) (2) (246) - (4,271) - 37 - (1,849) - (1,849) (4) - - (209) (1,849) (6,124) - (6,124) A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 60 Notes to the Financial Statements continued for the year ended 31 December 2012 23. Deferred tax asset/(provision) continued Deferred tax has been calculated at the prevailing rate of 23% (2011: 25% and 2010: 27%). A number of changes to the UK Corporation tax system were announced in the Finance Act 2012.The main rate of corporation tax was reduced from 26% to 24% from 1 April 2012 and reduced further to 23% from 1 April 2013. Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 22% by 1 April 2014. At the balance sheet date the substantively enacted rate was 23% (2011: 25%). The further 1% reduction has not been substantively enacted at the balance sheet date and therefore not included in these financial statements. The proposed reduction of the main rate of corporation tax by 1% from 1 April 2014 is expected to be enacted during 2013. The overall effect of this change from 23% to 22%, if applied to the deferred tax balance at 31 December 2012, would be to decrease the deferred tax liability by £266,000. Recognised in other Recognised 1 January comprehensive in the income 31 December 2011 £000s statement £000s income £000s 2011 £000s (3,725) (86) 4 4 - (3,803) - (3,803) - - (4) (2) - (6) (300) 45 (4,025) (41) - - - - 2 - (255) (4,064) - (4,064) The Group Non-current assets Intangible assets Property, plant and equipment Non-current Liabilities Derivative financial instruments Current Liabilities Derivative financial instruments Unused tax losses Recognised as: Deferred tax asset Deferred tax liability A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 24. Provisions for other liabilities At start of year Amount provided for in year Amount utilised in year Unwinding of discount At year end Financial Statements 61 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s 699 - (187) 49 561 1,013 - (378) 64 699 - 1,268 (340) 85 1,013 Leases and associated costs for offices in Newcastle and Dublin, acquired as part of the Cambridge Laboratories acquisition have subsequently been treated as onerous contracts. As at 31 December 2012 an amount of £561,000 (year ended 31 December 2011: £699,000) discounted at a rate of 10%, representing payments due until the end of each contract has been recognised. The Dublin property lease expired in 2011 and the Newcastle property lease will run until 2015. The balances are analysed as follows: Current Non-Current 25. Share capital At 31 December 2012 – ordinary shares of 1p each At 31 December 2011 – ordinary shares of 1p each At 1 January 2011 – ordinary shares of 1p each At 1 January 2011 – ordinary shares of 1p each Issued during the year At 31 December 2011 – ordinary shares of 1p each Issued during the year At 31 December 2012 – ordinary shares of 1p each 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s 197 364 189 510 372 641 Authorised No. of shares Authorised £000s 400,000,000 400,000,000 400,000,000 Allotted, called and fully paid No. of shares 236,105,418 3,961,866 240,067,284 2,968,358 243,035,642 4,000 4,000 4,000 Allotted, called and fully paid £000s 2,361 40 2,401 29 2,430 Between 1 January 2012 and 31 December 2012 1,555,265 shares were issued on the exercise of employee share options (2011: 2,089,250). During the year, the Company received conversion notices in respect of £296,750 nominal value of the Company’s 8% Convertible Unsecured Loan Stock (2011: £393,250). Accordingly, the Company has allotted 1,413,093 ordinary shares of 1p each in the Company (2011: 1,872,616). A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 62 Notes to the Financial Statements continued for the year ended 31 December 2012 25. Share capital continued Potential issues of ordinary shares Under the Group's share option scheme for employees and Directors options have been granted to subscribe for shares in the Company at prices ranging from 7.75p to 34.25p. Options are exercisable three years after date of grant. Options outstanding are as follows: Year of grant 2005 2006 2007 2008 2009 2010 2011 2012 Exercise price pence Exercise from 31 December 31 December 2011 Number 2012 Number 19.00 18.75 9.25 8.50 7.75 33.25 and 34.25 34.12 and 31.00 29.25 2008 2009 2010 2011 2012 2013 2014 2015 9,000 40,250 33,250 1,308,426 1,037,045 2,633,889 4,248,253 3,494,826 9,000 40,250 33,250 1,419,526 2,481,210 2,633,889 4,248,253 - 1 January 2011 Number 9,000 74,750 231,126 3,276,400 2,481,210 2,668,639 - - 12,804,939 10,865,378 8,741,125 See Note 19 for details of the Convertible Unsecured Loan Stock. Managing Capital Our objective in managing the business’ capital structure is to ensure that the Group has the financial capacity, liquidity and flexibility to support the existing business and to fund acquisition opportunities as they arise. The capital structure of the Group consists of net bank debt and Shareholders’ equity. At 31 December 2012, net bank debt was £21.8 million (excluding convertible unsecured loan stock), whilst Shareholders’ equity was £51.8 million. The business is profitable and cash generative. The main financial covenants applying to bank debt are that leverage (the ratio of net bank debt to EBITDA) should not exceed 2.0 times, interest cover (the ratio of EBITDA to finance charges) should be no less than 3.0 times, and operating cash flows must exceed debt service cash flows. The Group comfortably complied with these covenants in 2012 and 2011. Smaller acquisitions are typically financed purely with bank debt, while larger acquisitions typically involve a combination of bank debt and additional equity. The mixture of debt and equity is varied, taking into account the desire to maximise the shareholder returns while keeping gearing at comfortable levels, i.e. net bank debt below around two times EBITDA. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 63 26. Share based payments Under the Group's share option scheme for employees and Directors options to subscribe for shares in the Company are granted normally once each year. Options are granted with a fixed exercise price equal to the market price of the shares under option at the date of grant. The contractual life of an option is 10 years from date of grant. Options granted become exercisable on the third anniversary of the date of grant. Exercise of an option is normally subject to continued employment. All share-based employee remuneration is settled in equity. Options are valued using the Black-Scholes option-pricing model. There are no performance conditions attached to the options. The assumptions used in the calculation are as follows: Grant date 27/07/05 04/05/06 02/05/07 23/04/08 14/04/09 26/03/10 29/04/10 28/04/11 21/09/11 19/10/12 Share price at issue Exercise price 19.00p 18.75p 9.25p 8.50p 7.75p 33.25p 34.25p 34.12p 31.00p 29.25p 19.00p 18.75p 9.25p 8.50p 7.75p 33.25p 34.25p 34.12p 31.00p 29.25p Number of Number of options remaining at options 31 December 2012 granted 424,516 901,190 1,402,425 5,419,950 2,307,860 1,300,000 1,502,778 3,981,916 300,000 3,494,826 9,000 40,250 33,250 1,308,426 1,051,345 1,300,000 1,333,889 3,948,253 300,000 3,494,826 Expected volatility Risk free rate 22.8% 14.9% 20.4% 18.6% 25.5% 43.5% 45.7% 43.9% 53.2% 49.7% 4.13% 4.30% 4.62% 4.90% 4.08% 3.90% 3.90% 4.10% 4.10% 1.70% In each case, it is assumed the majority of options will be exercised at the earliest opportunity and that on average they are exercised after 4 years. The expected volatility is based on historical volatility from 23 December 2003. The risk free rate of return is based on UK government bonds of a term consistent with the assumed option life. Share options and weighted average exercise price are as follows for the reporting periods presented: 2012 2011 2010 Weighted average exercise price Pence 24.82 29.25 10.54 - Number 8,741,125 4,281,916 (2,089,250) (68,413) Number 10,865,378 3,494,826 (1,555,265) - Outstanding at start of year Granted Exercised Forfeited Outstanding at end of year 12,804,939 27.77 10,865,378 Weighted average exercise price Pence 16.59 33.90 8.70 - 24.82 Number 7,936,543 2,802,778 (1,564,906) (433,290) 8,741,125 Exercisable at end of year 2,427,971 8.40 1,502,026 8.89 314,876 Weighted average exercise price Pence 10.08 33.79 12.48 22.54 16.59 11.35 Share options were exercised throughout the financial year. Share options were exercised between 29p and 30.5p per share. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 64 Notes to the Financial Statements continued for the year ended 31 December 2012 27. Cash generated from operations Group Company Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2011 £000s 2012 £000s 2012 £000s 2011 £000s Year ended Result for the period before tax Interest paid Interest income Other finance costs Profit on disposal of intangibles Depreciation of property, plant and equipment Amortisation of intangibles Change in inventories Change in investments Change in trade and other receivables Change in trade and other payables Share options charges Cash flows from operating activities 28. Capital commitments 10,809 1,466 - 45 - 274 573 505 - (724) 1,100 369 14,417 10,712 1,504 (2) 124 (50) 263 735 (1,109) - 1,078 (1,780) 179 11,654 10,494 352 (1,310) 26 - - - - (1,435) (10,001) 68 369 (1,437) 185 358 (1,096) 31 - - - - (4,643) 66 5 179 (4,915) Neither the Group nor Company had any capital commitments at 31 December 2012 or at 31 December 2011. 29. Contingent liabilities Neither the Group nor Company had any contingent liabilities at 31 December 2012 or at 31 December 2011. 30. Pensions The Group operates a defined contribution group personal pension scheme for the benefit of certain Directors and employees. The Group Contributions payable by the group for the year The Group also operates a stakeholder pension plan available to all employees. 31 December 31 December 2011 £000s 2012 £000s 306 251 31. Leasing commitments The future aggregate minimum lease payments under non-cancellable operating leases are as follows: 31 December 31 December 2011 Land and buildings £000s 2012 Land and buildings £000s 1 January 2011 Land and buildings £000s 361 753 317 286 900 415 432 985 729 1,431 1,601 2,146 No later than one year Later than one year and no later than five years Later than five years A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Financial Statements 65 32. Related party transactions The group paid £642,000 (year ended 31 December 2011: £431,000) for services from Fasken Martineau LLP, a firm of which P Ranson was a partner during 2012. At 31 December 2012 there was a balance of £13,624 (31 December 2011: £12,150) outstanding in respect of services from Fasken Martineau LLP. Lynette Booley, wife of Director Tony Booley, was paid £14,000 (31 December 2011: £45,000) for promotional services and goods. £Nil was outstanding at 31 December 2012 (Year ended 31 December 2011: £2,000). The group paid £24,000 (year ended 31 December 2011: £24,000) for services from Patient Connect Service Limited, a company of which T Casdagli is a director. During the year the Company received funds of £219,000 (year ended 31 December 2011: £500,000) from its subsidiary Alliance Pharmaceuticals Limited. Net payments of £2,359,000 (year ended 31 December 2011: £1,752,000) were made by Alliance Pharmaceuticals Limited on behalf of Alliance Pharma plc. Interest of £1,309,000 (year ended 31 December 2011: £1,096,000) was charged to Alliance Pharmaceuticals Limited on the total outstanding debt. During the year the Company re-invested £2,010,000 (year ended 31 December 2011: £5,300,000) in Alliance Pharmaceuticals Limited. During the year an amount of £369,000 (year end 31 December 2011: £179,000) was charged to Alliance Pharmaceuticals Limited by the Company for the employee share based payment. The amount owed by Alliance Pharmaceuticals Limited at the year end is £43,161,000 (31 December 2011: £32,065,000). At the year-end dividends declared by Alliance Pharmaceuticals Limited due to the Company of £10,000,000 for the year ended 31 December 2012 (for the year ended 31 December 2011: £2,000,000, for the year ended 31 December 2010: £7,000,000) are included within other receivables and are still outstanding. During the year dividends of £2,000,000 were paid by Alliance Pharmaceuticals Limited to the Company. During the year the Group made payments on behalf of Unigreg of £377,000 (year ended 31 December 2011: £129,000), interest receivable from Unigreg was £48,000 (Year ended 31 December 2011: £48,000). 33. Acquisitions Details of the acquisition of significant subsidiaries are given below. During the year the Group acquired 100% of the share capital of Opus Group Holdings Ltd (“Opus”) for £8,040,000 plus the net asset value of the Opus Group which was £1,626,848. In the twelve months to 31 March 2012 the turnover of Opus was £3.8m and the pre- tax profit, before directors’ emoluments, was £2.1m. The group incurred acquisition related costs of £206,000 that have been expensed to the income statement. Intangible fixed assets Current assets (excluding cash and cash equivalents) Cash and cash equivalents Current liabilities Net assets Deferred tax liability Goodwill Total consideration Book of value assets and liabilities acquired £000s Fair value of assets and liabilities acquired £000s Fair value adjustments £000s 3 1,045 1,204 (625) 1,627 - - 1,627 8,040 - - - 8,040 (1,849) 1,849 8,040 8,043 1,045 1,204 (625) 9,667 (1,849) 1,849 9,667 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 66 Notes to the Financial Statements continued for the year ended 31 December 2012 34. Joint Venture Name Principal Activity Country of Incorporation Unigreg Ltd Distribution of pharmaceutical products to China British Virgin Islands % Owned 60 The Group considered the existence of substantive participating rights held by the minority shareholder which provide that shareholder with a veto right over the significant financial and operating policies of Unigreg Ltd and determined that, as a result of these rights, the Group does not have control over the financial and operating policies of Unigreg Ltd, despite the Group’s 60% ownership interest. The company is accounted for using the proportionate consolidation method of accounting. The following amounts are included in the balance sheet and the income statement of the Group, being the Group’s share of those items. Inter-company transactions are also eliminated proportionally. 31 December 31 December 2011 £000s 2012 £000s 1 January 2011 £000s 1,950 658 (145) 2,463 1,950 853 (309) 2,494 1,950 836 (600) 2,186 Year ended Year ended Year ended 31 December 31 December 31 December 2010 £000s 2012 £000s 2011 £000s 2,475 (1,415) (239) 821 1,812 (1,029) (249) 534 1,874 (1,033) (276) 565 Intangible fixed assets Current assets Current liabilities Net assets Income Cost of sales Administration and marketing expense Profit on ordinary activities before taxation 35. Ultimate controlling party There is no single ultimate controlling party. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Shareholder Information Supplementary Information 67 Shareholder enquiries The Company’s share register is maintained on our behalf by Capita Registrars, who are responsible for updating the register, including details of changes to shareholders’ addresses and purchases and sales of the Company’s shares. If you have any questions about your shareholding in the Company or need to notify any changes to your personal details you should write to Capita Registrars, Northern House, Woodsome Park, Fenay Bridge, Huddersfield, West Yorkshire HD8 0LA or telephone 0871 664 0300 (calls cost 10p per minute plus network extras, lines are open 9:00am to 5:30pm Monday to Friday). Financial Calendar Annual General Meeting Final dividend record date Payment of final dividend 22 May 2013 14 June 2013 11 July 2013 Interim results announcement 11 September 2013 Year End 31 December 2013 Preliminary announcement March 2014 Shareholder Analysis Below is an analysis of the share register by size of holding as at 18 March 2013: Size of shareholding 1-5,000 5,001-10,000 10,001-50,000 50,001-100,000 100,001-500,000 500,001-1,000,000 1,000,001-5,000,000 5,000,001-10,000,000 10,000,001-50,000,000 As at 18 March 2013 the Company has 584 registered shareholders. Proportion of shareholders Number of Proportion of shares shares held 29% 17% 35% 5% 5% 3% 4% 1% 1% 354,946 787,468 4,600,062 2,585,630 8,195,923 11,099,612 51,386,763 31,444,199 134,509,099 0.14% 0.32% 1.88% 1.06% 3.35% 4.53% 20.98% 12.84% 54.90% 100% 244,963,702 100% A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 68 Five Year Summary Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 2012 £m Year ended Year ended 2011 £m 2010 £m 2009 £m 2008 £m Revenue Operating profit before exceptional items Exceptional operating items Operating profit after exceptional items Exceptional finance items Profit before tax before exceptional items Profit before tax after exceptional items Intangible assets Tangible assets Current assets Current liabilities Equity Average shares in issue (millions) Shares in issue at period end (millions) Earnings per share – basic (p) Earnings per share – adjusted basic (p) 21.8 6.4 - 6.4 - 2.4 2.4 40.0 0.2 8.7 11.1 8.8 162.1 162.1 1.55 1.17 31.2 11.2 (2.8) 8.4 - 8.5 5.7 44.9 0.1 11.7 11.4 16.6 173.2 193.3 2.37 3.55 49.9 18.7 (1.7) 17.0 (1.8) 16.4 12.9 60.3 0.9 16.2 17.0 36.1 226.1 236.1 3.96 5.07 46.0 12.3 - 12.3 - 10.7 10.7 66.1 0.8 15.4 13.9 44.2 238.6 240.0 3.62 3.62 44.9 12.3 - 12.3 - 10.8 10.8 79.9 0.6 20.2 22.0 51.8 240.9 243.0 3.61 3.61 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Supplementary Information 69 Advisors AUDITOR Grant Thornton UK LLP Hartwell House 55-61 Victoria Street Bristol BS1 6FT BANKERS REGISTRARS Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 3TU Lloyds Bank Corporate Markets SOLICITORS The Atrium Davidson House Forbury Square Reading Berkshire RG1 3EU CORPORATE ADVISORS Numis Securities Ltd 10 Paternoster Square London EC4M 7LT FINANCIAL PR Buchanan Communications 107 Cheapside London EC2V 6DN Fasken Martineau LLP 17 Hanover Square London W1S 1HU Taylor Wessing LLP 5 New Street Square London EC4A 3TW REGISTERED OFFICE Avonbridge House Bath Road Chippenham Wiltshire SN15 2BB COMPANY NUMBER 04241478 A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 70 Supplementary Information Cautionary statement regarding forward-looking statements This Annual Report has been prepared for the members of the Company and no one else. The Company, its Directors, employees or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. This Annual Report contains certain forward-looking statements with respect to the principal risks and uncertainties facing Alliance. By their nature, these statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. The forward- looking statements reflect the knowledge and information available at the date of preparation of this Annual Report, and will not be updated during the year. Nothing in this Annual Report should be construed as a profit forecast. The Report of the Directors in this Annual Report has been drawn up and presented in accordance with English company law and the liabilities of the Directors in connection with that report shall be subject to the limitations and restrictions provided by such law. In particular, Directors would be liable to the Company (but not to any third party) if the Report of the Directors contains errors as a result of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable. Trademarks The following are registered trademarks of Alliance Pharmaceuticals Limited (a subsidiary of Alliance Pharma plc) and are protected in a number of countries: AbsorbagelTM, AcnisalTM, ALLIANCE, ALLIANCE and Logo, ALLIANCE GENERICS, ALLIANCE PHARMACEUTICALS, AlphadermTM, AnbesolTM, AquadrateTM, Ashton & Parsons Infants’ PowderTM, AtaraxTM, AvloclorTM, BuccastemTM, CeanelTM, ClearWayTM, ClearWay MiniTM, ClearWay Stoma BridgeTM, DeoGelTM, DeltacortrilTM, Dermamist, DistamineTM, ForcevalTM, HydromolTM, IsprelorTM, LiftTM, Lift+TM, Lift PlusTM, LysovirTM, MetedTM, MolluDabTM, NaseptinTM, NaturCareTM, NaturCare BreezeTM, NaturCare FragantTM, NaturCare ZestTM, NaturCare IPDTM, Nu-SealsTM, OcclusalTM, OndemetTM, OPUS and Logo, PaludrineTM, PavacolTM, Pavacol-DTM, PentraxTM, PeriostatTM, PermitabsTM, PosidormTM, QuinodermTM and Quinoderm Q device, RizudermTM, Roman in a chariot device, SavarineTM, SkinSafeTM, SkinSafe Non Sting Protective FilmTM, Terra-cortrilTM, ThwartTM, TimodineTM, UnifluTM, UnigregTM. The following are all used under licence by Alliance Pharmaceuticals Limited: XenazineTM is a registered trademark of Biovail Laboratories International (Barbados) GelclairTM is a registered trademark of Helsinn Healthcare S.A. ImmuCystTM is a registered trademark of Sanofi Pasteur Limited Designed & produced by Design Wall. A l l i a n c e P h a r m a p l c | A n n u a l R e p o r t 2 0 1 2 Alliance Pharma plc Avonbridge House Bath Road Chippenham Wiltshire SN15 2BB United Kingdom T: +44 (0)1249 466966 F: +44 (0)1249 466977 E: ir@alliancepharma.co.uk www.alliancepharma.co.uk 

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