Discover more with Allergy Therapeutics Annual report and accounts 2017 of Allergy Therapeutics plc www.allergytherapeutics.com Strategic Report Mission Statement To create a sustainable, fast-growing and profitable global specialty pharmaceutical business with a substantial franchise in the allergy sector by developing innovative, patented, registered therapies for both the treatment and prevention of allergy-related conditions. Strategic Report 01 Highlights 02 What is Immunotherapy? 04 At a Glance 06 Chairman’s Statement 08 Chief Executive Officer’s Review 12 Current Market Overview 14 Opportunities 16 Business Model 18 Strategic Framework 20 Strategy in Action 26 Key Performance Indicators 28 Product Review 32 Research & Development 36 Principal Risks and Uncertainties 39 Financial Review Governance 42 Board of Directors 44 Corporate Governance 47 Directors’ Remuneration Report 51 Nominations Committee Report 52 Audit Committee Report 54 Report of the Directors 59 Financial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc 66 Consolidated Income Statement 67 Consolidated Statement of Comprehensive Income 68 Consolidated Balance Sheet 69 Consolidated Statement of Changes in Equity 70 Consolidated Cash Flow Statement 71 Notes to the Financial Statements 109 Company Balance Sheet 110 Statement of Changes in Equity (Company) 111 Notes to Company Balance Sheet 115 Shareholder Information Allergy Therapeutics is an AIM listed specialty pharmaceutical group. Allergy Therapeutics is European-based and focused on the treatment and prevention of allergy with aluminium-free products. © Allergy Therapeutics plc Find this report online at www.allergytherapeutics.com/annualreport2017 Highlights Financial Operational +72% increase in operating profit (pre-R&D) to £7.4m (2016: £4.3m) +32% revenue growth increase in actual terms to £64.1m (2016: £48.5m) +15%* revenue growth at constant currency ** to £55.5m (2016: £48.5m) 10% compound annual growth in net sales over 18 years 13% Market share in the Group’s main European markets (2016: 12%) £22.1m Cash at 30 June (2016: £23.4m) • Commencement of recruitment for pivotal Phase III Pollinex Quattro Birch trial • US Grass MATA programme proceeding well; safety study successfully completed • First patient recruited for Acarovac MPL Phase I trial in Spain • Positive pre-clinical proof of concept trial data announced for Polyvac Peanut Percentage based on figures in thousands (2017: £55.545m, 2016: £48.509m) * ** Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. See table in the Financial Review for an analysis of revenue on page 39. 01 allergytherapeutics.com Strategic Report What is Immunotherapy? Immunotherapy is the practice of administering gradually increasing doses of an allergen in order to address the causes of the symptoms of allergy. It was first carried out almost 100 years ago and is now in widespread use around the world. It is sometimes referred to as ‘allergy vaccination’ or ‘desensitisation’. Immunotherapy may be given via different routes including subcutaneous injections or sublingually. 02 What is Immunotherapy? Immunology A patient who is suffering from an allergy: 1 2 interleukin-13 IgE 3 IgE 4 T cell B cell Activated B cell interleukin-4 IgE Mast cell Histamine Patient comes into contact with an allergen Th2 Cell stimulates B cells to produce IgE IgE binds to immune cells causing histamine release upon exposure to allergen Histamine leads to classic symptoms of allergy A patient who is treated with Allergen Immunotherapy: 1 2 interleukin-13 IgG T cell B cell Activated B cell interleukin-4 IgE IgG 4 3 IgE IgG Mast cell Histamine Patient comes into contact with an allergen Th1 Cell stimulates B cells to produce IgG Increased IgG production inhibits the production of IgE Lower levels of IgE prevent excess release of histamine and reduce symptoms of allergy Treated with Allergen Specific Immunotherapy 03 allergytherapeutics.com Strategic Report At a Glance Who we are We are a visionary immunology business with specialist experience in the research and development of allergy treatments. We have a well-established commercial presence in Europe and are focused on the US market opportunity. What we do We specialise in the diagnosis and treatment of allergy. Allergy vaccination is a successful treatment that deals with the underlying cause of allergies and not just the symptoms1. We mainly sell our products in European countries and our pipeline of products in clinical development includes vaccines for grass, tree and house dust mite, as well as a peanut allergy vaccine in pre- clinical development. Adjuvant systems to boost performance of vaccines outside allergy are also under evaluation. What makes us different Our ultra-short course treatments consist of 4-6 injections over the course of 3-6 weeks compared to daily tablets or an average treatment in the market of a 12-15 course of injections. Our approach offers the simplicity of 4-6 injections, increased tolerability and demonstrated efficacy2. Our adjuvant technologies improve therapies by allowing them to increase efficacy. We are further developing this concept in our specialist business, Bencard Adjuvant Systems; improving health and evaluating vaccinations for infectious diseases and cancer treatments. Our values have created a culture based around vision, commitment and humanity. We take extraordinary ideas and bring them to market – enhancing treatments and transforming people’s lives. Sales Products 1. Pollinex Quattro 2. Oralvac 3. Tyrosine S / TU, 4. TyroMILBE 17% 8 1% 9% 2% 7 6 5 4 5% 3 5% 5. Acarovac Plus 6. Third Party Products 7. Diagnostics 8. Pollinex 9. Venomil 3% 9 2 14% 1 Zielen S et al., Allergologie 2007 (30) Suppl 1;(S1-8) 2 Patel P, et al. J Allergy Clin Immunol 2014; 133:121-9 04 Markets 1. Germany 2. Italy 3. Austria 4. Spain 5. Switzerland 6. The Netherlands 7. UK & Export market 8. Czech Republic 9. Slovakia 10. Canada and South Korea 2% 2% 1% 4% 4% 910 8 7 1 59% 1 44% 3% 6 5 9% 7% 4 3 2 9% At a Glance Our reach 10 10 7 6 59% of our total sales in the German market. 4 8 3 9 8 1 5 2 Pipeline Pre-clinical Phase I Phase II Phase III Pollinex Quattro Grass Pollinex Quattro Birch Pollinex Quattro Ragweed Pollinex Quattro Trees Oralvac Grass, Trees & house dust mite Acarovac Platform Polyvac Peanut Also available as a Named Patient Product 05 allergytherapeutics.com Strategic Report Chairman’s Statement Peter Jensen Chairman Overview I am pleased to introduce the Group’s Annual Report & Accounts for the year ended 30 June 2017. It has been another year of strong and consistent performance across all areas of the Group. The key areas for value creation remain profitable growth in European markets, pipeline advancements and paving the way to the significant US market. 06 Chairman’s Statement by an effective and knowledgeable Board. We are pleased that a regular and transparent dialogue is maintained with our key stakeholders throughout the year. Looking ahead Allergy Therapeutics’ strategy remains clear and focused and it is expected that the business will continue to grow and its portfolio of products expand in 2018 and beyond. The Group benefits from a committed, experienced and enthusiastic management team and the Board and I are confident that we shall continue our successful record of growth and deliver long-term value creation for shareholders. On behalf of the Board, I would like to thank all Allergy Therapeutics’ employees for their commitment and hard work during the year. Peter Jensen Chairman 27 September 2017 “ Allergy Therapeutics’ strategy remains clear and focused and it is expected that the business will continue to grow and its portfolio of products expand in 2018 and beyond.” Performance In our European business, sales grew by 15%* in constant currency and we continued to achieve market share gains, with our market share in markets where we operate up to 13 % (2016: 12%). This shows an increasing adoption in the market for our convenient and patient-friendly treatments compared to other products. In addition, there has been good progress in the R&D pipeline this year, facilitated by investment from our growing revenue stream. In March, we announced that we had recruited the first patient in our pivotal Phase III PQ Birch trial and, in May, the first patient was recruited for our Acarovac MPL (house dust mite) study. We announced exciting pre-clinical data from the Polyvac Peanut project in February and we are pleased that all of the products that the Group has submitted for the German Therapieallergen- Verordung (TAV) process are continuing to progress well. We are also making progress with our US commercial strategy. The Grass MATA MPL product completed the safety study relating to its higher dose and the Phase II Grass trial is due to commence before the end of 2017. Financially, the Group remains in a robust position with a strong cash balance due to strong sales growth, aided additionally by the weakening of sterling against the euro. Board Changes There were a number of changes to the Board during the year. In February, we welcomed US-based Jeff Barton who succeeded Jean- Yves Pavée as Abbott Laboratories’ nominated director and, in June, Thomas Lander, our Board member with extensive R&D experience, retired from the Board and Tunde Otulana was appointed as a new independent Non-Executive Director. I thank Jean-Yves and Thomas for their significant contributions to the Board during their tenures. Jeff Barton, who is based at Abbott headquarters in Chicago and is VP Licensing and Acquisitions, brings extensive commercial experience, especially in the US, which will prove vital as the Group continues to execute its global strategy. Tunde is also based in the US and brings a wealth of global experience in clinical and regulatory work, particularly with the US Food & Drug Administration (FDA), with whom he worked for six years earlier in his career. I am delighted to welcome Jeff and Tunde to the Board. Governance The Group endeavours to adopt best practice, above normal levels for a company of its size and sector across the business and it is overseen * Percentage based on figures in thousands (2017: £55.545m, 2016: £48.509m) 07 allergytherapeutics.com Strategic Report Chief Executive Officer’s Review Manuel Llobet CEO Delivering on our strategy – three areas for growth Strong advances have been made this year across all three major strategic objectives. These are focused around three key pillars of growth: profitably expanding the existing European business; developing a strong product pipeline, and; preparing for product entry into the US market. 08 Chief Executive Officer’s Review “ A key aim of the management team is to leverage its current infrastructure and this is demonstrated by the strong increases in revenue and pre-R&D operating profit this year in comparison with the prior year. ” European business – milestone CAGR of 10% reached over past 18 years The Group reached a significant milestone this year with compound annual growth over the past 18 years of 10%. This reflects continued delivery of our focused growth strategy, innovative products and a robust business model that is resilient to major economic downturns and significant regulatory changes. The business achieved net sales of £64.1m, up 15%* at constant currency on the 2016 performance and up 32% in actual terms. Following on from the 16% underlying constant rate growth last year, this illustrates the strength of the Group’s portfolio of convenient, patient-friendly, technically advanced products and the skilled sales and marketing teams in the business. Whilst operating in a highly fragmented European allergy market, Allergy Therapeutics continues to benefit from its innovative approach within this marketplace and will look to build value for shareholders via suitable corporate development opportunities. The Group has also continued to invest in its infrastructure, further strengthening its supply chain and regulatory functions in anticipation of an increasingly regulated framework for allergy treatment across the EU and the US. The changes in the regulatory environment and a drive towards evidence-based products will be to the Group’s advantage. Increasing market share During the period, the Group continued to increase its market share in the markets in which we operate, driving this to 13% (2016: 12%) against a broadly flat market backdrop. In the product portfolio, Pollinex Quattro continues to grow well as patients and allergists increasingly seek the benefits of our ultra-short course treatment programmes. Venomil, driven by raw material supply issues in the market also grew strongly. Acarovac Plus and Probiotics continued to gain market share with the former being the fastest growing component of the Spanish portfolio. they will form part of both the German and US regulatory submissions. The products in the German TAV process continue to progress well with plans for the start of clinical trials on the oral products and the injectable house dust mite product in a staggered process starting during the 2018 financial year. The German TAV process has the potential to boost sales of these products through additional clinical data as well as reducing the number of competing products in the market. The Acarovac MPL product for house dust mite allergy has started Phase I trials in Spain using the Pollinex Quattro platform technology. This product, if successful through the trial programme, could become a global best-in-class product with the first short course subcutaneous treatment in a global market worth an estimated $3-4bn1. Scaling up the business A key aim of the management team is to leverage its current infrastructure and this is demonstrated by the strong increases in revenue and pre-R&D operating profit this year in comparison with the prior year. Pipeline – Phase III trial underway with broad programmes running During the year, the scientific team has been actively managing and preparing for a number of significant clinical trial. The Pollinex Quattro Birch Phase III trial received Clinical Trial Application (CTA) approval and recruitment is now well under way, with treatment of patients ongoing and read out expected in H2 2018. The Grass MATA MPL development is discussed in more detail below. If the Grass trials are successful, The Polyvac Peanut product completed a positive pre-clinical trial showing impressive protective immunity with a single vaccination and no anaphylaxis. This product uses the virus like particle (VLP) technology that the business acquired to create a subcutaneous product that could offer long lasting protective immunity for subjects with peanut allergy, rather than just increasing tolerability in the case of accidental exposure. Team – expanding the scientific excellence In order to facilitate continued success in the clinical development programme, the Group is strengthening the organisation with expansion of the clinical team led by Murray Skinner, Chief Scientific Officer at the Group’s UK headquarters in Worthing. * Percentage based on figures in thousands (2017: £55.545m, 2016: £48.509m) 1 Datamonitor Epidemiology 2011 09 allergytherapeutics.com Strategic Report | Chief Executive Officer’s Review The Group has underlined its commitment to clinical excellence by appointing Pieter-Jan de Kam as Clinical Director in mid-September. Pieter-Jan de Kam joined the Group from HAL Allergy in the Netherlands where he was responsible for clinical development with recent successes including European and US studies for pollen and house dust mites. In addition to the appointment of Pieter-Jan, the Group has recruited Simon Piggott as Head of Clinical Science. Simon will be responsible for the delivery of a robust clinical strategy bridging the gap between the Groups’ existing product development teams and clinical departments. Simon has significant experience in successful development programmes from time spent at Novartis, GSK and most recently at Quintiles. Tim Higenbottam has been appointed to the role of Senior Pharmaceutical Physician and will focus on the US regulatory process. The Group is continuing to invest in the R&D function to drive the key pipeline trials. The overall headcount in the research and development function within the Group has doubled in the last two years. Publication of data – validating the Bencard Adjuvant Systems division During the year, two papers were published in peer-reviewed journals reporting on new pre-clinical studies from the Group’s Bencard Adjuvant Systems (BAS) division. The two papers report that the novel depot adjuvant behind the Pollinex platform, micro-crystalline tyrosine (MCT), both alone and in an adjuvant system, have broad applications and elicit high, sustained antibody levels demonstrating enhanced protective efficacy compared to conventional adjuvants including aluminium. MCT has now been granted manufacturing patents in the US, Europe and Japan. US market – changing environment will drive market share towards Allergy Therapeutics The US market for allergic rhinitis, which is estimated to be worth $2bn1, continues to evolve. The regulatory pressures in the US that the Group acknowledged last year are becoming stronger as the FDA and the US Pharmacopeial Convention (USP) set strict guidelines for compounding and dispensing of allergy products. These guidelines, if fully implemented, will drive the market towards pharmaceutical grade, centrally manufactured products that should benefit businesses, like Allergy Therapeutics, with GMP, MHRA approved facilities. Given the widespread adoption of subcutaneous immunotherapy (SCIT) treatments in the US, the oral products that are currently in the US market have so far not achieved a significant share leaving the market open for new entrants, such as Allergy Therapeutics, with the right products, manufacturing capability and commercial approach. The Group continues to prepare its portfolio of products for capturing the significant US market opportunity. The Grass MATA MPL product, which is in development, has completed a safety study relating to a new higher dose and the Phase II trial is expected to start in the autumn. Following completion of this trial, meetings with the regulatory authorities in the US and Germany will be necessary before it progresses to a Phase III trial. Outlook – confidence across the business Allergy Therapeutics’ management team expects 2018 to be a pivotal year with significant results due across a number of key programmes. Revenue for 2018 is again set to show continued growth at constant currency, driven by further penetration of the market by the Group’s convenient ultra-short course treatment. Gross margins are likely to improve slightly as volumes grow. Overheads will rise less in 2018 than they did in 2017 as investment slows, based on constant currency rates. However, as previously disclosed, we anticipate research and development expenditure is likely to almost double as the Group commences the PQ Birch Phase III and Grass MATA MPL Phase II studies and continues to invest in new product development. The Group expects the results of both the PQ Birch Phase III trial, the first pivotal Phase III trial for a Pollinex Quattro product in Europe, and the results of the Grass MATA MPL Phase II trial in H2 2018. The Board and the executive team remain confident about the Group’s future growth potential and remain focused on generating significant value for shareholders given its continued sales momentum, the robust research pipeline progress driven by the strengthened research and development team and the potential of the US product portfolio as we prepare the ground for the future. Manuel Llobet CEO 27 September 2017 10 1 internal estimate Chief Executive Officer’s Review “ Allergy Therapeutics’ management team expects 2018 to be a pivotal year with significant results due across a number of key programmes. ” Manuel Llobet CEO allergytherapeutics.com 11 Strategic Report Current Market Overview The Group continues to maintain a strong presence in Europe with established operations in significant markets including Germany, Italy, Spain, Austria, Switzerland, Netherlands and the United Kingdom. In markets where the Group does not have a direct presence, products are distributed through partners. The most important distributor markets for the Group are Canada, the Czech and Slovak Republics, South Korea and more recently, Greece and the Baltics. Germany is the Group’s main market, generating approximately 59% of the Group’s revenue in the 12 months ending 30 June 2017. The percentage of revenue derived from each country is detailed below: Italy (9%) The total Italian allergy immunotherapy market is shrinking because patients have been impacted by adverse economic conditions affecting their ability to pay for vaccines, compounded by the withdrawal of reimbursement in certain regions. The Italian immunotherapy market is dominated by sublingual products. However, despite these challenges, it is believed that there remains a significant opportunity to continue to grow our market share in this important market. Austria (7%) The Austrian market for allergen immunotherapy has grown slightly in the last 2 years. The German TAV registration process will continue to indirectly influence the Austrian market. Sales of modified allergen (allergoid) products are the driving segment, partly cannibalising the classical subcutaneous native allergens but also enlarging the market. Switzerland (3%) The sensitivity of patients and authorities towards aluminium continues to grow. This factor, combined with the significant reduction in the product range of competitors and prolonged interruptions in supplies, arrives at a time when the Group have made available the full-range of products on a named-patient basis. Spain (9%) Market sales in Spain were largely flat over the last year but the allergoid immunotherapy segment has grown 15%. The advanced allergoid products at Allergy Therapeutics allow the Group to be in a strong position to achieve further growth in the coming years. 12 Market Overview Germany (59%) Germany is the single largest allergy immunotherapy market in Europe and is expected to remain flat for the next 2 years. It will be increasingly influenced by the TAV which is an opportunity to demonstrate the high standard and efficacy of the Group’s products. Despite a flat German market, Allergy Therapeutics outperformed market trends. This confirms the quality of the products and the sales and marketing team. Germany remains a key focus for the Group with continued strengthening of sales and marketing which has been instrumental to an increase in market share. Spain continues to be a large valuable market, with approximately 150,000 immunotherapy patients a year. Of the injectable immunotherapy products, modified allergens remain the treatment of choice for Spanish physicians. The Group completed the acquisition of Alerpharma S.A. in 2015, which is now fully merged as part of Allergy Therapeutics Ibérica. The combined Group has strengthened the company presence in Spain and has maintained a broad product range. United Kingdom (4%) The UK is an important market due to its potential for future growth for the Group. Whilst currently, there is limited use of allergy vaccines in the UK, there is potential for this to change and the Group has focused on marketing to the medical community to promote greater awareness of more suitable treatment options. Pollinex is the only pollen SCIT product currently registered in the UK. The Netherlands (4%) After several years in decline, the allergen immunotherapy market in The Netherlands is in a stable state. The market is dominated by two companies, Allergy Therapeutics and ALK, with Allergy Therapeutics the only allergy company showing growth in the Dutch market with a year on year growth of 27% in local currency (source: IMS Health). 13 allergytherapeutics.com Strategic Report Opportunities Recent Developments in US Market Four sublingual immunotherapy (SLIT) products have been granted licence approval in the USA. These sublingual medications require daily treatment for up to three years which poses a problem for adherence (the patients taking all the necessary doses to achieve a beneficial effect). Allergy Therapeutics’ subcutaneous immunotherapies that require weekly injections over as little as four weeks offer a simpler means to gain the benefits of immunotherapy. For this reason the research programme of clinical development of Pollinex Quattro has been extended to the USA. Allergy affects 15-40% of the US population (i.e. between 50 and 130 million), so the total market size for allergy vaccine products is potentially very large. About 2-3 million Americans with moderate to severe allergy received some form of allergen immunotherapy. For the US market, Pollinex Quattro Grass has been developed with an extended range of doses for a dose selection study. The new highest dose was tested in the G104 study conducted in New Jersey and was completed in February 2017. It showed no increase in the number of adverse events seen with lower cumulative dose regimens and this new higher dose is to be included in the range of doses for the dose selection study G205. The G205 study follows the successful technique of allergen challenge used in the PQ Birch 204 study of 2016. Our goal to be the first allergy immunotherapy company to launch a subcutaneous Grass product in the United States remains unchanged. To achieve this, the G205 dose range finding study will now be run before the planned Phase III study. $2bn* Estimated market * Internal estimate 14 Opportunities “ In the high value US market, PQ Grass has the potential to become a convenient, best in class, ultra short course subcutaneous immunotherapy” Lawrence DuBuske MD allergytherapeutics.com 15 Strategic Report Business Model The diagram below shows how the business generates value through its strategy. Returns to shareholders US & Other New Markets Sales European Sales Manufacturing New Markets New Products TAV Process Potential markets Reinvestment in business Research and Development 16 Business Model How we create value for our stakeholders Patients We strive to deliver the best immunology treatments for patients. In treating the cause rather than just the symptoms of allergy with shorter course treatments, we are transforming lives for the better. Healthcare professionals Healthcare professionals rely on our quality products, our knowledge and our trusted partnership to deliver the best care for their patients. 99% of named patient products were delivered on time during the year. For shareholders We create value through strong individual market performances and pipeline developments. Investors are attracted by our portfolio of products, our adjuvant technologies and our commitment to innovation through R&D. Employees We put our people first knowing that they make our business successful; taking extraordinary ideas and bringing them to market. In return, we offer the opportunity to grow careers and make a real difference to our business. 17 allergytherapeutics.com Strategic Report Three Pillars of the Business Strategic priorities European Pipeline US Market – Continue growth of business – Leverage pre-R&D profitability – Focused investment – Develop Synbiotics strategy – Successful completion of TAV process for all products – Completion of clinical trials on Acarovac MPL and global marketing approval – Successful design & undertaking of clinical trials of Polyvac Peanut leading to marketing approval – Develop Bencard Adjuvant Systems and enter strategic partnership – Complete trials of Grass MATA MPL and marketing approval – Decide route to market either via distributor or own sales force in US – Release clinical hold on Ragweed and PQ Trees and complete trials – Bring further products in the pipeline through clinical trials (Acarovac/Polyvac) Strategic Framework Our strategy is based on the three pillars of the business. 18 Strategic Framework Progress in 2016/17 Objectives for 2017/18 £64.1m Net sales of £64.1m (2016: £48.5m) 99% Delivery on time in full by supply chain 72% Continue strong growth of pre- R&D operating profit Continue strong growth of sales Improve pre-R&D profitability further Product launched in three new countries Preparation for Phase III PQ Birch trials Positive pre- clinical trial data for Polyvac Peanut Start of Acarovac MPL Phase I Trial in Spain Successful PQ Birch Phase III trial Successful Acarovac MPL Phase I trial Two successful studies to show impact of adjuvant systems on non allergy treatments Further development of Bencard Adjuvant Systems Successful Phase I Grass MATA MPL Tolerability trial Preparation for Grass MATA MPL Phase II trial Successful Grass MATA MPL Phase II trial Further develop KOL network in USA 19 allergytherapeutics.com Strategy in Action – European Business Strategic Report Introduction European market for immunology treatments for allergy estimated to be worth €700m1 Market split between subcutaneous and sublingual treatments. Market focus is on technically advanced and efficacious treatments. Drive towards tighter regulatory framework leading to reduced products and turbulence in the market. 6 or 7 major players in a market that is broadly flat or growing slightly. 1 internal estimate 20 Strategy in Action Current Position Potential Fastest growing group in the market Further markets within Europe to be entered Unique selling point of ultra-short course, patient friendly treatment. Strategic investment in sales and marketing as well as supply chain and regulatory. Recent additions to the portfolio, such as Acarovac Plus and Synbiotics continue to grow fast. New Acarovac MPL product has potential in Europe to be best in class. – Portfolio of technically advanced products. – TAV process being run by Paul Ehrlich Institut has reduced other company’s products in the market, currently the Group has ten products in the process. – Potential for consolidation in market with a number of small businesses focused on one market. – European Synbiotics is estimated to be a multi-billion euro market with Italy and Germany being the largest markets. – European business is profitable and part-funds the further investment in R&D pipeline. Current market size does not reflect food allergies which could be significant, especially peanut. 21 allergytherapeutics.com Strategic Report Strategy in Action – Pipeline Introduction Focus on allergy immunotherapy treatments Currently developing products on three platforms as well as Bencard Adjuvant Systems. Development of products to address both seasonal as well as perennial allergies. Extension of allergy research into food allergies. Four products in late-stage development. Have completed 15 trials in the US 22 Strategy in Action Current Position Potential Pollinex Quattro Birch in Phase III in Europe Both Acarovac and Polyvac have potential for global products £9.3m Investment of £9.3m this year in R&D and likely to double next year. Doubled number of R&D staff in last two years. – Polyvac Peanut in pre-clinical studies. – Acarovac MPL in Phase I in Europe. – Two studies carried out this year with Bencard Adjuvant Systems illustrating protective efficacy compared to conventional adjuvants. $3-4bn1 Global House Dust Mite market is estimated to be $3-4bn. Licensing of adjuvant systems for use in vaccines or development of phase II product with low efficacy outside of the allergy field. $8bn2 Global Polyvac Peanut market is estimated to be worth $8bn. 1 Datamonitor Epidemiology 2011 2 Internal estimate 23 allergytherapeutics.com Strategic Report Strategy in Action – the US Market Introduction US market is part of the strategy of the Group due to its large size and high potential $2bn The size of the US market is estimated to be $2bn.1 2-3m +20m Approximately 2 to 3 million Americans have received some form of allergen immunotherapy. More than 20 million Americans have been diagnosed with hay fever in past 12 months.2 The Group has carried out 15 trials in the US already and has one potential product, Grass MATA MPL, that is at advanced stage. 1 Internal estimate based on the number of patients with moderate to severe symptoms multiplied by the estimated cost to treat. 2 Centre for Disease Control and Protection. 3 Hankin CS, Cox L, Land D et al JACI 2007. 4 As presented at the Investor Presentations June 2017, Lawrence DuBuske. 24 Strategy in Action Current Position Potential Market served by allergists who buy concentrate allergen compounds from manufacturers and then dilute and treat 16% One study suggested that only 16% of patients completed the three year treatment. 3 3-5yr Typical course is 3-5 years and can include up to 100 injections. – FDA and the US Pharmacopeial Convention have been tightening regulations for Allergist regarding preparation and treatment.4 – Healthcare insurers in the US are reducing the amount of treatment that they are willing to fund.4 – FDA has expressed a desire to move away from off label non-approved mixtures to pharmacy-grade medicine allergen vaccines.4 – Several oral immunotherapy treatments approved and available in US but uptake by Allergist and patients has been low.4 Pressure from healthcare insurers and the regulatory authorities towards reduced frequency of treatment and pharmaceutical grade products benefiting pharma grade ultra-short course treatments A move to an ultra-short course treatment could significantly increase the number of patients taking and completing treatment. Estimated that 50% of patients never start treatment after being informed of the treatment regime and 50% of the remaining patients drop out in the first year. – In addition to the Grass MATA MPL product, the Group has Pollinex Quattro Ragweed and Pollinex Quattro Trees products which were put on clinical hold. – Plan to restart clinical work if the Grass product clinical process is complete. This would require products to go through a further Phase II and Phase III trials as the products have already undergone several clinical trials. – US is predominantly a subcutaneous market.4 – Preparing for Phase II Grass MATA MPL Trial for US and Europe. – Additionally, two pipeline products, Acarovac MPL and Polyvac Peanut, could also be developed for the US market providing a broad portfolio of products in the US allergy field. 25 allergytherapeutics.com Strategic Report Key Performance Indicators 26 Key Performance Indicators Strategic objective KPI Analysis Graph Maximise revenue Revenue at constant exchange rate Total revenue measured at a constant budgeted foreign exchange rate Revenue at constant exchange rate has grown satisfactorily compared to the two prior years Revenue at constant exchange rate1 £m 58.4 47.2 39.6 Maximise funds available from operational activities for investment in other R&D and other value adding projects EBITDA excluding R&D Profit before interest, tax, depreciation, amortisation and research and development expenditure Maximise market share in the countries into which we sell our products2 Combination of IMS Health data and information collected by independent third parties Countries in which we have a distributor, agent or direct sales force 2015 2016 2017 1 GBP:EUR exchange rate 1.28 EBITDA excluding R&D has increased year on year EBITDA excluding R&D £m 9.3 5.9 5.1 2015 2016 2017 Operational markets Percentage market share in the markets which we operate 13 12 10 2015 2016 2017 1 Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. 2 In previous years a KPI of maximising the number of countries into which we sell our products was measured. This new KPI is a more relevant measure for the future. 27 allergytherapeutics.com Strategic Report Product Review The Group sells a wide range of aluminium- free allergy vaccines and diagnostics. The majority of revenue arises from sales of allergy vaccines. Our Products The Group sells both injectable and sublingual (oral) formats. The most commonly prescribed are those for the treatment of pollen- related allergies, particularly for allergies to grasses, weeds and trees. Our vaccines trade under various brand names depending on the market, e.g. Pollinex Quattro, Polligoid and TA Gräser Top. Our extensive range of well-characterised diagnostics includes 82 diagnostics in Germany with marketing authorisations and specialised allergens for other markets. According to the current opinion of expert immunologists, immunoglobulin E (IgE) mediated allergies (type one allergies) are due to deregulation of the T helper lymphocyte (Th) cell. Whereas healthy people develop tolerance to allergens, allergy sufferers have a Th2-dominated immune response with increased IgE and corresponding clinical symptoms. This deregulation of the immune system can be counteracted efficiently using specific immunotherapy (SIT). By administering high doses of allergen in a controlled fashion, the balance between Th1 and Th2 response to the allergen can be restored. Since SIT was first carried out successfully by Leonard Noon in 1911, it has become established as the only therapy addressing the cause of type one allergies. Pollinex Quattro, launched in 1999, heralded a transformation in immunotherapy by introducing allergy vaccination with only four injections per course. The short treatment period is due to the use of microcrystalline tyrosine (MCT) adsorbed allergoids, an improved extract allergen that has been modified in order to lower its allergenicity while maintaining most of its immunogenicity, and the innovative adjuvant monophosphoryl-lipid A (MPL). An adjuvant is a substance which improves the immune response to an antigen or allergen. 28 Product Review Modified Allergen (Allergoid) Native Allergen Recombinant Allergen Microcrystalline Tyrosine (MCT) Monophosphoryl Lipid A (MPL) Virus-Like Particles (VLP) Pollinex Pollinex Quattro Oralvac Acarovac Plus Acarovac MPL1 Venomil Peanut2 • • – • • – – – – • – – • – 1 Product in phase 1 clinical study 2 Product under pre-clinical investigation, full product profile yet to be determined – – – – – – • • • – • • – • – • – – • – – – – – – – – • 29 allergytherapeutics.com Strategic Report | Product Review “ The adjuvant effect of MPL in SIT has been documented in numerous studies and is seen in its essential role of promoting the switch from a Th2-directed immune response (with IgE induction) to a Th1-directed immune response.” 30 Product Review a favourable shift in Th1/Th2 balance compared with an unmodified version of the product and we have recently published a one-year follow-up study with Dr. Albert Roger, Director of the Allergy Unit at Hospital Universitari Germans Trias i Pujol, Barcelona, Spain.1 Penicillin Diagnostics DAP is a product for exclusive use in the diagnosis of type I, or immediate hypersensitivity to benzyl penicillin and related antibiotics (beta lactams) by means of cutaneous tests (prick and intradermal). Allergic reactions to beta lactams are the most common cause of severe adverse drug reactions and there is an increasing prevalence in the population. DAP is supplied to Italy, the UK and The Netherlands. MPL is derived from a lipopolysaccharide (LPS) which is obtained from the cell wall of Salmonella Minnesota R595 using a process of extraction, purification and detoxification. As a vaccine adjuvant, MPL has been used for many years. Vaccines containing MPL have been evaluated in various indications such as cervical cancer and malaria at GlaxoSmithKline (‘GSK’). Two vaccines with an adjuvant system containing MPL – Fendrix, a hepatitis B vaccine and Cervarix, a HPV vaccine to protect against cervical cancer – have received broad approval in Europe, the US, Japan and Canada. These modern, successful vaccines are already widely used. The adjuvant effect of MPL in SIT has been documented in numerous studies and is seen in its essential role of promoting the switch from a Th2-directed immune response (with IgE induction) to a Th1- directed immune response. Our sublingual product is Oralvac Compact with a dosing schedule which allows for a more rapid and simple escalation of dosage making treatment more convenient for patients and doctors. The treatment can be taken by the patient in their own homes and is raspberry flavoured for improved patient compliance. Wasp and bee treatment is provided by our freeze dried Venomil product, which can be used via a ‘Rush’ dosing regimen. Synbiotics Synbiotics are special formulations of prebiotics and probiotics. Synbiotics act as bio-immunomodulators of the immunologic response. In June 2012, the Group launched three new synbiotic products (Kallergen-Th, ATI-Prob and Pollagen) across Spain and Italy. Since then, Austria and Germany have also been added. In 2013, the Group launched a further new synbiotic product, Syngut, specifically designed for food and lactose intolerance. The products contain specific combinations of Lactobacilli and Bifidobacteria. Between 2015 and 2016 two further products were launched in line with the WAO guidelines for atopic dermatitis prevention: our first synbiotic in drops, Kallergen Baby for the prevention of atopic dermatitis in children from 0 to 3 years old and Kallergen Mamy for pregnant women with high risk of atopic disease. In 2016, the Group began its first NIS study for lactose intolerance with 50 patients at S. Martino Hospital, Genova, Italy. Acarovac Plus Acarovac Plus was launched in Spain in March 2013 and is a novel MCT- adsorbed, modified-allergen product developed to address the cause of perennial mite allergy. The product has been standardised to meet a dose regime consistent with “one vial” convenience. Clinical evaluation has been completed demonstrating excellent patient tolerability and serological analyses consistent with allergytherapeutics.com 31 1 Roger et al., Immunotherapy 2016, 8(10), 1169-1174 Strategic Report Research & Development Scientific Developments Clinical Developments in the United States of America The Group continues to progress with the Grass MATA MPL product in clinical trials in the US. In November 2015, the Group initiated the G204 Phase II study using for the first time two mobile environmental exposure chambers (mEECs) to challenge grass allergic people with a constant high level of pollen, recording their symptoms on a hand held computer. Whilst no serious drug-related adverse events or severe systemic events occurred, no dose effect was seen with the primary outcome variable. Following the results of the G204 study, Grass MATA MPL has been further developed with an extended range of doses for a dose selection study. The new highest dose was tested in the G104 study, a Phase I clinical study evaluating safety and tolerability, conducted in New Jersey and was completed in February 2017. It showed no increase in the number of adverse events compared with lower cumulative dose regimens and this new dose is to be included in the range of doses for the G205 dose selection study. The Group is taking advantage of the chance to carry out another dose selection study (G205) by using the successful conjunctival provocation test (CPT). Following discussions with the FDA’s Center for Biologics Evaluation and Research (CEBR), the G205 will be performed in Europe, starting in Autumn 2017 with a planned end of Phase II meeting with the FDA in 2018. Subject to approval and successful outcomes and following discussions with the regulatory authorities, results for these two studies are planned to be available to enable a Phase III study (G306). Discussions will take place with the FDA over the requirements and timing of a safety database for the Grass MATA MPL product at a suitable point. The Group’s goal remains to be the first allergy immunotherapy company to launch an ultra short course subcutaneous Grass product in the United States. European Clinical Development of Subcutaneous Immunotherapies (SCIT) Clinical evaluation of Pollinex Quattro (PQ) products is being undertaken as part of the German TAV (Therapieallergene-Verordnung) regulatory framework. Following the successful dose selection study PQBirch 204 completed in April 2016, the Group has gained approval from the Paul Ehrlich Institut (PEI) to proceed to a Phase III field study – PQBirch 301. 32 Research & Development The PQ Birch 301 study targets enrolment of over 500 patients across Germany, Austria, Sweden & Poland. Enrolment for the study has already started, with the results of the pivotal Phase III study expected to be published H2 2018, enabling, subject to approvals and successful outcomes, submission of dossiers for regulatory assessment in Germany. Acarovac Plus and Acarovac MPL – Next Generation Products for Dust Mite Immunotherapy Following the success of short- course house-dust mite SCIT product Acarovac Plus in Portugal & Austria, monophosphoryl lipid A (MPL) was added to Acarovac Plus to create Acarovac MPL with new dose regimens tested in the AM101 phase I study. The adjuvant MPL is used in the Company’s successful PQ product range. AM101 is a Phase I clinical study evaluating the safety and tolerability of Acarovac MPL in over 30 patients over two different posologies. The study is currently ongoing with interim results expected in H2 2018. Polyvac Preclinical data demonstrating protection against anaphylaxis when challenged with peanut, enabled the Group to progress towards defining a target product profile according to timelines. The Group’s innovative peanut vaccine is focused on a subcutaneous application of recombinant peanut allergen coupled with its state-of- the-art proprietary adjuvant system AdSys-VcT (VLP & MCT) and aiming to induce protective immunity. Positive proof of concept data from the recombinant vaccine candidates has enabled the Group to progress with GMP development of a defined target product profile to support the phase I timeline. Allergens for use in formulation have been identified and small-scale production and VLP association studies are encouraging. Synbiotics Last year, the Group launched two new synbiotic products, Kallergen-Th D and SynGut Baby. Research is continuing and exploring two of the current products, Kallergen-Th D® and SynGut™. A double blind, parallel group, randomised study to determine the clinical efficacy and safety of Kallergen-Th D® oral synbiotic compared with placebo in children with atopic dermatitis is planned to commence in Q4 2017. Additionally, enrolment is complete for the observational study evaluating the efficacy and tolerability of SynGut™ oral synbiotic in patients with lactose intolerance. The study is expected to finish in January 2018 with final results by H2 2018. The results of a retrospective controlled Italian multi-centre study investigating whether Pollagen prescribed as complementary therapy demonstrated that it was able to reduce symptoms severity, endoscopic features and nasal cytology in 93 patients with inflammatory non allergic rhinitis (INAR). Analysis of Allergoids: The Group recently completed a detailed review of the structural and immunological characterisation of “group 1 allergen IgG binding epitopes” within the modified grass SCIT product range. The analysis unveiled the structural and immunological changes which take place following the grass allergen modification process and revealed distinct IgG immunological profiles. The results from the study support the concept that modification not only enhances the safety profile of SCIT but allows shorter- course therapy options as a result of providing an IgG epitope repertoire important for efficacy.1 The work paves the way to help develop methods to better standardise allergoid platforms. Analysis of Adjuvants The Group is continuing to advance adjuvant systems such as MCT as a depot and to enhance immunogenicity of vaccines in areas outside of allergy. The Group have published studies run in conjunction with leading UK institutions such as The Jenner Institute at The University of Oxford and Public Health England to test these adjuvant systems in vaccines for diseases such as flu and malaria. Recent Group highlights include a comparative influenza vaccine study in a ferret model using MCT as an adjuvant that demonstrated that a single dose of antigen adjuvanted with MCT was effective in generating a sero-positive (protective) antibody level that is considered protective. A further highlight includes the assessment of the potential of MCT and Virus-Like Particle technology platform to serve as an adjuvant in the development of a vaccine against malaria. The combination of VLP with MCT appears to be an attractive biodegradable and safe formulation for development of novel prophylactic vaccines. Cross Reactivity Wheel The Group is proud of their commitment to the education both of physicians and also patients and therefore to coincide with the annual European Academy of Allergy & Clinical Immunology (EAACI) congress, an educational tool highlighting the degree of cross-reactivity between allergens was researched and developed. 1 Starchenka et al., World Allergy Organization Journal 2017 10:17. 33 allergytherapeutics.com Strategic Report | Research & Development “ The Group’s goal remains to be the first allergy immunotherapy company to launch an ultra short course subcutaneous Grass product in the United States.” Murray Skinner Chief Scientific Officer 34 Research & Development The tool comprises a list of allergens and an overview of any potential cross-reactivity. The piece also includes a wheel that can be turned to highlight cross reactivity between common allergens to enable physicians to better explain allergy to patients and allow them to feel involved in their condition and take an active role in avoiding cross-reactive allergens. Published Work during the period 1. Virus-Like Particle (VLP) Plus Microcrystalline Tyrosine (MCT) Adjuvants Enhance Vaccine Efficacy Improving T and B Cell Immunogenicity and Protection against Plasmodium berghei/vivax. Cabral-Miranda G., Heath M.D., Mohsen M.O., Gomes A.C., Engeroff P., Flaxman A., Leoratti F.M.S., El-Turabi A., Reyes-Sandoval A., Skinner M.A., Kramer M.F., Bachmann M.F. Vaccines 2017, 5, 10. 2. Clinical use of adjuvants in allergen-immunotherapy Klimek L., Schmidt-Weber C.B., Kramer M.F., Skinner M.A. and Heath M.D. Expert Review of Clinical Immunology, 2017. VOL 13:6, 599-610. Following a successful launch at EAACI 2017 in Helsinki, the cross-reactivity tool is being made available to all the Groups’ markets to assist in the further education of patients and doctors. 3. Adjuvantien in der allergenspezifischen Immuntherapie – AIT Klimek L, Kramer M. and Pfaar O. Allergologie, Jahrgang 40, Nr. 2/2017, S. 46-49 (Article in German) 4. Comparison of a novel microcrystalline tyrosine adjuvant with aluminium hydroxide for enhancing vaccination against seasonal influenza. Heath, M.D., Swan, N.J., Marriott, A.C., Silman, N.J., Hallis, B., Prevosto, C., Gooch, K.E & Skinner, M.A. BMC Infectious Diseases (2017) 17:232. 5. Molecular Fingerprinting of Complex Grass Allergoids: size assessments reveal new insights in epitope repertoires and functional capacities. Starchenka, S., Bell, A.J., Mwange, J., Skinner, M.A and Heath, M.D. World Allergy Organization Journal (2017) 10:17. 6. The grass pollen season 2014 in Vienna: A pilot study combining phenology, aerobiology and symptom data Kmenta M., Bastla K., Kramer M.F., Hewings S.J., Mwange J., Zetter R. and Berger U. Sci Total Environ 2016 Oct 15;566-567:1614-20. 7. Adjuvant treatment with a symbiotic in patients with inflammatory non-allergic rhinitis M Gelardi, C De Luca, S Taliente, ML Fiorella, N Quaranta, C Russo, A Ciofalo, A Macchi, M Mancini, P Rosso, V Seccia, F Guagnini, G Ciprandi. Journal Biological Regulators & Homeostatic Agents (2017) Jan-Mar;31(1):201-206 8. Probiotics, gut microbiome and immunomodulation, is this the key to counteract the allergy epidemics F Fassio and F Guagnini (2016). Journal of Pharmacy and Nutrition Science Vol 6 Issue 2, 83-88 9. Ultra-short-course booster is effective in recurrent grass pollen-induced allergic rhinitis. Pfaar O, Lang S, Pieper-Fürst U, Astvatsatourov A, Gerich F, Klimek L, Kramer MF, Reydelet Y, Shah-Hosseini K, Mösges R Allergy. 2017 Jul 4. doi: 10.1111/all.13240. Pipeline Pre-clinical Phase I Phase II Phase III Market/Registered Pollinex Grass Short-course SCIT Pollinex Tree Short-course SCIT Pollinex Ragweed Short-course SCIT Venomil Bee Bee venom SCIT Venomil Wasp Wasp venom SCIT Pollinex Quattro Grass* Short-course Grass SCIT with MPL Pollinex Quattro Birch Short-course Birch SCIT with MPL Pollinex Quattro Ragweed Short-course Ragweed SCIT with MPL Pollinex Quattro Grass** Short-course Grass SCIT with MPL Pollinex Quattro Trees Short-course Tree SCIT with MPL Oralvac Grass, Trees and House Dust Mite Sublingual immunotherapy with flexible-dosing Acarovac Platform Short-course SPPAllergen HDM SCIT Polyvac Peanut Short-course Peanut SCIT * -0.5mL formulation ** -1.0mL formulation Region where product is currently sold or is intended to be sold Also available as a Named Patient Product 35 allergytherapeutics.com Strategic Report Principal Risks and Uncertainties The Board has overall responsibility for the Group’s system of risk management. In common with many pharmaceutical companies the Group faces a number of risks and uncertainties. Internal controls are in place to help identify, manage and mitigate these risks. The main risks have been identified as follows: Commercial successful products risk Continued development of viable new products and their successful registration and marketing is key to the success of the Group and is a costly and lengthy process. Rationale for new product development may indicate potential; however, following significant investment there is no guarantee that a product will be commercially successful. In order to mitigate this risk, the Group is developing and commercialising Pollinex Grass in the US, seeking the PEI market authorisation for Pollinex Quattro Grass in Germany and continuing to increase market share across Europe as well as developing new markets to spread risk. Production risk A significant majority of the Group’s products are manufactured on the Worthing site which is shared with GSK. Any disruption to production caused by internal or external factors could materially affect the business. The site is also leased from GSK and therefore there is a mid-term risk that the lease is terminated. Further, any failure in production could lead to a product recall. In order to minimise these risks, regular maintenance and upgrade of the facility is undertaken. The Group has a recovery plan in place. In respect of the lease, the Group is currently negotiating a longer termination notice period and has a contingency plan in place. The Group also has an IT disaster recovery plan. Product liability risk Despite extensive product testing prior to market launch, products may produce unanticipated adverse side effects that may hinder their marketability. The Group may be insufficiently covered for any potential litigation which in some 36 Risk Management cases can potentially be open- ended. The Group’s manufacturing facilities and those of some of its suppliers are subject to regulatory requirements and there is a risk that such facilities may not comply with such requirements. The Group maintains product liability insurance and ensures systems and processes relating to the manufacture of its products are compliant and regularly reviewed. It has a pharmacovigilance team in place to monitor and address any safety issues arising. Intellectual property risk Group patents may be challenged at any time and any unsuccessful defence may cause the Group to lose protection for its products and subsequently affect further development and sales. The Group is reliant on some intellectual property owned by external stakeholders that, if lost, could hinder the commercialisation of some of its products. The Group has internal and external patent experts. Internal controls are in place to avoid disclosure of patentable material and to protect existing patents. Arrangements are also in place to notify the Group of any infringements of our intellectual property which it would defend robustly. Economic risks A high level of risk is attached to the research, development and commercialisation of innovative drugs. The Group ensures that business cases are scrutinised before Board approval and that any increases in costs are justified. Competitors may reduce prices or increase sales investment making maintaining market share less profitable. Key suppliers may be unable to execute contractual requirements that hamper product development and/or the route to markets, but the Group maintains appropriate measures to protect its supply chains. The Group may be unable to attract partners or licensees on favourable terms or recruit the right staff to help develop and market its products. Approximately 59% (2016: 59%) of Group sales are made in Germany and therefore Group results are particularly sensitive to German legislation and government policies and performance of the German market. To mitigate this risk, the Group continues to expand its revenue outside Germany. The Group also continues to develop new products and increase clinical data to protect its market position. Pharmaceutical products are subject to far greater controls on price in certain markets than other products in the marketplace. Some governments intervene directly in setting price levels and rebates paid into public sick funds, especially with an increasing aged population in developed countries. The Group cannot accurately predict when, where and how such controls and restrictions may be altered, either to its benefit or detriment, but it does conduct regular reviews of pricing and reimbursement levels and assessments of healthcare reforms on pricing. European Union Referendum risks The referendum in the UK to leave the EU could pose a significant risk for the Group. In the short term the referendum outcome has and may continue to impact exchange rates and investor confidence. The medium term risk impact is not clear given the uncertain nature of the future arrangements between the UK and the rest of the EU. Significant potential areas of risk are regulatory, fiscal and financial. The Group mitigation in relation to currencies is noted under Financial Risks. In relation to other aspects of this risk, the Group has considered at a high level the potential effects. The Group does have in place a high-level contingency plan but will only carry out detailed evaluation and planning once future arrangements between the UK and the EU become clearer. Financial risks Adequate funding may not be available to the Group, either through reserves or external partners for the advancement of clinical trials, manufacturing and marketing. Failure to obtain further funding may lead to postponement or cancellation of programmes. The Board actively reviews the financial requirements of the Group on a regular basis in order to ensure that adequate funding is available. A majority of the Group’s sales are denominated in euros whilst nearly all the manufacturing and most corporate administration costs are in the UK and therefore the Group is exposed to volatility 37 allergytherapeutics.com Strategic Report | Risk Management Internal controls The internal control system is designed to manage rather than eliminate risk, but it can only provide reasonable and not absolute assurance against material misstatement or loss. Internal controls are designed for the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, regulation and best practice and the identification and management of business risk. The Group has an internal audit function, reporting directly to the Audit Committee, which carries out periodic reviews of the Group’s subsidiaries. The Group also has a budgeting and reporting system in place, with results compared to annual budgets and half-yearly forecasts using variance analysis. The Strategic Report, as set out on pages 1 to 41 has been approved by the Board. On behalf of the Board Nicolas Wykeman Director 27 September 2017 in exchange rate fluctuations. The Group monitors exchange rates regularly and implements hedges to mitigate such risks. Note 24 in the Notes to the Financial Statements gives details of the Group’s objectives and policies for risk management of financial instruments. Clinical and regulatory risk The Group operates in a highly regulated environment for the testing, manufacture and supply of its products. Compliance with clinical and regulatory requirements within the EU affects not only the cost of product development and resource use, but also the time required to comply. Increased regulation may require products to be amended to comply with regulations and/or products have to be withdrawn, reducing revenues and/or increasing costs. Regulatory authorities such as the FDA and PEI are increasingly focussed on the benefit/risk of pharmaceutical products and safety data making it more onerous to obtain regulatory approval. Compliance systems are in place to ensure all clinical, manufacturing and marketing activities comply with regulations in the EU and other territories. Standard operating procedures are maintained to ensure compliance with good manufacturing practice. The Group strictly monitors new industry regulations and engages with key regulatory authorities to inform the Group’s strategic direction and identify factors likely to affect the future development, performance and position of the Group’s business. The Group maintains good relations with the small number of specialised suppliers for its raw materials for its products. 38 Financial Review Financial Review The following section should be read in conjunction with the financial statements and related Notes on pages 59 to 114. Overview The results for the twelve months to 30 June 2017 demonstrate continuing growing profitability of the core business before R&D expense, with an operating profit excluding R&D of £7.4 million (2016: £4.3 million). Including R&D expense of £9.3 million (2016: £16.2 million), the Group reported an operating loss of £1.9 million (2016: loss £12.0 million). The operating loss includes a non-cash credit of £0.8 million (2016: charge of £2.0 million) in relation to the fair valuation of forward exchange contracts. The reduction in research and development activity was due to the timing of trials related to the US programme and the European Birch Dosing Study. The net loss after tax for the period was £2.5 million (2016: loss of £13.1 million). 2017 Germany £m 37.8 5.8 43.6 2017 Other £m 26.3 – 26.3 2017 Total £m 64.1 5.8 69.9 2016 Germany £m 28.5 3.9 32.4 2016 Other £m 20.0 – 20.0 2016 Total £m 48.5 3.9 52.4 (6.3) (3.1) (9.4) Revenue Add rebates Gross revenue Adjustment to retranslate at prior year foreign exchange rate Gross revenue at constant currency* 37.3 23.2 60.5 32.4 20.0 52.4 2017 Germany £m 2017 Other £m 2017 Total £m 2016 Germany £m Revenue 37.8 26.3 64.1 28.5 2016 Other £m 20.0 2016 Total £m 48.5 Adjustment to retranslate at prior year foreign exchange rate Revenue at constant (5.5) (3.1) (8.6) currency* 32.3 23.2 55.5 28.5 20.0 48.5 * Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. 39 allergytherapeutics.com Strategic Report | Financial Review Revenue Helped by a stronger weighted average euro exchange rate against sterling during the year compared to the prior year, revenue increased by 32% to £64.1 million (2016: £48.5 million). The weighted average euro exchange rate in the year was €1.16 to £1 compared to €1.36 in the previous year; the impact of the stronger euro on revenue was £8.6 million. Although the vaccine markets in Europe did not grow significantly, revenue at constant currency* was 14.5% higher at £55.545 million (2016: £48.509 million) as shown in the table on the previous page. Revenue from Germany was 59% (2016: 59%) of total reported revenue although the Group continues to develop new and existing markets to reduce reliance on the German market. The key flagship product Pollinex Quattro, which accounts for 44% of total sales (2016: 45%), grew strongly in the year at a double digit constant currency growth rate. In addition to the sale of allergy vaccines, the Group has continued to look to increase its revenue from other products, including synbiotics. Total sales from other products contributed £4.4 million for the year ended 30 June 2017 (2016: £3.6 million). Revenue in Germany grew well in the year with revenue at constant currency increasing to £32.3 million (2016: £28.5 million); an increase of 13%. All the main European markets (except for Italy) exhibited double digit sales growth at constant currency with Spain showing 13%; The Netherlands 29%; Austria 27% and Germany 13%. Gross Profit With the increased sales, cost of sales rose to £16.8 million (2016: £14.1 million). The gross margin was 74% (2016: 71%), leading to a gross profit of £47.4 million (2016: £34.4 million). Operating Expenses Total overheads are £3.5 million higher against the prior year at £50.0 million (2016: £46.5 million). Within this total is a reduction in R&D expenditure which fell by £6.9 million to £9.3 million (2016: £16.2 million) due to the reduced clinical study activity during the year. Sales, marketing and distribution costs which were mainly continental European increased by £6.7 million to £26.9 million (2016: £20.2 million). About half of the increase was due to the strong euro against sterling while the Group also continued to invest in improving its marketing and sales infrastructure. Administration expenses increased by £3.7 million to £13.8 million (2016: £10.1 million) with the major driver behind this increase being foreign exchange. In the previous year the Group booked a non-cash gain of £2.4m on its US dollar cash deposits due to the weakening pound. In the current year, the Group held minimal US currency holdings. The remainder of the increase was mostly due to the weakening of sterling against the euro. Other income in the year of £0.7 million (2016: £0.1 million) was all due to R&D tax credits in the UK. Tax The current year tax charge is predominately made up of provisions for tax in the Italian and German subsidiaries (as in the previous year). Balance Sheet Property, plant and equipment were in line with last year at £9.7 million with the depreciation charge for the period equalling new investment in new manufacturing plant and office refurbishment. Goodwill increased to £3.4 million due solely to the stronger euro exchange rate at the balance sheet date (2016: £3.3 million), whilst other intangible assets have not changed, with an increase due to foreign exchange changes offsetting the amortisation charge for the year. Total current assets, excluding cash, have increased by £1.1 million to £15.3 million (2016: £14.2 million). Inventory deceased by £0.2 million as the Group carefully managed its production planning. Trade debtors have decreased (mainly in UK and Italy) reflecting the Group’s management of debtors despite increased sales. Cash and cash at hand decreased to £22.1 million from £23.4 million in 2016. The fair value of derivative financial instruments was a liability of £0.4m in 2017 (2016: £1.2 million). Retirement benefit obligations, which relate solely to the German pension scheme, decreased to £9.6 million (2016: £10.2 million). The decrease in the liability was mainly driven by an increase in the discount rate. * Percentage based on figures in thousands (2017: £55.545m, 2016: £48.509m) 40 Financial Review The Group achieved a net cash surplus of £0.2 million in the year (2016: £11.8 million cash used) primarily due to the increased sales and reduction in spend in the year on the R&D programme. Currency The Group uses forward exchange contracts to mitigate exposure to the effects of exchange rates. The current policy of the Group is to cover, on average, about 70% of the net euro exposure for a year on a declining basis. Financing The Group’s debt on its balance sheet relates to activities in Spain and consists of the loans acquired as a result of the Alerpharma acquisition (£1.7 million) and further loans (£1.7 million) arranged to fund development of products in the Spanish market. The overdraft facility was unused at 30 June 2017 but has been renewed for a further 12 months to cover seasonal funding requirements. The Directors believe that the Group will have adequate facilities for the foreseeable future and accordingly they continue to adopt the going concern basis in preparing the full year results. Legal On 23 February 2015, the Company received notification that The Federal Office for Economics and Export (“BAFA”) had made a decision to reverse their preliminary exemption to the increased manufacturers rebate in Germany for the period July to December 2012. The Company was granted a preliminary exemption to the increased rebate for this period by BAFA in 2013. The Company recognised revenue of €1.4 million (£1.1 million at that time) against this exemption in the year ended 30 June 2013. All other preliminary exemptions (granted for periods up to 30 June 2012) have previously been ratified as final by BAFA. After taking legal advice, the Company has lodged an appeal against this decision and is confident that the exemption will be re-instated. Therefore, as at 30 June 2017, no provision has been recognised for the repayment of the rebate refund of €1.4 million (£1.2 million). This position will be kept under review. The Group is in discussion with one of its suppliers and their lawyers over potential cost overruns on one of its clinical trials which may lead to additional expense for the Group. Nicolas Wykeman Finance Director 27 September 2017 41 allergytherapeutics.com Governance Board of Directors Peter Jensen Chairman Manuel Llobet Chief Executive Officer Nick Wykeman Finance Director Peter is responsible for the leadership of the Board, ensuring its effectiveness and setting its agenda. Peter held a number of senior positions in his 21 years with SmithKline-Beecham, including Chairman of Consumer Healthcare and President of Worldwide Supply Operations. Manuel has been CEO of Allergy Therapeutics plc since 2009, shaping strategy and driving growth. Prior to this, Manuel was the Principal Consultant for Biohealth LLC and CEO of International Operations of the Weinstein family’s group of companies. Nick joined Allergy Therapeutics plc in 2016 as Finance Director. He leads the finance function developing and implementing financial strategy. Nick is a Chartered Accountant and previously held positions at Skyepharma PLC (now part of Vectura Group plc) and Quest International (a division of ICI PLC) External Appointments None External Appointments None He has previously held Non- executive or Chairman roles at a number of public and private companies including Domino Printing Sciences plc, Glenmorangie plc and Genetix Group plc. External Appointments Chairman of Sandown Park Racecourse Screendragon (Software) Limited Home of Horseracing Trust Limited British Sporting Art Trust Trustee of National Horseracing Museum A N* 42 Board of Directors Key to Committees A N R * Audit Committee Nomination Committee Remuneration Committee Denotes Chairman of a Committee Stephen Smith Non-Executive Director & Senior Independent Director Stephen is a Chartered Management Accountant, Fellow of the Association of Corporate Treasurers and member of the Institute for Turnaround. During his career he held a number of financial roles in UK listed companies. He formed Icknield in 1995 and has since taken on a number of board, advisory or executive roles during stabilisation and restructuring phases of turnaround projects. External Appointments Roles include Chairman of Tensator Holdings Limited, Rio Laranjan Holdings Limited and Icknield Limited. A* N R* Tunde Otulana Non-Executive Director Jeffery Barton Non-Executive Director Tunde is Senior Vice President and Chief Medical Officer at Mallinckrodt Pharmaceuticals where he has responsibility for all global medical functions. His career includes leadership roles at Boehringer Ingelheim Pharmaceutical Inc. and the US Food and Drug Administration (FDA). Jeff is currently Vice President, Licencing and Acquisitions at Abbott Laboratories and is their nominated Director on the Board. During his career at Abbott, Jeff has held a variety of financial management positions, including in Diagnostics, Nutrition and Pharmaceuticals. External Appointments None External Appointments None N R N 43 allergytherapeutics.com Governance Corporate Governance Board & committees The Board The Board is collectively responsible for the long term success of the Company and for its leadership, strategy, values, standards, control and management. Day to day management of the Group is delegated to the Executive Directors, subject to formal delegated authority limits; however, certain matters are reserved for Board approval. These matters are reviewed periodically and include Board and Committee composition, strategy, funding decisions and corporate transactions outside the normal course of business among others. As an AIM listed Company, the Group does not comply with the UK Corporate Governance Code (the “Code”), however, the Group does follow best practice guidance, such as the QCA guidelines, and report on compliance with aspects of the Code as far as is reasonable. Directors at Year End Peter Jensen Chairman Stephen Smith Non-Executive Director, Senior Independent Director Independent Independent Date of Appointment: October 2010 September 2004 Thomas Lander**** Non-Executive Independent April 2012 8/9*** Jeff Barton* Tunde Otulana** Director Non-Executive Director Non-Executive Director Not independent February 2017 Independent June 2017 Manuel Llobet Chief Executive Officer Not independent Nick Wykeman Finance Director Not independent July 2009 June 2016 4/5 2/2 9/9 9/9 * Appointed 7 February 2017 ** Appointed 6 June 2017 *** Non-attendance at Board meeting due to personal reasons **** Retired 30 June 2017 Attendance at Board meetings Attendance at Audit Committee Attendance at Remuneration Committee Attendance at Nomination Committee 9/9 9/9 3/3 3/3 5/5 5/5 2/2 2/2 1/1 Board Composition The Board comprises the Chairman, two Executive Directors and three Non-Executive Directors. Board Independence The UK Corporate Governance Code requires at least half the Board to comprise independent Non-Executive Directors and the Board considers Peter Jensen, Stephen Smith and Tunde Otulana to be independent. 44 Roles of Board Members Position Chairman Name Peter Jensen Chief Executive Officer Manuel Llobet Finance Director Nick Wykeman Non-Executive Directors Stephen Smith; Jeff Barton; Tunde Otulana Responsibilities Leads the Board, ensures its effectiveness and sets its agenda. Ensures an effective link between shareholders and the Board Develops the Company’s strategy, implements policies and strategies agreed by the Board and manages the business. Responsible for developing and implementing financial strategy for the Group. Constructively challenge the Executive Directors and monitor the delivery of the agreed corporate strategy and objectives. All Directors have access to the Company Secretary: Company Secretary Sara Goldsbrough Ensures a good flow of information within the Board and its Committees and between Senior Management and Board. Provides advice on Corporate Governance matters. The Board Meetings There were nine Board meetings held during the year. The annual calendar includes a budget meeting at which the Executive team from all areas of the business present their business unit updates and their proposed budget for the forthcoming financial year. The budget meetings are also an opportunity for the Board to spend some time with members of senior management in a less formal environment. The Chairman maintains regular contact with the Non-Executive Directors and the CEO outside of meetings. Board Papers Board papers are circulated by email at least three clear business days in advance of any meeting to ensure that Directors have sufficient time to read the papers and consider their content prior to the meeting. Matters Considered by the Board At each meeting, the Board receives business updates from the CEO, financial performance updates from the Finance Director, the Committee Chairmen update the Board on any Committee matters and there is a Health & Safety update. R&D investment is regularly considered and clinical study budget variances are also brought to the attention of the Board. New business opportunities and any other key investment decisions are proposed by the CEO as they arise. Often, such matters are complex and evolve over a period of time. Other periodic matters considered by the Board include: Annual and half year results; Annual budget; Principal Risks; AGM resolutions; and LTIP awards. Market, broker updates and changes to the shareholder register are circulated to the Board outside of the meetings. 45 allergytherapeutics.comCorporate Governance Governance | Corporate Governance Board Committees The Board has established Audit, Remuneration and Nomination Committees to enable the Board to operate effectively and ensure a good governance framework for decision making. Each Committee has written terms of reference. Minutes of all Committee Meetings are made available to all Directors. The Board Collectively responsible for the long-term success of the Company, management of strategy, leadership and risk Audit committee – Oversees financial reporting – Monitors internal controls – Monitors internal and external auditors Remuneration committee – Determines the Executive Directors and senior managers salaries and bonuses – Recommends to the Board LTIP distribution and scope of the Plan – Monitors remuneration trends throughout the Group – Determines the Chairman’s remuneration Nomination committee – Recommends Board Appointments – Board & Executive Succession Planning – Reviews mix of skills and experience on the Board Committee Membership Audit Committee Stephen Smith (Chairman) Peter Jensen Invited to meetings: Nick Wykeman External Auditors Group Financial Controller Remuneration Committee Stephen Smith (Chairman) Tunde Otulana Nomination Committee Peter Jensen (Chairman) Jeff Barton Stephen Smith Annual General Meeting The AGM allows the Board to update the shareholders on the Company’s progress and provides an opportunity for shareholders to pose questions to Directors. Shareholders are encouraged to vote on the resolutions put to the meeting, either in person or by submitting a proxy card. The results of the votes are published on our website after the meeting. The 2017 AGM will be held on 22 November 2017. The notice of meeting will be issued to shareholders at least 20 days before the meeting. Directors who have been appointed since the last AGM will be proposed to shareholders for election at the 2017 AGM. In accordance with the Company’s Articles, at least one third of the Board will retire from office and offer themselves for re-election by shareholders on a rotational basis. 46 Directors’ Remuneration Report Directors’ Remuneration Report Unaudited information The Remuneration Committee The Committee’s key objectives are to ensure that Allergy Therapeutics’ executive team is appropriately motivated by remuneration arrangements that are aligned with the interests of long term shareholders. The Committee determines and agrees the overall Remuneration Policy, including appropriate salary levels for each Executive Director; the composition of remuneration packages, performance periods, measures and targets for variable remuneration components and any clawback arrangements. In addition, the Committee also agrees or recommends to the Board various compensation matters, including any share-related compensation, for executive management. During the financial year, the Remuneration Committee comprised Stephen Smith (Chairman) and Thomas Lander. The Terms of Reference of the Committee clearly sets out the Committee’s duties and responsibilities. The number of meetings held during the year and attendance at those meetings is set out in the table on page 44. The Committee is able to seek external advice when required. During the year, the Committee took advice from H2Glenfern Ltd on various matters including the 2013 Long Term Incentive arrangements. During the year, the Company was charged a total of £10,200 by H2GlenFern Ltd in respect of advice to the Committee. Remuneration policy The Committee ensures that the remuneration policy is linked to the delivery of the Group’s business objectives and strategy; packages are designed to motivate and retain existing executives, recruit new high-quality executives and encourage executives to acquire and retain Allergy Therapeutics shareholdings. Elements of Remuneration: Purpose & link to strategy Operation Performance Metric Base Salary To provide an appropriately competitive base salary. Basic salary is reviewed annually, with reference to: – each Executive Directors performance and contribution during the year; The Committee considers individual and Company performance when setting base salary, as well as the general increase to other employees. Benefits Pension To be appropriately competitive with those offered at comparator companies. To be appropriately competitive with those offered at comparator companies. – the scope of the Executive Directors responsibilities; – other similar companies Benefits are in line with those offered to other senior management employees and may include private healthcare, life insurance, travel insurance and a car allowance. The UK Company operates a defined-contribution personal pension scheme and currently makes pension contributions in respect of all Executive Directors. n/a n/a 47 allergytherapeutics.com Governance | Directors’ Remuneration Report Purpose & link to strategy Operation Performance Metric Annual Bonus To incentivise and reward performance. Performance measures and targets are set each year to reinforce the strategic business priorities for the year. Long Term Incentive Plan To incentivise and reward long- term outperformance, and help retain Executive Directors over the longer term. The annual bonus arrangements are reviewed annually and agreed by the Committee at the start of the financial year. Executive’s performance is measured relative to challenging one-year financial targets and other performance objectives. The maximum bonus opportunity for Manuel Llobet is 60% of annual salary and is 30% for Nick Wykeman. Executive Directors are eligible to receive awards of shares under the 2013 Long Term Incentive Plan, at the discretion of the Committee. In assessing the outcome of the performance conditions, the Committee satisfies itself that the figures are a genuine reflection of financial performance. LTIPs awarded since 2016 are subject to malus and clawback provisions 2013 LTIP awards vest after a performance period of approximately three years. Since 2016, 50% of the Executive Directors award is subject to a three-year post vesting holding period. The vesting of the award is subject to continued employment and the Company’s performance over a three-year performance period based: – 50% on compounded annual growth rate in profit before depreciation, amortisation and R&D spend – 50% on compounded share price growth The performance measures and weighting are reviewed by the Committee annually and the Committee has the discretion to make changes to the measures or weightings for future awards to ensure that they remain relevant to the Company strategy and are suitably stretching. Director Service Contracts Executive Directors Manuel Llobet Nicolas Wykeman Non-Executive Directors Peter Jensen Jeff Barton Tunde Otulana Stephen Smith 48 Date of contract Notice period 11 June 2009 9 June 2016 1 October 2010 7 February 2017 6 June 2017 5 October 2004 12 months 6 months 6 months 3 months 3 months 3 months Directors’ Remuneration Report Directors’ remuneration (audited information) Details of remuneration of those who served as Directors during the financial year are set out below. Manuel Llobet Nicolas Wykeman Peter Jensen Thomas Lander Stephen Smith1 Jean-Yves Pavée2,3 Jeff Barton2,4 Tunde Otulana5 Ian Postlethwaite7 Totals Basic Salary £ 273,156 140,000 75,000 38,000 14,800 – – 2,923 – Bonus for the year £ 40,000 30,000 Taxable benefits £ 10,200 9,959 – – – – – – – – – – – – – – Fees £ Total £ Pension6 £ Total £ Pension6 £ Year ended 30 June 2016 – – – – 27,700 21,972 15,695 – – 323,356 41,074 368,084 39,878 179,959 14,000 75,000 38,000 42,500 21,972 15,695 2,923 – – – – – – – – – 75,000 38,000 42,500 37,667 – – – – – – – – – 203,722 16,213 543,879 70,000 20,159 65,367 699,405 55,074 764,973 56,091 1 Stephen Smith’s fee payments are split between SRS Business Enterprises Limited and himself. 2 Fees payable to Abbott Laboratories. Jean-Yves Pavée retired as a Director on 7 February 2017 3 4 Jeff Barton was appointed as a Director on 7 February 2017 5 Tunde Otulana was appointed as a Director on 6 June 2017 6 Pension contributions are in respect of a defined contribution scheme 7 Ian Postlethwaite resigned as a Director on 10 June 2016 LTIPs and share options for Directors who held office during the financial year Manuel Llobet Nick Wykeman Total * These share options were converted from vested LTIP’s Options/ LTIPS held 1 July 2016 LTIPS awarded in the year Share Options/ LTIPs lapsed in the year Share Options/ LTIPS held at 30 June 2017 1,690,000 1,690,000 (845,000) 2,535,000 Subscription price in £ Exercise Date from Expiry date *624,024 *905,000 *624,024 *905,000 0.001 25-Nov-15 25-Nov-18 0.001 10-Mar-16 10-Mar-18 – 422,500 – 422,500 3,219,024 2,112,500 (845,000) 4,486,524 49 allergytherapeutics.com Governance | Directors’ Remuneration Report LTIP in 2016/17 LTIP grants made to Manuel Llobet in May 2013 lapsed in full during the year as the performance conditions were not met. An LTIP grant was made in December 2016 to Manuel Llobet and Nick Wykeman of 1,690,000 and 422,500 awards respectively. These awards are subject to performance conditions laid out in the policy table on page 48. The award to Manuel Llobet was at twice his normal annual award level because no LTIP award was made in the financial year 2015/16. At 30 June 2017, the London Stock Exchange mid-market value of shares was 25.6 pence per share. The range of mid-market values during the period from 1 July 2016 to 30 June 2017 was 17.5 pence to 30.3 pence per share. The Directors that held office during the financial year had the following interests in the ordinary shares of the Company: At beginning of year: At end of year: Ordinary Shares Options & LTIPs Ordinary Shares Options & LTIPs 3,175,000 3,219,024 3,275,000 4,064,024 – 120,000 – – 776,513 – – – – – – – – – 150,000 422,500 150,000 – – 776,513 – – – – – – – – Name Manuel Llobet1 Nicolas Wykeman Peter Jensen Thomas Lander Jean-Yves Pavée Stephen Smith Jeff Barton Tunde Otulana 1 Includes shares held by Wild Indigo Stephen Smith Chairman, Remuneration Committee 27 September 2017 50 Nominations Committee Report Nominations Committee Report The Nomination Committee has responsibility for making recommendations on Board appointments and succession to the Board. The members of the Committee as at 30 June 2017, comprised Peter Jensen (Chairman), Jeff Barton and Stephen Smith. The Nomination Committee met twice during the year and attendance at these meetings is shown in the table on page 44. Board Composition and Succession Planning During the year, the Committee considered Board composition and succession planning for both Executive and Non-Executive Directors and also the Executive Management Team. Following a review of Executive succession planning, the Group recruited two senior managers in Germany and, as noted in the CEO Report, has also strengthened the R&D function during the year. When considering Non-executive Director succession planning, the Committee ensures that the Board and its Committees continue to have the right mix of skills and experience to be able to deliver the Group’s strategy. Director Recruitment Following a review of the skills, experience and knowledge of Board members during the year, the Committee agreed to seek a new Non-executive Director with specific knowledge of the US Regulatory market, which would benefit the Board as the Company embarked on its planned US program. Separately, Thomas Lander indicated that he wished to retire from the Board which would have led to a skills gap in R&D and clinical knowledge. Executive search agency, Director Bank, was engaged to assist with a search to identify appropriate candidates who were US based and had relevant regulatory and clinical experience. To ensure that the list of candidates reflected diversity of both gender and skills, a broad brief was provided to Director Bank. Following an interview process led by the Chairman and Chief Executive, it was recommended to the Committee that Tunde Otulana be appointed as a Non-Executive Director of the Company. The Committee made a formal recommendation of the appointment to the Board. Director Induction An induction programme is provided for any new Director, which is tailored depending on the Director’s experience and expected role on the Board. Tunde’s induction program included individual meetings with the Chairman, Executive Directors, Company Secretary and members of senior management, a site visit to the Worthing site, and an introduction to the Company’s advisers and lawyers. Tunde was also provided with copies of past Board and Committee papers and minutes, and individual briefings were arranged on topics such as Directors’ duties and responsibilities and the R&D Pipeline. Peter Jensen Chairman, Nominations Committee 27 September 2017 51 allergytherapeutics.com Governance Audit Committee Report The Committee plays a key role for the Board, overseeing the financial reporting process, monitoring the effectiveness of internal control, internal audit and the external audit and also monitors the independence of the external auditors and the provision of non-audit services. As at 30 June 2017, the Committee comprises two independent Non-Executive Directors and is chaired by Stephen Smith who is considered to have significant, recent and relevant financial experience. The Committee’s meetings were also attended by invitation by the Company’s Finance Director, Company Secretary, Group Financial Controller and Financial Reporting Manager together with senior representatives of the external auditor. The Committee met twice during the year. Attendance at these meetings is shown in the table on page 44. The Committee also met privately during the year with the external auditors. External Auditors The Committee oversees the relationship with Grant Thornton LLP, the external auditors, and is responsible for developing and monitoring the Company’s policy on external audit and for monitoring the auditor’s independence. The external auditors have direct access to the Audit Committee Chairman should they wish to raise any concerns outside of formal Committee meetings. The Committee monitored Grant Thornton’s effectiveness during the year and considered the views of management that Grant Thornton were providing a good-quality audit service. The Committee is satisfied that the external auditors remain independent and objective and that the Group is receiving a robust audit and has therefore recommended to the Board that Grant Thornton be reappointed in 2017. Non-Audit Services Non-audit services are normally limited to assignments that are closely related to the annual audit or where the work is of such a nature that a detailed understanding of the Group is necessary. The Company has adopted a policy to ensure that the provision of non-audit services by the external auditor does not compromise its independence or objectivity. The policy requires the Audit Committee to pre-approve any non-audit work with a cost exceeding £10,000. Approval is only given following a thorough assessment of the case. The total fees charged by Grant Thornton in the year are shown on page 85. 52 Audit Committee Report Internal Audit During the year, the internal audit plan included reviews of financial controls in Germany, Spain and Italy. Next year, it is expected that the audit plan will include UK, Germany, Italy and Spain. The Committee reviews the timetable and work of the internal audit programme, any matters identified as a result of internal audits and whether recommendations are addressed by management in a timely and appropriate way. Internal Controls The Audit Committee monitors and reviews the effectiveness of the Group’s internal controls and reports to the Board on its work and conclusions. In reviewing the effectiveness of the Group’s internal controls, the Committee considers reports from the internal audit team and the auditors as part of their auditing process. No significant failings or weaknesses have been identified in the review process during the year. Details of the Group’s internal controls are set out below: – Schedule of matters reserved for the Board – Terms of Reference for Board Committees – Schedule of Delegated Authorities – Documentation of significant transactions – Whistle blowing procedure under which staff may raise matters of concern confidentially. Controls relating to financial reporting: – Appropriately qualified management structure, with clear lines of responsibility – A comprehensive budget review and approval process – Board and Audit Committee updates from the Finance Director which include forecasts and performance against budget – Regular internal audit of the financial control procedures Stephen Smith Chairman of Audit Committee 27 September 2017 53 allergytherapeutics.com Governance Report of the Directors The Directors present their Annual Report and the audited financial statements for the 12 months ended 30 June 2017. The financial statements are for Allergy Therapeutics plc (the “Company”) and its subsidiary companies (together, the “Group”). The Strategic Report The Group’s 2017 Strategic Report, which includes a review of the Group’s business during the financial year, the Group’s position at year end and a description of the principal risks and uncertainties facing the Group, comprises the following sections of the Annual Report: Non-Executive Directors Jeff Barton (appointed 7 February 2017) Thomas Lander (retired 30 June 2017) Tunde Otulana (appointed 6 June 2017) Jean-Yves Pavée (retired 7 February 2017) Stephen Smith Chairman’s Statement Chief Executive’s Review Business Model & Strategy Key Performance Indicators Product Review Principal Risks and Uncertainties Financial Review Page 6 8 16 26 28 36 39 Directors The Directors of the Company who held office during the year and up to the date of signing the financial statements were as follows: Chairman Peter Jensen Executive Directors Manuel Llobet Nick Wykeman 54 Biographies of each Director can be found on pages 42 and 43 and details of each Director’s interests in the Company’s shares are set out on page 50. The powers of the Directors are determined by UK legislation and the Company’s Articles of Association together with any specific authorities that shareholders may approve from time to time. The rules governing the appointment and replacement of Directors are contained in the Company’s Articles of Association and UK legislation. Compensation for loss of office The Company does not have any agreements with any Executive Director or employee that would provide compensation for loss of office or employment resulting from a takeover except that provisions of the Company’s shares scheme may cause share options and awards to vest on a takeover. Directors’ indemnities and insurance In accordance with the Company’s Articles, the Company had indemnified the Directors to the full extent allowed by law. The Company maintains Directors’ and Officers’ liability insurance which is reviewed annually. Report of the Directors Dividend The loss for the year after taxation was £2.5 million (2016: £13.1 million). The results for the year are set out on page 66 and are described in more detail in the Financial Review. Due to the current research and development investment strategy, the Company has negative distributable reserves and is unable to declare a dividend (2016: nil). Further details of the Group’s research and development strategy can be found on pages 32 to 35. Capital structure Details of the Company’s issued share capital, including details of movements during the year, authorities to issue or repurchase shares and details of shares repurchased by the Company during the year, of which there were none, are shown in note 27 to the financial statements on page 104. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the transfer of shares beyond those standard provisions set out in the Articles of Association. No shareholder holds shares carrying special rights with regard to control of the Company. Substantial shareholdings The significant holdings of voting rights in the share capital of the Company notified and disclosed in accordance with Disclosure and Transparency Rule 5, as at 27 September 2017 are shown in the table below: Shareholder CFR International SPA & Associated Holding* Southern Fox Investments Odey Asset Management Invesco Perpetual Asset Management Blackrock Investment Management * 100% owned subsidiary of Abbott Laboratories. Number of Ordinary shares % of voting rights and issued share capital 240,584,571 127,283,783 43,747,523 34,110,209 30,368,413 40.49 21.42 7.36 5.74 5.11 Use of financial instruments Information on risk management objectives and policies, including hedging policies, and exposure of the Company in relation to the use of financial instruments, can be found in note 24 on pages 97 to 100. Employees The Group employed 506 people at the year-end and is committed to achieving equality of opportunity in all employment practices. A thorough review of all employees is performed annually to identify and promote areas that require development and growth; feedback is encouraged and sought. Staff are motivated by performance related incentives, which help to attract and retain the right people, and are encouraged to achieve business targets through market-rate pay, discretionary performance based bonuses and long term incentive programmes, details of the Long Term Incentive Plan can be found on page 104. The Board is committed to retaining staff and implementing well balanced, challenging incentives makes this possible. The Company encourages the continuous development and training of its employees and the provision of equal opportunities for the training and career development of all employees. The Group places considerable value on the involvement of its employees and has continued to keep them informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through formal and informal meetings and email updates. Family friendly employment policies conform to statutory requirements and flexible working practices are adopted where viable. The Company operates a non-discriminatory employment policy and full and fair consideration is given to applications for employment made by disabled applicants, having regard to their particular aptitudes and abilities, and the continued employment of staff who become disabled. 55 allergytherapeutics.com Governance | Report of the Directors Going concern The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 1 to 41. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are also described in the Finance Director’s Financial Review on pages 39 to 41. In addition, Note 24 to the financial statements includes the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to foreign currency risk, interest rate risk and liquidity risk. After making appropriate enquiries, which included a review of the annual budget, considering the cash flow requirements for the foreseeable future, noting the renewed overdraft facility, and the effects of sales and foreign exchange sensitivities on the Group’s funding plans, the Directors continue to believe that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance. Strategic report The strategic report on pages 1 to 41 contains information on future developments and post balance sheet events. Statement of Directors’ responsibilities The Directors are responsible for preparing the Strategic Report and 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 in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws) including FRS101 “Reduced Disclosure Framework”. 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: – select suitable accounting policies and then apply them consistently; – make judgments and accounting estimates that are reasonable and prudent; – state whether applicable IFRSs and UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; – 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. 56 Report of the Directors The Directors confirm that in so far as each Director is aware: – there is no relevant audit information of which the Group’s auditors are unaware; and – the Directors have taken all the steps that they ought to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the auditor are aware of that information. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Disclosure to auditors So far as the Directors are aware, there is no relevant audit information of which the Group’s auditors are unaware and each Director has taken all steps that he or she ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the auditors are aware of that information. Independent auditors The Group’s auditors, Grant Thornton LLP, have indicated their willingness to continue in office and a resolution seeking to re-appoint them will be proposed at the forthcoming Annual General Meeting. Annual general meeting The 2017 Annual General Meeting of the Company will be held from 11:00 am on 22 November 2017 at the offices of Covington LLP in London. The Notice of the Meeting, together with an explanation of the business to be dealt with at the Meeting, is included as a separate document and is also available on our website. By order of the Board Sara Goldsbrough Company Secretary 27 September 2017 57 allergytherapeutics.com Financial Statements Financial Statements 59 Independent Auditor’s Report to the Members of Allergy Therapeutics plc 66 Consolidated Income Statement 67 Consolidated Statement of Comprehensive Income 68 Consolidated Balance Sheet 69 Consolidated Statement of Changes in Equity 70 Consolidated Cash Flow Statement 71 Notes to the Financial Statements 109 Company Balance Sheet 110 Statement of Changes in Equity (Company) 111 Notes to Company Balance Sheet 115 Shareholder Information 58 Financial Statements Financial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc Opinion Our opinion on the financial statements is unmodified We have audited the financial statements of Allergy Therapeutics Plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year ended 30 June 2017 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement, the Company Balance Sheet, and the Statement of Changes in Equity (Company), and Notes to the Financial Statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosures Framework (United Kingdom Generally Accepted Accounting Practice). In our opinion: – 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 30 June 2017 and of the Group’s loss for the year then ended; – the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; – the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Who we are reporting to 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. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: – the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or – the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Overview of our audit approach – Overall Group materiality: £640,000, which represents 1.0% of the Group’s revenues – Key audit matters were identified as revenue recognition, the defined benefit pension scheme and impairment of non-current assets – We performed full scope procedures at the Group’s operating locations in the United Kingdom and Germany. We performed targeted procedures over component locations in Italy, Spain, Switzerland and the Netherlands 59 allergytherapeutics.comFinancial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc continued Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter – Group Revenue recognition Revenue from the sale of the Group’s goods is recognised once certain criteria are met. The most critical element of these criteria is that revenue is recognised only when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, which is generally when the customer has physically received those goods. While determining the date of delivery to the customer and therefore the timing of revenue recognition requires little significant management judgement or estimate, due to the volume of transactions that occur during the year, we identified revenue recognition as a significant risk, which was one of the most significant assessed risks of material misstatement. How the matter was addressed in the audit – Group Our audit work included, but was not restricted to: – considering the appropriateness of the Group’s revenue recognition policy in light of the requirements of International Accounting Standard (IAS) 18 ‘Revenue’ and ensuring its consistent application; – selecting a sample of revenue transactions from across the Group and ascertaining the occurrence of each item through verification to source documentation pertaining to the validity of the sale and the date at which the risks and rewards of ownership transfer to the customer; – identifying sales recorded in the last three days of the financial year across the Group’s key trading jurisdictions and considering whether delivery of the goods to the customer had occurred; and – selecting a sample of year end receivables and verifying their existence by tracing their payment after the balance sheet date. The Group’s accounting policy on revenue recognition is set out in Note 2 “Accounting Policies” to the financial statements and related disclosures are shown in Notes 3 and 4. Key observations Our procedures, as set out above, did not identify any material misstatement in respect of revenue recognised by the Group during the year. 60 Financial Statements Key Audit Matter – Group How the matter was addressed in the audit – Group Defined benefit pension scheme The Group has a defined benefit pension scheme that provides benefits to a number of current and former German employees. At 30 June 2017 the defined benefit pension net deficit was £9.6m. The gross value of pension scheme liabilities and assets which form the net deficit amount to £11.0m and £1.4m respectively. Our audit work included, but was not restricted to: – utilising the expertise of our actuarial specialists in order to review the assumptions used, such as discount rate, price inflation, pension increase and mortality rates for reasonableness and methods employed in calculation of the obligation; – assessing the accuracy of the underlying data utilised The measurement of pension liabilities in accordance with IAS 19 “Employee Benefits” involves significant judgement and their valuation is subject to complex actuarial assumptions. Variations in those actuarial assumptions could lead to a materially different defined benefit pension scheme liability being recognised within the Group financial statements. We therefore identified the defined benefit pension scheme, including its valuation, as a significant risk, which was one of the most significant assessed risks of material misstatement. Impairment of non-current assets The directors are required to make an annual assessment to determine whether the Group’s goodwill which stands at £3.4m is impaired. In addition, other intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Other intangible assets at 30 June 2017 amount to £2.1m. The process for assessing whether impairment exists under IAS 36 “Impairment of assets” is complex. The process of determining the value in use, through forecasting cash flows related to cash generating units (CGUs) and the determination of the appropriate discount rate and other assumptions to be applied can be highly judgemental and can significantly impact the results of the impairment review. We therefore identified the impairment of non-current assets, being goodwill and other intangible assets, as a significant risk, which was one of the most significant assessed risks of material misstatement. by the actuaries; and – confirming the existence of pension scheme assets with third parties. The Group’s accounting policy on defined benefit pension schemes is shown within note 2 “Accounting Policies” to the financial statements and related disclosures are included in note 26. Key observations Our procedures, as set out above, did not identify any material misstatements in respect of the valuation of the defined benefit pension scheme as included within the Consolidated balance sheet. Our audit work included, but was not restricted to: – obtaining management’s assessment of the relevant CGUs used in the impairment calculation and comparing those to our understanding of the business units and operating structure of the Group; – recalculating the arithmetical accuracy of those calculations and considering the sensitivity of the impairment calculation to changes in key assumptions; – testing the assumptions utilised in the impairment models, including growth rates, discount rates and terminal values; and – testing the accuracy of management’s forecasting through a comparison of budget to actual data and historical variance trends and reviewing the cash flows for exceptional or usual items or assumptions. The Group’s accounting policy on impairment of non-current assets is shown within note 2 “Accounting Policies” to the financial statements and related disclosures are included in notes 14 and 15. Key observations Our procedures, as set out above, did not identify any material misstatements in respect of the carrying value of goodwill or intangible assets included within the Group balance sheet. 61 allergytherapeutics.comFinancial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc continued Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our audit work and in evaluating the results of that work. Materiality was determined as follows: Materiality measure Group Parent Financial statements as a whole £640,000 which is 1% of Group revenue. This benchmark is considered the most appropriate because it the primary statutory reporting measure used to assess the Group’s performance during the year. £43,000 which is 2% of the company’s total assets. This benchmark is considered the most appropriate because the company balance sheet primarily consists of investments in subsidiaries and intragroup receivables. Materiality for the current year is higher than the level that we determined for the year ended 30 June 2016 reflecting the Group’s increased revenues for the year ended 30 June 2017. Materiality for the current year is similar to the level that we determined for the year ended 30 June 2016. Performance materiality used to drive the extent of our testing 75% of financial statement materiality. 75% of financial statement materiality. Specific materiality Communication of misstatements to the audit committee We determined a lower level of specific materiality for certain areas such as directors’ remuneration and related party transactions. We determined a lower level of specific materiality for certain areas such as directors’ remuneration and related party transactions. £32,000 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. £2,150 and misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. 62 Financial Statements An overview of the scope of our audit Our audit approach was a risk-based approach founded on a thorough understanding of the Group’s business, its environment and risk profile and in particular included: – evaluation by the Group audit team of identified components to assess the significance of that component and to determine the planned audit response based on a measure of materiality. For example, significance as a percentage of the Group’s total assets, revenues and profit before taxation or significance based on qualitative factors, such as concerns over specific components; – in respect of the parent company, full scope audit procedures; – undertaking a planning visit in June 2017 to evaluate the Group’s internal control environment, perform an evaluation of the design effectiveness of controls over key financial statement risk areas identified as part of our audit risk assessment and to select certain transaction items to test during our procedures at the final audit stage; – we determined that full scope audit procedures were to be carried out in the UK and German locations and targeted procedures in Spain, Italy and the Netherlands based on their relative materiality to the Group and an assessment of their audit risk. Those targeted procedures addressed the key audit matters set out above. Those locations subjected to full scope audit and targeted procedures represent 67.3% and 22.0% of external Group revenues respectively, however comprehensive and targeted testing performed at the component and Group levels addressed 100% of Group revenues; – the Group locations subject to comprehensive and targeted testing were consistent with the prior year except we extended our targeted procedures in 2017 to address material inventory and cash balances in the Netherlands and Switzerland respectively; – the remaining operations of the Group were subject to analytical procedures over the balance sheet and income statements of the related entities with a focus on applicable risks identified above and the significance to the Group balances; – detailed audit instructions were issued to the auditors of the reporting components in Germany, Italy and the Netherlands where full scope and targeted audit approaches had been identified. The instructions detailed the key audit matters that were to be addressed through the audit procedures and indicated the information that we required to be reported back to the Group Audit Team. The Group Audit Team performed a site visit to Spain to perform planned targeted procedures. Our work over the cash balances held in Switzerland was conducted remotely; and – in addition, the Group Audit Team performed a site visit to Germany, which included a review of the work performed by the component auditors and conducted a review of working papers by the Italian component auditors remotely. The Group Audit Team communicated with all component auditors throughout the planning, fieldwork and concluding stages of the local audits. 63 allergytherapeutics.comFinancial Statements Independent Auditor’s Report to the Members of Allergy Therapeutics plc continued Other information The directors are responsible for the other information. The other information comprises the information included in the annual report set out on pages 1 to 57, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion, based on the work undertaken in the course of the audit: – the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: – 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 – the parent company financial statements are not in agreement with the accounting records and returns; or – certain disclosures of directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Responsibilities of directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on pages 56 to 57, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. 64 Financial Statements Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Jonathan Maile BSc (Hons) FCA Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Crawley 27 September 2017 65 allergytherapeutics.comFinancial Statements Consolidated Income Statement for the year ended 30 June 2017 Revenue Cost of sales Gross profit Sales, marketing and distribution costs Administration expenses – other Research and development costs Administration expenses Other income Operating loss Finance income Finance expense Loss before tax Income tax Loss for the period Loss per share Basic (pence per share) Diluted (pence per share) Note 3 8 10 9 5 11 13 Year to 30 June 2017 £’000 Year to 30 June 2017 £’000 Year to 30 June 2016 £’000 Year to 30 June 2016 £’000 (13,778) (9,296) 64,138 (16,771) 47,367 (26,888) (23,074) 699 (1,896) 151 (225) (1,970) (511) (2,481) (0.42p) (0.42p) (10,094) (16,223) 48,509 (14,070) 34,439 (20,223) (26,317) 150 (11,951) 180 (293) (12,064) (1,008) (13,072) (2.29p) (2.29p) 66 Financial Statements Consolidated Statement of Comprehensive Income for the year ended 30 June 2017 Loss for the period Items that will not be reclassified subsequently to profit or loss: Remeasurement of net defined benefit liability Remeasurement of investments – retirement benefit assets Deferred tax– freehold land and buildings Revaluation gains – freehold land and buildings Items that may be reclassified subsequently to profit or loss: Exchange differences on translation of foreign operations Total comprehensive loss Year to 30 June 2017 £’000 Year to 30 June 2016 £’000 Note (2,481) (13,072) 26 17 12 16 1,500 (1,688) (91) – – (16) (43) 119 (23) (744) (1,095) (15,444) 67 allergytherapeutics.comFinancial Statements Consolidated Balance Sheet Assets Non-current assets Property, plant and equipment Intangible assets – goodwill Intangible assets – other Investments – retirement benefit asset Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Current borrowings Derivative financial instruments Total current liabilities Net current assets Non-current liabilities Retirement benefit obligations Deferred taxation liability Non-current provisions Long term borrowings Total non-current liabilities Total liabilities Net assets Equity Capital and reserves Issued share capital Share premium Merger reserve – shares issued by subsidiary Reserve – share based payments Revaluation reserve Foreign exchange reserve Retained earnings Total equity 30 June 2017 £’000 30 June 2016 £’000 Note 16 14 15 17 18 19 20 21 22 24 26 12 23 22 9,673 3,390 2,069 4,592 9,667 3,271 2,084 4,045 19,724 19,067 7,484 7,853 22,122 37,459 57,183 7,692 6,514 23,406 37,612 56,679 (13,225) (11,045) (391) (404) (295) (1,180) (14,020) (12,520) 23,439 25,092 (9,619) (10,174) (352) (291) (334) (257) (2,936) (3,070) (13,198) (13,835) (27,218) (26,355) 29,965 30,324 27 604 599 102,420 102,392 40,128 40,128 900 1,254 (907) 741 1,254 (884) (114,434) (113,906) 29,965 30,324 These financial statements were approved by the Board of Directors and authorised for issue on 27 September 2017 and signed on its behalf by Manuel Llobet Chief Executive Officer Nicolas Wykeman Finance Director Registered number: 05141592 68 Financial Statements Consolidated Statement of Changes in Equity Issued Capital £’000 Share premium £’000 Merger reserve – shares issued by subsidiary £’000 Reserve – shares held in EBT £’000 Reserve – share based payment £’000 Revaluation reserve £’000 Foreign exchange reserve £’000 Retained earnings £’000 Total equity £’000 At 30 June 2015 556 91,463 40,128 67 591 1,178 (140) (99,374) 34,469 Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Deferred tax (Land and buildings) Valuation gain taken to equity (Land and Buildings) Remeasurement of investments – retirement benefit assets Total other comprehensive income Loss for the period after tax Total comprehensive income Share based payments Shares issued Share issue costs Transfer of lapsed options to retained earnings Transfer of EBT reserve to retained earnings – – – – – – – – – – – – – – – – – – 43 11,441 – – – (512) – – – – – – – – – – – – – – – At 30 June 2016 599 102,392 40,128 Exchange differences on translation of foreign operations Remeasurement of net defined benefit liability Remeasurement of investments – Retirement benefit assets Total other comprehensive loss Loss for the period after tax Total comprehensive loss Share based payments Shares issued Transfer of lapsed options to retained earnings – – – – – – – 5 – – – – – – – – 28 – – – – – – – – – – At 30 June 2017 604 102,420 40,128 – – – – – – – – – – – – (67) – – – – – – – – – – – – – – – – – – – 327 – – (177) – 741 – – – – – – 703 – (544) 900 – – (43) 119 – 76 – 76 – – – – – (744) – (744) – – – – (1,688) (1,688) – – (16) (43) 119 (16) (744) (1,704) (2,372) – (13,072) (13,072) (744) (14,776) (15,444) – – – – – – – – 177 67 327 11,484 (512) – – 1,254 (884) (113,906) 30,324 – – – – – – – – – (23) – (23) – – (23) – (23) – – – 1,500 1,500 (91) 1,409 (2,481) (1,072) – – 544 (91) 1,386 (2,481) (1,095) 703 33 – 1,254 (907) (114,434) 29,965 69 allergytherapeutics.comFinancial Statements Consolidated Cash Flow Statement Cash flows from operating activities Loss before tax Adjustments for: Finance income Finance expense Non cash movements on defined benefit pension plan Depreciation and amortisation Impairment of intangible assets Loss on disposal of fixed assets Net monetary value of above the line R&D tax credit Charge for share based payments Movement in fair valuation of derivative financial instruments Foreign exchange revaluation on US dollar cash deposits Increase/(decrease) in trade and other receivables Decrease/(increase) in inventories Increase/(decrease) in trade and other payables Net cash generated/(used) by operations Bank loan fees and interest paid Income tax Net cash generated/(used) by operating activities Cash flows from investing activities Interest received Payments for retirement benefit investments Payments for intangible assets Payments for property plant and equipment Net cash used in investing activities Cash flows from financing activities Share issue (options exercised)/proceeds from issue of equity shares (net of issue costs) Repayment of borrowings Proceeds from borrowings Net cash (used)/generated by financing activities Net decrease in cash and cash equivalents Effects of exchange rates on cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period Cash at bank and in hand Bank overdraft Cash and cash equivalents at the end of the period 70 Year to 30 June 2017 £’000 Year to 30 June 2016 £’000 Note 10 9 15,16 15 15,16 8 (1,970) (12,064) (151) 225 322 (180) 293 295 1,936 1,666 69 42 (699) 703 (776) (361) 1,004 334 823 1,501 (222) (1,101) – – (85) 327 1,963 (2,394) (368) (585) (412) (11,544) (388) 93 178 (11,839) 41 (258) (226) (1,500) (1,943) 33 (297) 76 – (260) – (1,232) (1,492) 10,972 (86) 1,653 (188) 12,539 (1,953) 669 23,406 22,122 22,122 – (792) 2,999 21,199 23,406 23,406 – 22,122 23,406 Financial Statements Notes to the Financial Statements 1. Basis of preparation Allergy Therapeutics is a specialty pharmaceutical Group focused on allergy vaccination. The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) in issue as adopted by the European Union (‘EU’) and with those parts of the Companies Act 2006 that are relevant to the Group preparing its accounts in accordance with EU adopted IFRS. Allergy Therapeutics plc is the Group’s parent company. The Company is a limited liability company incorporated and domiciled in England. The address of Allergy Therapeutics plc’s registered office and its principal place of business is Dominion Way, Worthing, West Sussex and its shares are listed on the Alternative Investment Market (AIM). The consolidated financial statements for the year ended 30 June 2017 (including comparatives) have been prepared under the historical cost convention except for land and buildings and derivative financial instruments which have been measured at fair value. They were approved and authorised for issue by the Board of Directors on 27 September 2017. New standards adopted There are no IFRS or IAS interpretations that are effective for the first time in this financial period that have had a material impact on the Group. Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group in the 30 June 2017 financial statements At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective. Not all of these have yet been adopted by the EU. The Group has not adopted any of these pronouncements early. The new standards, amendments and interpretations that are expected to be relevant to the Group’s financial statements are as follows: IFRS 9 Financial Instruments (effective 1 January 2018) This IFRS replaces IAS 39 and addresses the usefulness for users of financial statements by simplifying the classification and measurement requirements for financial instruments. Management are currently assessing the detailed impact on the Group’s financial statements. IFRS 15 Revenue from Contracts with Customers (issued in May 2014 and effective 1 January 2018) IFRS 15 supersedes current revenue recognition guidance including IAS 18, Revenue, and specifies how and when entities recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Management are currently assessing the detailed impact on the Group’s financial statements. IFRS 16 Leases (effective 1 January 2019) IFRS 16 removes the current distinction between an operating and finance lease, introducing consistent requirements for all leases similar to the current finance lease accounting. Management anticipate that the above pronouncements will be adopted in the Group’s financial statements in line with the effective dates stated above. Management are currently assessing their detailed impact on the Group’s financial statements. Other new standards and interpretations have been issued but are not expected to have a material impact on the Group’s financial statements. 71 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 1. Basis of preparation continued Going concern Operating loss in the period was £1.9 million (2016:£12.0 million loss); net cash inflow from operations was £1.5 million (2016: £11.5 million net cash outflow). The inflow was due to the strong trading offset by further R&D expenditure. Excluding the R&D expenditure, the Group would have reported an operating profit of £7.4 million (2016:£4.3 million). The Directors do not consider the current operating loss to be a cause for concern. Detailed budgets have been prepared, including cash flow projections for the periods ending 30 June 2018 and 30 June 2019. These projections include assumptions on the trading performance of the operating business and the continued availability of the existing bank facilities. The Group had a cash balance of £22.1m at 30 June 2017 and the overdraft facility was renewed in April 2017. After making appropriate enquiries, which included a review of the annual budget and latest forecast, by considering the cash flow requirements for the foreseeable future and the effects of sales and other sensitivities on the Group’s funding plans, the Directors continue to believe that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in preparing these financial statements. 2. Accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated. Consolidation The Group’s financial statements consolidate those of the parent company and all of its subsidiaries drawn up to 30 June 2017. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated on the date control ceases. Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated except for unrealised losses if they show evidence of impairment. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used in the Group. The Group applies the acquisition method in accounting for business combinations. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are measured at their acquisition-date fair values. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of a) fair value of consideration transferred, b) the recognised amount of any non-controlling interest in the acquiree and c) acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately. Goodwill Goodwill arising from business combinations is the difference between the fair value of the consideration paid and the fair value of the assets and liabilities and contingent liabilities acquired. It is initially recognised as an intangible asset at cost and is subject to impairment testing on an annual basis or more frequently if circumstances indicate that the asset may have been impaired. Details of impairment testing are described in the accounting policies. 72 Financial Statements 2. Accounting policies continued Intangible assets acquired as part of a business combination Intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an asset and be identifiable. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised over their useful economic life as follows: Trade names Customer relationships Know-how and patents Distribution agreements 15 years 5 years 10 years 15 years/period of contract Externally acquired intangible assets Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised over their useful economic life as below and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for intangible assets is reviewed at least at each financial year end. Computer software Other intangibles 7 years 15 years Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets is recognised in the consolidated income statement in the expense category consistent with the function of the intangible asset in either administration costs or marketing and distribution costs. Internally generated intangible assets An internally generated intangible asset arising from development (or the development phase) of an internal project is recognised if, and only if, all of the following have been demonstrated: – the technical feasibility of completing the intangible asset so that it will be available for use or sale – the intention to complete the intangible asset and use or sell it – the ability to use or sell the intangible asset – how the intangible asset will generate probable future economic benefits – the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset – the ability to measure reliably the expenditure attributable to the intangible asset during its development The amount initially recognised for internally generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no internally generated intangible asset can be recognised, research and development expenditure is charged to the consolidated income statement in the period in which it is incurred. Subsequent to initial recognition, internally generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation shall begin when the asset is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. 73 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 2. Accounting policies continued Amortisation of all intangible assets is calculated on a straight line basis over the useful economic life using the following annual rates: Manufacturing know-how Non-competing know-how 4 years Other intangibles 15 years 15 years These periods were selected to reflect the assets’ useful economic lives to the Group. The cost of amortising intangible assets is included within administration expenses in the consolidated income statement. Segmental reporting The Group’s operating segments are market based and are reported in a manner consistent with the internal reporting provided to the Group’s Chief Operating Decision Maker (CODM) who has been identified as the Executive Directors. The CODM is responsible for allocating resources and assessing the performance of the operating segments. In identifying its operating segments, management follow the Group’s revenue lines which represent the main geographical markets within which the Group operates. These operating segments are managed separately as each requires different local expertise, regulatory knowledge and a specialised marketing approach. Each market based operating segment is engaged in production, marketing and selling within a particular economic environment that is different from that in segments operating in other economic environments. All inter-segment transfers are carried out at arm’s length prices. Foreign currency translation Functional and presentational currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The Group’s presentational currency is Sterling, which is also the functional currency of the Group’s parent. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation, at reporting period end exchange rates, of monetary assets and liabilities denominated in foreign currencies, are recognised in the Consolidated Income Statement. Non-monetary items are carried at historical cost or translated using the exchange rate at the date of the transaction or a weighted average rate as an approximation where this is not materially different. Foreign operations In the Group’s financial statements, all assets, liabilities and transactions of Group entities with a functional currency other than sterling are translated into sterling upon consolidation. The functional currency of the entities in the Group has remained unchanged during the reporting period. On consolidation, assets and liabilities have been translated into sterling at the closing rate at the reporting date. Goodwill and fair value adjustments arising on the acquisition of a foreign entity have been treated as assets and liabilities of the foreign entity and translated into sterling at the closing rate. Income and expenses have been translated into sterling at the weighted average rate over the reporting period which approximates to actual rates. Exchange differences are charged or credited to other comprehensive income (OCI) and recognised in the currency translation reserve in equity. OCI includes those items which would be reclassified to profit or loss and those items which would not be reclassified to profit or loss. 74 Financial Statements 2. Accounting policies continued Revenue recognition Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, net of statutory rebates paid in Germany and excluding value added tax. Revenue is recognised upon the performance of services or transfer of risk to the customer. Sale of goods Revenue from the sale of goods is recognised when all the following conditions have been satisfied: – the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, which is generally when the customer has physically received the goods. – the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold which is again when the customer has physically received the goods. – the amount of revenue can be measured reliably. – it is probable that the economic benefits associated with the transaction will flow to the Group, and – the costs incurred or to be incurred in respect of the transaction can be measured reliably. Where the Group provides services to new distributors, which mainly include marketing and customer information, in exchange for an up-front lump sum fee, revenue is recognised in line with these services being delivered. Services are fair valued and pro-rated to agree to the total fee receivable. Where there is an on-going responsibility to provide services, the balance relating to those services is recognised in future periods as the service is performed. Part of the Group’s overseas sales are made through distributors and agents. Arrangements for sales through distributors For all distributor arrangements, the distributor is invoiced at the time of delivery and title to the product passes upon full and final settlement of the invoice to which the delivery relates. The distributor has full discretion over the setting of the final selling price to the end customer and is responsible for all customer returns of product. It is considered that the significant risks and rewards of ownership of the product are transferred to the distributor at the point of delivery and therefore revenue is recognised at this point in accordance with IAS 18. Where the Group sells to distributors at initially low margin and there is further consideration receivable by the Group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances, the deferred consideration is accrued at a discounted value at the point of delivery. Arrangements for sales through agents For all agreements with agents, the agent places orders with the Group and goods are then shipped to them. The Group however, holds title to these products until they are sold on to a third party. The selling price to the end user is set by the relevant Government body and the agent receives a fixed percentage of this selling price. The agent notifies the Group monthly on stock levels and this is reconciled to a statement which generates an invoice for payment by the agent. The Group is responsible for any customer returns of product. It is considered that the significant risks and rewards of ownership of the product are not transferred from the Group until the agent has sold the product to a third party and therefore revenue on these sales is recognised only at this point by the Group in accordance with IAS 18.16. Statutory Rebates In Germany, pharmaceutical companies are required to pay a manufacturer’s rebate to the government as a contribution to the cost of medicines paid for by the State and private health funds. This is similar to a sales tax and the rebate is therefore treated as a deduction from revenue in accordance with IAS18.8. 75 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 2. Accounting policies continued Rebates have been in the region of 6% (inclusive of VAT). However, in 2010 the German government increased the rate to 16%. In certain circumstances, companies could apply for an exemption from the rebate increase, for limited periods at a time. If the application for the exemption is successful, a preliminary exemption is normally granted to be converted to a final exemption at a later date when audited financial statements are available. Allergy Therapeutics plc has been successful in obtaining preliminary exemptions up to 30 June 2012, which have been subsequently confirmed as final. Revenue is recognised initially net of the full rebate, as at that stage it is not considered probable that any refund of the rebate will be received. When the preliminary exemption is granted, it is considered probable, based on our past experience, that the rebate refund will be received. Therefore, as it is probable that the economic benefits will flow to Allergy Therapeutics Plc, in accordance with IAS 18.14(d), revenue is adjusted at that time. As of April 2014, the current rebate in force has been set at 7%. The rebate is subject to a price moratorium and this applies to certain products in Germany. Expenditure recognition Operating expenses are recognised in the Consolidated Income Statement upon utilisation of the service or at the date of their origin. Property, plant and equipment (PPE) The Group policy is that all freehold properties will be subject to a full revaluation with sufficient regularity so that the carrying amount and the fair value are not materially different. Revaluations are performed by independent qualified and experienced valuers who have adequate local knowledge in the country in which the property is situated. In the intervening years between independent revaluations, the Directors review the carrying values of the freehold land and buildings and adjustments are made if the carrying values differ significantly from their respective fair values. Increases in the carrying value from revaluations are recognised in other comprehensive income and accumulated in equity under the heading of revaluation reserve unless this reverses a revaluation decrease on some asset previously recognised in the income statement, in which case it is first credited to the consolidated income statement to that extent. When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is restated proportionately with the change in the gross carrying amount of the asset. The amount of the adjustment arising on the restatement or elimination of accumulated depreciation forms part of the increase or decrease in carrying amount. Decreases in the carrying values arising from revaluations are first offset against increases from earlier revaluations in respect of the same assets and are thereafter charged to the Consolidated Income Statement. Other plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Provision for depreciation of all PPE assets of the Group (except land) is made over their estimated useful lives, on a straight line basis principally using the following annual rates: Freehold buildings Computer equipment Motor vehicles Fixtures and fittings Plant and machinery 33 years 3 – 7 years 4 years 5 – 15 years 5 – 15 years Residual values and useful lives are reviewed annually and amended as necessary. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the PPE may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount exceeds the higher of the asset’s fair value less costs to sell or value in use. Depreciation charges are included in either administration expenses or cost of sales when arriving at operating profit in the Consolidated Income Statement. 76 Financial Statements 2. Accounting policies continued Impairment The Group’s goodwill, other intangible assets, freehold land and buildings and plant & equipment are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Goodwill is allocated to those cash generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls the related cash flows. Individual assets or cash generating units that include goodwill or intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the assets or cash generating units 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, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. Inventories Inventory is carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are measured by means of weighted average cost using standard costing techniques. The cost of finished goods and work in progress comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, depreciation, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards. Net realisable value is calculated based on the selling price in the normal course of business less any costs to sell. Research & Development Investment Credits Investment credits are directly related to the Group’s qualifying research and development expenditure and have a monetary value that is independent of the Group’s tax liability. Such investment credits are dealt with in other income in the consolidated income statement. Leases A finance lease exists where the economic ownership of a leased asset is transferred to the lessee and the lessee bears substantially all the risks and rewards of ownership of the leased asset. All other leases are operating leases in the Group. Operating lease rentals are charged to the income statement over the term of the lease. There are no finance leases in the Group. Financial assets Financial assets consist of cash at bank and in hand, trade and other receivables and derivative financial instruments. Financial assets are assigned to their different categories by management on initial recognition, depending on the contractual arrangements. Cash and trade and other receivables are denominated as loans and receivables and these are measured at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. Financial derivatives are designated at FVTPL (fair value through profit and loss) upon initial recognition. 77 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 2. Accounting policies continued Cash and cash equivalents comprise cash on hand, demand deposits and overdrafts, together with other short-term, highly liquid investments with maturities of three months or less from inception that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. All financial assets are recognised when the Group becomes a party to the contractual provisions of the instrument and loans and receivables are initially recognised at fair value, including transaction costs, with the exception of ‘fair value through profit and loss’ and subsequently at amortised cost, with any changes going through the consolidated income statement. Where securities are designated as ‘fair value through profit and loss’, gains and losses arising from changes in fair value are included in net profit or loss for the period. Derecognition of financial assets occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least at each reporting period whether or not there is objective evidence that a financial asset or a group of financial assets is impaired. Financial liabilities The Group’s financial liabilities include borrowings, trade and other payables and derivative financial instruments. Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest related charges are recognised as an expense in ‘Finance expense” in the consolidated income statement. Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. Contingent consideration on business combinations is recognised initially at their fair value and subsequently measured at FVTPL. Borrowings comprise secured bank borrowings, and are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowings. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Derivative financial instruments The Group uses euro forward contracts and euro exchange swaps to manage the exposure to changes in translation rates and these are classified as derivative financial instruments. All derivative financial instruments are initially measured at fair value on acquisition and are subsequently restated to fair value at each reporting date. Any change in the fair value of the instruments is recognised in either administration expenses (Foreign exchange contracts) or finance expenses (Note 9) in the Consolidated Income Statement. Equity Equity comprises the following: – “Issued capital” represents the nominal value of equity shares that have been issued. – “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. – “Merger reserve” represents the excess over nominal value of the fair value of consideration received for equity shares issued on acquisition of subsidiaries, net of expenses of the share issue. – “Reserve – Shares held in EBT” represents the shares of the parent company acquired by a trust set up for the benefit of the Group’s employees. These shares are deducted from shareholders’ funds at the cost that the shares were acquired. The net proceeds received from the issue of these shares through the exercise of options are also recognised through this reserve. – “Reserve – share based payments” represents equity-settled share-based employee remuneration until such share options are exercised. 78 Financial Statements 2. Accounting policies continued – “Revaluation reserve” represents the revaluations of investment assets and land and buildings. – “Foreign exchange reserve” represents the foreign currency translation differences that have occurred since the transition date as per IFRS 21. Exchange differences prior to this date are included within retained earnings. – “Retained earnings” represents retained profits and losses. Equity is any contract which evidences a residual interest in the assets of the Group after deducting all its liabilities. Income taxes Current income tax assets and liabilities comprise those obligations to fiscal authorities in the countries in which the Group carries out its operations. They are calculated according to the tax rates and tax laws applicable to the fiscal period and the country to which they relate that have been enacted or substantially enacted by the end of the reporting period. All changes to current tax liabilities are recognised as a component of tax expense in the Consolidated Income Statement. Deferred income taxes are calculated using the asset/liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is neither provided on the initial recognition of goodwill nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. Tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates and laws that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to other comprehensive income (such as the revaluation of land and buildings) or equity, in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity, respectively. Defined contribution pension scheme Payments to defined contribution schemes are charged as an expense to the Consolidated Income Statement as they fall due in the expense category consistent with the function of the employee to which they relate. Defined benefit pension scheme Plan assets are measured at fair values. Defined benefit obligations are measured on an actuarial basis using the projected unit credit method and are discounted at appropriate high quality corporate bond rates that have terms to maturity approximating to the terms of the related liability. Interest expense or income is calculated on the net defined benefit liability (asset) by applying the discount rate to the net defined benefit liability (asset). Past service cost is recognised in the Consolidated Income Statement in the period when the plan is amended. Remeasurements are recognised in the balance sheet immediately with a charge or credit to other comprehensive income in the periods in which they occur. The related deferred tax is shown with other deferred tax balances. A surplus is recognised only to the extent that it is recoverable by the Group. The current service cost, past service cost and costs from settlements and curtailments are charged against administrative expenses in the Consolidated Income Statement. Interest on the scheme liabilities and the expected return on scheme assets are included in other finance costs. 79 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 2. Accounting policies continued Other employee benefits Short term Short-term employee benefits, including holiday entitlement are included in current pension and other employee obligations, within trade and other payables, at the undiscounted amount that the Group expects to pay as a result of the unused entitlement. Long term Under Italian law, alongside each monthly salary payment an amount is accrued into a reserve for each employee. When the employee leaves the company, the accrued amount is paid as a deferred salary payment. Investments Investments relate to long-term insurance policies. In accordance with IAS19, these cannot be directly deducted from the German pension obligation and are recognised as a separate asset, rather than as a deduction in determining the defined benefit liability. Interest income is recognised through the Consolidated Income Statement. They are held at fair value with any gains or losses on remeasurement charged or credited to other comprehensive income. Provisions Provisions are recognised when the present obligations arising from legal or constructive obligations resulting from past events, will probably lead to an outflow of economic resources from the Group which can be estimated reliably. Provisions are measured at the present value of the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates. Share based employee compensation The Group operates equity-settled share based compensation plans for remuneration of its employees comprising Long Term Incentive Plan (LTIP) schemes. All employee services received in exchange for the grant of any share based compensation are measured at their fair values. These are indirectly determined by reference to the share option or shares awarded. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions (e.g. profitability or share price growth targets). The fair value of LTIP shares, which have market conditions attached, includes an adjustment based on the probability of the shares vesting at the end of the vesting period. Details of the LTIP schemes and the conditions applying to each scheme are disclosed in Note 28 (Share Based Payments) on page 104. All share based compensation is ultimately recognised as an expense in the Consolidated Income Statement with a corresponding credit to the share based payments reserve. If vesting periods or other vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of shares expected to vest. Non market vesting conditions are included in assumptions about the number of shares that are expected to become issuable. Estimates are subsequently revised if there is any indication that the number of shares expected to vest differs from previous estimates. No adjustment to expense recognised in prior periods is made if fewer shares ultimately vest than estimated, however the expensed value of these lapsed shares is transferred from the share based payment reserve to retained earnings. 80 Financial Statements 2. Accounting policies continued Employee Benefit Trust (EBT) The financial statements include the assets and liabilities of a trust set up for the benefit of the Group’s employees. The EBT has acquired shares in the Company and these are deducted from total equity on the balance sheet at the cost of acquisition less proceeds on disposal. The balance in the EBT reserve brought forward in the prior year relates to the historic purchase and disposal of Company shares. No transactions have passed through the EBT since 2009. There are no shares currently held by the EBT. The remaining balance on the reserve was transferred to retained earnings in the prior year. Use of accounting estimates and judgements Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the Notes to the Financial Statements and the key areas are summarised below: Judgements in applying accounting policies a) Capitalisation of development costs requires analysis of the technical feasibility and commercial viability of the project concerned. Capitalisation of the costs will be made only where there is evidence that an economic benefit will accrue to the Group. To date no development costs have been capitalised and all costs have been expensed in the income statement as research and development costs. Costs expensed in the year amounted to £9.3 million (2016: £16.2 million). b) Where the Group sells to distributors at initially low margin and there is further consideration receivable by the Group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances, the deferred consideration is accrued at a discounted value at the point of delivery. The Directors considered the following points in applying this accounting treatment: Although a significant portion of the sales price is received upon a further sale to an end customer, substantially all the risks and rewards of ownership are passed to the distributor when the goods are shipped, and the distributor is acting as principal (not merely as agent) when arranging to resell the goods. The Directors have reached this conclusion because; i. The Group does not have any continued managerial involvement in the distributor’s onward sale of goods; ii. The distributor does not have the right to return any goods. More information on the reasoning behind the treatment of sales to distributors can be found in the ‘Sale of goods’ accounting policy description. c) Land and buildings are carried at valuation and are re-valued with sufficient regularity so that the carrying amount and the fair value are not materially different. The Italian freehold property was revalued in June 2016 by independent valuers (see Note 16). The Italian freehold property was revalued to fair value at that reporting date based on this valuation. The freehold property in Spain was revalued in June 2015 (see Note 16). The Directors do not consider an impairment provision to be required in respect of the freehold property in Spain. d) The Group had been awarded a provisional exemption to the increased statutory rebate charge in Germany for the period July to December 2012 by BAFA. Revenue of £1.1 million (equivalent of €1.4 million) was recognised in the year ended 30 June 2013 in relation to this exemption and the refund from the German authorities was subsequently collected. In February 2015, the provisional exemption was withdrawn by BAFA. The Group has lodged an appeal and, following legal advice, believe that the exemption will be re-instated. While the Group is confident that the exemption will be confirmed, there is a possibility that this will not happen. If the exemption is not confirmed, then the Group will ultimately have to repay €1.4 million (£1.2 million) with a corresponding impact on net income and net assets. 81 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 2. Accounting policies continued Sources of estimation uncertainty a) Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. There is inherent uncertainty in the useful lives of assets, which means that they are constantly reviewed by management (Accounting policies Note (page 76) and Note 16). b) Estimates of future profitability are required for the decision whether or not to carry forward a deferred tax asset. (Note 12). c) Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating unit to which the goodwill has been allocated. This value in use calculation requires an estimation of the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the present value. d) Inventory standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards. e) In relation to the accrued additional revenue due from distributors referred to in the Judgements section (point (b) above); there is some uncertainty that the additional revenue will crystallise as it is dependent on a further sale by the distributor. The Directors consider that the additional consideration can be measured reliably because it is based on a fixed list price and our past experience indicates that the distributor will sell the vaccines. The Directors have assessed that the accrued consideration of £0.1 million is recoverable and will crystallise in future periods and has been carried forward in prepayments and accrued income (2016: £0.1m). f) The Group operates equity-settled share based compensation plans for remuneration of its employees comprising Long Term Incentive Plan (LTIP) schemes. As explained in Note 28, employee services received in exchange for the grant of any share based compensation are measured at their fair values and expensed over the vesting period. The fair value of this compensation is dependent on whether the provisional share awards will ultimately vest, which in turn is dependent on future events which are uncertain. The Directors use their judgment and experience of previous awards to estimate the probability that the awards will vest, which impacts the fair valuation of the compensation. g) Where the Group is in negotiation with third party contractors around final account payments in relation to contracts, there is always an element of uncertainty as to the exact amount that will become payable. The Group accounts for its liabilities based on best estimates of the most likely outcome and gives extra disclosure where the range of likely outcomes could be materially different from the estimate accounted for. 3. Revenue An analysis of revenue by category is set out in the table below: Sale of goods Rendering of services 2017 £’000 2016 £’000 64,113 48,468 25 41 64,138 48,509 Rendering of services relates to the supply of services to a new distributor to assist them in setting up operations in their territory. 4. Segmental reporting The Group’s operating segments are reported based on the financial information provided to the Executive Directors, who are defined as the Chief Operating Decision-Maker (CODM), to enable them to allocate resources and make strategic decisions. The CODM reviews information based on geographical market sectors and assesses performance at an EBITDA (operating profit before interest, tax, depreciation and amortisation) and operating profit level. Management have identified that the reportable segments are Central Europe (which includes the following operating segments; Germany, Austria, Switzerland and the Netherlands), Southern Europe (Italy, Spain and Portugal), the UK and Rest of World. 82 Financial Statements 4. Segmental reporting continued For all material regions that have been aggregated, management consider that they share similar economic characteristics. They are also similar in respect of the products sold, types of customer, distribution channels and regulatory environments. Revenue by segment Central Europe Germany Other Southern Europe Italy Spain Other UK Rest of World Revenue from External Customers 2017 £’000 Inter Segment Revenue 2017 £’000 Total Segment Revenue 2017 £’000 Revenue from External Customers 2016 £’000 Inter Segment Revenue 2016 £’000 38,200 9,386 47,586 5,535 6,075 498 12,108 1,868 2,576 38,200 9,386 47,586 5,535 6,075 498 12,108 27,655 2,576 28,484 6,688 35,172 4,741 4,590 229 9,560 1,856 1,921 25,787 17,862 Total Segment Revenue 2016 £’000 28,484 6,688 35,172 4,741 4,590 229 9,560 19,718 1,921 64,138 25,787 89,925 48,509 17,862 66,371 Revenues from external customers in all segments are derived principally from the sale of a range of pharmaceutical products designed for the immunological treatment of the allergic condition. Rest of World revenues include sales through distributors and agents in several markets including Czech and Slovak Republics, Canada and South Korea. These include rendering of services revenues (Note 3). Inter-segment revenues represent sales of product from the UK to the operating subsidiaries. The price is set on an arms-length basis which is eliminated on consolidation. The CODM also reviews revenue by segment on a budgeted constant currency basis, to provide relevant year on year comparisons. The following revenue table is based on a budget currency rate of €1.28: £1.00 which was the rate used in the 2017 budget. Revenue from External Customers 2017 £’000 Revenue from External Customers 2016 £’000 Central Europe Germany Other Southern Europe UK Other 34,754 8,220 42,974 11,062 1,869 2,589 27,699 6,439 34,138 9,302 1,851 1,921 58,494 47,212 83 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 4. Segmental reporting continued The Group has no customers which individually account for 10% or more of the Group’s revenue. Depreciation and amortisation by segment Central Europe Southern Europe UK EBITDA by segment Allocated EBITDA Central Europe Southern Europe UK Allocated EBITDA Depreciation and amortisation Operating loss Finance income Finance expense Loss before tax Total assets by segment Central Europe Southern Europe UK Inter-segment assets Inter-segment investments Total assets per Balance Sheet 2017 £’000 230 488 1,218 1,936 2017 £’000 380 89 2016 £’000 167 404 1,095 1,666 2016 £’000 407 (325) (429) (10,367) 40 (10,285) (1,936) (1,896) 151 (225) (1,666) (11,951) 180 (293) (1,970) (12,064) 2017 £’000 14,577 7,154 61,666 83,397 2016 £’000 12,119 7,627 59,585 79,331 (4,586) (2,432) (21,628) (20,220) 57,183 56,679 Included within Central Europe are non-current assets to the value of £2,594,000 (2016: £2,523,000) relating to Goodwill and within Southern Europe assets to the value of £2,840,000 (2016: £2,942,000) relating to freehold land and buildings. There were no material additions (excluding foreign exchange differences) to non-current assets in any country except the UK where non-current asset additions totalled £1,485,000 (2016:£1,433,000). 84 Financial Statements 4. Segmental reporting continued Total liabilities by segment Central Europe Southern Europe UK Inter-segment liabilities Total liabilities per Balance Sheet 5. Loss before tax Loss for the period has been arrived at after charging/(crediting): (Gain)/loss on fair valuation of foreign exchange forward contracts (Gain) on foreign exchange forward contracts matured in the year (Gain) on revaluation of US dollar denominated cash deposits Other foreign exchange gains Acquisition costs of new subsidiary Depreciation and amortisation: Depreciation of property plant and equipment (Note 16) Amortisation of intangible assets (Note 15) Impairment of intangible assets (Note 15) Loss on disposal of intangible assets (Note 15) Loss on disposal of tangible assets (Note 16) Research and development Land and buildings held under operating leases Other operating leases Audit and non-audit services: Fees payable to the Company’s auditor for the audit of the Group accounts Fees payable to the Company’s auditor and its associates for other services: The audit of the Company’s subsidiaries pursuant to legislation Audit related assurance Tax compliance services Tax advisory services 2017 £’000 2016 £’000 (14,964) (14,956) (6,163) (10,677) (6,658) (7,119) (31,804) (28,733) 4,586 2,378 (27,218) (26,355) 2017 £’000 2016 £’000 (776) (1,930) (361) (525) – 1,510 426 69 29 13 1,963 (519) (2,394) (749) 84 1,427 240 – – – 9,296 16,223 752 797 51 81 10 6 8 695 606 42 90 10 17 15 Share based payment expense (Note 28) 703 327 85 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 6. Remuneration of key management personnel Salaries and short-term employee benefits Social security costs Post-employment benefits – defined contribution plans (Over)/under accrual of bonuses Share based payment 2017 £’000 699 76 55 830 (24) 63 869 2016 £’000 765 87 56 908 26 59 993 Key management personnel are considered to be the Directors and full details of their remuneration are set out in the information included in the Director’s Remuneration table on page 49 and forms part of the financial statements. 7. Employees (including Directors) Wages and salaries Social security costs Share based payments Pension costs – defined benefit plans Pension costs – defined contribution plans 2017 £’000 21,913 3,654 703 367 451 2016 £’000 18,560 2,980 327 251 341 27,088 22,459 The average number of employees during the period (including Executive Directors) was made up as follows: R & D, marketing and administration Sales Production 8. Other income Net monetary value of above the line R&D tax credit 9. Finance expense Interest on borrowing facility Net interest expenses on defined benefit liability Other interest and charges 86 2017 178 126 175 479 2017 £’000 699 2017 £’000 70 154 1 225 2016 150 119 158 427 2016 £’000 150 2016 £’000 57 171 65 293 Financial Statements 10. Finance income Bank interest Interest on investment assets Other finance income Other finance income relates to the unwinding of the discount on accrued revenue. 11. Income tax expense Current tax: Prior period overseas tax Overseas tax Deferred tax – current year Tax charge for the period 2017 £’000 45 89 17 151 2016 £’000 90 50 40 180 2017 £’000 2016 £’000 9 508 517 (6) 511 574 489 1,063 (55) 1,008 The tax charge assessed for the period is higher than the standard rate of corporation tax as applied in the respective trading domains where the Group operates. The differences are explained below: Loss for the period before tax Loss for period multiplied by the respective standard rate of corporation tax applicable in each domain (average 19.75% (2016: 20%)). Effects of: Disallowable adjustments Movements in unrecognised deferred tax Adjustment of taxes for prior periods Adjustment for different tax rates Relief for shares acquired by employees & Directors Gross up of R&D expenditure credit Deferred tax – reduction in carrying amount of deferred tax asset Tax charge for the period 2017 £’000 2016 £’000 (1,970) (12,064) (389) (2,413) 376 520 9 198 (102) (101) 511 – 511 370 2,499 574 41 (71) 8 1,008 – 1,008 87 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 12. Deferred tax Recognised deferred tax liability At 1 July 2016 Amount (charged)/ credited to the income statement Exchange differences At 30 June 2017 Tax value of carried forward losses £’000 Tax value of accelerated capital allowances £’000 Acquisition of Teomed AG £’000 403 (44) – 359 (403) 44 – (359) (139) 15 (11) (135) Italian Freehold Property £’000 Tax value of Alerpharma SA losses £’000 Acquisition of Alerpharma SA £’000 (43) – (2) (45) 243 (58) 14 199 (395) 49 (25) (371) At 1 July 2015 Amount credited to the income statement Transfer from revaluation reserve Exchange differences At 30 June 2016 455 (52) – – (455) (130) 52 – – 15 – (24) (139) 403 (403) Tax value of carried forward losses £’000 Tax value of accelerated capital allowances £’000 Acquisition of Teomed AG £’000 Italy Freehold property £’000 Tax value of Alerpharma SA losses £’000 Acquisition of Alerpharma SA £’000 207 (375) – – 36 243 40 – (60) (395) – – (43) – (43) Total £’000 (334) 6 (24) (352) Total £’000 (298) 55 (43) (48) (334) Deferred tax is provided under the balance sheet liability method using the local tax rate for the overseas difference. Deferred tax assets and deferred tax liabilities are offset where the Group has a legally enforceable right to do so and when the deferred tax assets and liabilities relate to tax levied by the same tax authority and where there is an intention to settle the balances on a net basis. Deferred tax assets, in respect of losses, are recognised up to the value of the fixed asset liability as the nature of the asset & liability is such that they unwind at the same time. The deferred tax liability in respect of the Italian freehold property relates to the revaluation of this property. The following is the analysis of the deferred tax balances after offset for financial reporting purposes: 2017 £’000 558 (910) (352) 2016 £’000 646 (980) (334) Deferred tax assets Deferred tax liabilities 88 Financial Statements 12. Deferred tax continued Unrecognised deferred tax Non Current Assets Property, plant and equipment R&D expenditure credit Current Assets Stock Current Liabilities Derivative financial instruments Non Current Liabilities Pension and other employee obligations Share options Unused tax losses Total 2017 Deferred tax assets £’000 2016 Deferred tax assets £’000 57 306 148 69 61 74 202 212 1,658 113 13,572 15,923 2,021 122 13,778 16,470 As at 30 June 2017 the Group had approximately £79m of unutilised tax losses (2016: approximately £76m) available for offset against future profits. No net deferred tax asset has been recognised in respect of unutilised tax losses. Substantially all the tax losses have no fixed expiry date. The main UK corporation tax rate is to change from 19% to 17% with effect from 1 April 2020. The recognised and unrecognised deferred tax assets have been calculated at 17%, being the rate enacted at 30 June 2017. 13. Earnings per share Loss after tax attributable to equity shareholders Issued ordinary shares at start of the period Ordinary shares issued in the period Issued ordinary shares at end of the period Weighted average number of ordinary shares for the period Potentially dilutive share options Weighted average number of ordinary shares for diluted earnings per share Basic earnings per ordinary share/(loss) (pence) Diluted earnings per ordinary share/(loss) (pence) 2017 £’000 2016 £’000 (2,481) (13,072) Shares ‘000 Shares ‘000 589,159 545,848 4,959 43,311 594,118 589,159 592,192 570,344 – – 592,192 570,344 (0.42p) (0.42p) (2.29p) (2.29p) 89 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 13. Earnings per share continued The diluted loss per share does not differ from the basic loss per share as the exercise of share options would have the effect of reducing the loss per share and is therefore not dilutive under the terms of IAS 33. 2017 Number Of Shares ‘000 2016 Number Of Shares ‘000 Weighted average number of ordinary shares in issue Potentially dilutive share options Weighted average number of diluted ordinary shares 14. Goodwill At 1 July Addition Exchange difference At 30 June 592,192 570,344 22,893 18,885 615,085 589,229 2017 £’000 3,271 – 119 2016 £’000 2,980 – 291 3,390 3,271 For the purposes of impairment testing of goodwill, the Directors recognise the Group’s Cash Generating Units (CGU) to be the following: 2017 £’000 2016 £’000 Germany Spain Total 2,594 796 3,390 2,523 748 3,271 Apart from the considerations described in determining the value in use of the CGU described below, the Group’s management is not currently aware of any reasonably possible changes that would necessitate changes in its key estimates. There are no reasonably possible changes in the assumptions that could lead to an impairment being recorded. Germany The recoverable amount for the Germany CGU above was determined based on a value-in-use calculation, covering a detailed three-year forecast of future cash flows using budgeted projections assuming a 17.4% discount rate (2016: 17.4%) which the Group has estimated to be the weighted average cost of capital adjusted for risks specific to the CGU. Management’s key assumptions include sales growth (at an average of 4% for the three-year period), which has been determined based on past experience in this market. The Group’s management believes that this is the best available input for forecasting this mature market. Spain The addition to goodwill arose on the acquisition of Alerpharma Group SA in June 2015. The recoverable amount for the Spain CGU above was determined based on a value-in-use calculation, covering a detailed ten-year forecast of future cash flows using budgeted projections assuming a 17% discount rate (2016: 17%) which the Group has estimated to be the weighted average cost of capital adjusted for risks specific to the CGU. Management’s key assumptions include sales growth (at an average of 4% for the ten-year period), which has been determined based on past experience in this market. The Group’s management believes that this is the best available input for forecasting this mature market. 90 Financial Statements 15. Intangible assets Cost At 1 July 2015 Additions Disposals Foreign exchange At 30 June 2016 Asset reclassification Additions Disposals Foreign exchange At 30 June 2017 Amortisation At 1 July 2015 Disposals Charge for the year Foreign exchange At 30 June 2016 Asset reclassification Disposals Charge for the year Impairment Foreign exchange At 30 June 2017 Net book value At 1 July 2015 At 30 June 2016 At 30 June 2017 Manufacturing and Non- Competing know-how £’000 Distribution agreements (Switzerland) £’000 Trade names (Spain) £’000 Customer relationships (Spain) £’000 Know-how and patents (Spain) £’000 Other intangibles £’000 Computer software £’000 Total £’000 4,120 976 372 237 220 882 2,252 9,059 – – – – – – – – – 372 237 220 – – 458 4,578 – – (23) 183 4,738 4,102 – – 455 4,557 – – – – 181 4,738 – – 118 1,094 – – – 57 1,151 322 – 34 39 395 – – 57 – 21 – – – 26 398 – – 20 – 20 – – 31 69 2 – – – 17 254 – – 39 – 39 – – 59 – 3 473 122 101 – – 154 1,036 – 14 (6) 4 126 – 92 126 – 822 2,470 10,007 216 212 – 38 216 226 (29) 340 1,048 2,936 10,760 850 1,765 7,039 – 28 61 – 101 89 – 240 644 939 1,955 7,923 – – 6 – 3 23 – 246 – 38 23 – 426 69 250 948 2,262 8,691 – – – 15 235 – – 18 – 18 – – 27 – 2 47 18 21 – 654 699 678 372 352 276 237 198 153 220 202 188 32 97 100 487 515 674 2,020 2,084 2,069 The class of Intangible Assets “Distribution agreements” arose from the acquisition of the Swiss Subsidiary, Teomed AG on 1 July 2010. These distribution agreements represent the present value of the future cash flows expected to arise from the agreements and are amortised over a period of fifteen years. Trade names, customer relationships, know-how and patent (Spain) assets were recognised at fair value upon the acquisition of Alerpharma S.A. Other intangibles relate to trademarks and licences. 91 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 16. Property, plant and equipment Cost or valuation At 1 July 2015 Revaluation Additions Foreign exchange Disposals At 30 June 2016 Asset reclassification Additions Foreign exchange Disposals At 30 June 2017 Depreciation At 1 July 2015 Charge for the year Revaluation Foreign exchange Disposals At 30 June 2016 Charge for the year Asset reclassification Foreign exchange Disposals At 30 June 2017 Net book value At 1 July 2015 At 30 June 2016 At 30 June 2017 Plant & machinery £’000 Fixtures & fittings £’000 Motor vehicles £’000 Computer equipment £’000 Freehold land & buildings £’000 Total £’000 9,012 5,205 36 3,412 2,603 20,268 – 722 61 (3) – 562 98 (2) – – – – – 433 105 – (27) – 447 – (27) 1,717 711 (5) 9,792 5,863 36 3,950 3,023 22,664 – 531 31 – 727 42 (910) (768) 9,444 5,864 5,032 549 3,743 264 – 15 (3) 5,593 672 – 20 – 83 (2) 4,088 385 – 29 (909) (756) – – – – 36 15 7 – – – 2,646 476 – 91 – 22 3,213 6 – – – 309 (23) 30 – (216) 242 53 – – – 180 – (216) 1,500 306 (1,678) 4,029 3,203 22,576 82 131 (146) 14 – 81 138 – 5 – 11,518 1,427 (146) 203 (5) 12,997 1,510 (23) 84 (1,665) 5,376 3,746 28 3,529 224 12,903 3,980 4,199 4,068 1,462 1,775 2,118 21 14 8 766 737 500 2,521 2,942 2,979 8,750 9,667 9,673 Note 22 provides details of the assets secured against the Group’s bank borrowings. Freehold land and buildings relates to the Group’s office and warehouse building in Milan, Italy and the Group’s manufacturing and office facility in Madrid, Spain. The building in Italy was revalued in June 2016 by independent valuers based on an open market valuation. This property is carried at fair value and is classified as level 3 (that is not market nor observable valuation) in the IFRS fair value hierarchy. 92 Financial Statements 16. Property, plant and equipment continued The Madrid premises were acquired on the acquisition of Alerpharma in June 2015 with a fair valuation of £1,607,000. The valuation was carried out by independent valuers and the fair valuation is classified as level 3 in the fair value hierarchy. The valuation was performed using the depreciated cost replacement method (adjusted for reduction in value due to age). The age reduction applied related to a percentage discount to allow for the fact that the valuation reflected the current age of the building. The unobservable input relates to the percentage applied for this reduction in value. If the age reduction discount were to increase by 10% then the valuation of the building would reduce by £155,000. The net book value at acquisition was £937,000. The reconciliation of the carrying amounts of land and buildings non-financial assets classified within level 3 is as follows: Spain £’000 Italy £’000 Total £’000 Balance at 1 July 2016 Loss recognised in income statement – depreciation of buildings Gain recognised in other comprehensive income – exchange differences on translating foreign operations Balance at 30 June 2017 1,798 1,144 2,942 (85) 106 (53) 69 (138) 175 1,819 1,160 2,979 The Italian land and buildings were previously valued using the cost model and had a carrying value of £1. Fair values were estimated based on recent market transactions, which were then adjusted for specific conditions relating to the land and buildings. A valuation of the Italian land and buildings was carried out in June 2017 by independent valuers using the market method. The value of the property was calculated taking into account the sale prices achieved by other properties similar to the one in question as regards size, location, type, use quality, construction features etc. The valuers used an equivalent value of €1,600 (£1,406) per m2. This compares to a range of prices from €1,400 per m2 to €2,100 per m2 observed by the valuers. Management do not consider that the fair value as at 30 June 2017 for the Italy and Spain land and buildings is significantly different to the carrying value, based on the latest valuation, knowledge of the local market and enquiries of local experts. If the cost basis was used, the carrying amounts of the Italian revalued land and buildings would be £1 (the carrying value of the asset at the point the subsidiary was first consolidated). The revalued amounts include a revaluation surplus of £1,298,000 before tax (of which £476,000 writes back the accumulated depreciation) which is not available for distribution to the shareholders of the Group. 17. Remeasurement of retirement benefit investments The Group carries an insurance policy which is designed to contribute towards the obligation in respect of the German defined benefit pension scheme (see Note 26). The policy includes a right to reimbursement and therefore does not meet the definition of a qualifying insurance policy under IAS19.8. It is valued at fair value by the pension scheme administrators (SLPM) each year. SLPM value the insurance policies according to contractual arrangements (equivalent to cash surrender values). This is classified as level 2 in the fair value hierarchy. 2017 £’000 At 1 July Additions Finance income Remeasurement of investment Profit on foreign exchange 4,045 302 89 (91) 247 2016 £’000 3,160 260 50 (16) 591 4,592 4,045 93 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 18. Inventories Raw materials and consumables Work in progress Finished goods 2017 £’000 1,648 2,774 3,062 7,484 2016 £’000 1,604 3,142 2,946 7,692 The value of inventories measured at fair value less cost to sell was £305,000 (2016: £425,000). The movement in the value of inventories measured at fair value less cost to sell during the year gave rise to a credit of £120,000 which was dealt with in the consolidated income statement. 19. Trade and other receivables Trade receivables Other receivables VAT Prepayments and accrued revenue 2017 £’000 4,336 1,546 333 1,638 7,853 2016 £’000 4,678 428 352 1,056 6,514 Accrued revenue of £56,000 relates to deferred consideration receivable from customers (2016: £59,000). All amounts due as shown above are short-term. The carrying value of trade receivables is considered a reasonable approximation of fair value. All trade and other receivables have been reviewed for indicators of impairment. During the year, £163,000 of trade receivables were provided for and none of the provision utilised. The impaired trade receivables are mostly due from private customers in the Italian market who are experiencing financial difficulties. Bad and doubtful debt provision Balance brought forward Foreign exchange adjustments Charge for the year Balance carried forward 2017 £’000 421 28 163 612 2016 £’000 216 54 151 421 In addition, some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired is as follows: The financial assets which were overdue but not provided for were: Trade receivables Not more than 3 months More than 3 months but not more than 6 months More than 6 months but not more than 1 year More than one year 2017 £’000 2016 £’000 1,196 305 88 18 1,764 215 102 133 1,607 2,214 94 Financial Statements 20. Cash and cash in hand Cash at bank and in hand 21. Trade and other payables Due within one year Trade payables Social security and other taxes Other creditors Accrued expenses and deferred income 22. Borrowings Due within one year Bank Loans Due in more than one year Bank Loans 2017 £’000 2016 £’000 22,122 23,406 2017 £’000 2016 £’000 2,881 1,539 189 8,616 13,225 3,110 1,428 139 6,368 11,045 2017 £’000 391 391 2017 £’000 2016 £’000 295 295 2016 £’000 2,936 2,936 3,070 3,070 There is an overdraft facility provided by The Royal Bank of Scotland Plc which has a variable limit during the year up to a maximum of £5 million. Interest on the overdraft is at the bank’s base rate plus a fixed margin of 2.50%. The facility is secured in favour of The Royal Bank of Scotland Plc by means of debentures granted by the Company and its principal subsidiaries and share pledge agreements relating to Bencard Allergie GmbH, Allergy Therapeutics Italia SRL and Allergy Therapeutics Iberica SL. The overdraft facility is due for renewal in May 2018. The overdraft was unused at 30 June 2017 (2016: Nil). As part of the acquisition of Alerpharma SA, the Group acquired loans totalling €2,386,000 (£1,684,000). The loans are secured by way of a charge on land and buildings owned by Alerpharma Group SA. Capital Repayments Due Bank Inter (1) Bank Inter (2) Santander (1) Tecnoalcala Santander (2) CDTI Interest rate 3 month Euribor + 0.55% 1 month Euribor + 5.0% 12 month Euribor + 2.5% Interest Free Fixed rate of 2.5% Interest Free <1 Year £’000 1-5 Years £’000 >5 Years £’000 125 33 124 26 83 – 347 133 377 102 1,034 10 391 2,003 – 199 – 26 640 68 933 95 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 22. Borrowings continued During the year, Allergy Therapeutics Iberica SL took out a new loan with The Centre for the Development of Industrial Technology (CDTI) for €0.4m to fund research and development specifically for Acarovac MPL. The initial drawdown during the year was 25% of the loan amount. Further drawdowns are based on achieving milestones. The loan is provided on an interest free basis for a term of 10 years with a 4-year capital repayment delay. No warranty with regard to this new loan was provided by Allergy Therapeutics plc. 23. Provisions The provision refers to a leaving indemnity reserve in Allergy Therapeutics Italia srl. Under Italian law, alongside each monthly salary payment an amount is accrued into this reserve for each employee. When the employee leaves the company the accrued amount is paid as a deferred salary payment. The actuarial valuation, in accordance with International Accounting Standard 19 (IAS19) for employee benefits is based on assumptions determinate at the valuation date. The methodology used is the “Projected unit credit method”. This method sees each year of service give rise to an additional unit of leaving indemnity entitlement and values each unit separately to build up to a final total obligation. The actuarial valuation in accordance with IAS19 was carried out by Managers & Partners actuarial services SpA at 30 June 2017. The major assumptions used were as follows:- 2017 % pa 2016 % pa Retail price inflation Salary increase rate Annual rate of leaving indemnity increase Annual discount rate Demographic assumptions Mortality Inability Advanced payment annual rate Withdrawal annual rate The movement in the leaving indemnity reserve during the year was as follows: At 1 July Additions Utilisation IAS19 Addition Foreign exchange movement At 30 June 1.5 0.5 2.6 0.91 1.5 0.5 2.6 0.67 RG48 RG48 INPS tables INPS tables 1.00% 10.00% 1.00% 10.00% 2017 Total £’000 257 24 (46) 40 16 291 2016 Total £’000 211 27 (19) – 38 257 During the year an independent actuarial valuation of the Italy leave indemnity reserve was carried out and an adjustment made so as to comply with IAS19. 96 Financial Statements 23. Provisions continued The following table summarises the effects of changes in these actuarial assumptions on the defined benefit liability at 30 June 2017: Changes in significant actuarial assumptions Withdrawal annual rate +1.00% Withdrawal annual rate -1.00% Annual discount rate +0.25% Annual discount rate -0.25% Annual price inflation +0.25% Annual price inflation -0.25% 2017 £’000 289 293 294 288 286 296 24. Financial instruments Risk management The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern whilst maximising the return to shareholders through the effective management of liquid resources raised through share issues and loan arrangements. Capital management objectives are met through regular reviews of cash flows, debtor/creditor balances, budgets and forecasts. 2017 £’000 2016 £’000 Capital Total equity Borrowings Overall financing Capital-to-overall financing ratio 29,965 29,965 3,327 33,292 0.90 30,324 30,324 3,365 33,689 0.90 There is no requirement by external parties to comply with any capital ratios. The IAS 39 categories of financial assets and liabilities included in the balance sheet and the headings under which they are shown are as follows: Categories of financial instrument Financial assets Current Loans and receivables (including cash and cash equivalents) Financial liabilities Current At amortised cost (including borrowings and payables) Fair value through profit and loss – held for trading Non current At amortised cost (including borrowings and payables) 2017 £’000 2016 £’000 28,395 28,395 28,922 28,922 (13,616) (11,340) (404) (1,180) (14,020) (12,520) (3,227) (3,327) (17,247) (15,847) 97 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 24. Financial instruments continued Derivative financial instruments The Group uses derivative financial instruments to mitigate the effects of exchange rate exposure through the use of forward exchange contracts. The fair value of these instruments is calculated by reference to observable market rates (spot rate versus forward rates for matching maturity dates) and supported by counterparty confirmation. Within the fair value hierarchy, this financial derivative is classified as level 2. Euro forward contracts (including euro exchange swaps) The Group has euro forward contracts with its bank that are arranged for the net sale of €22,421,000 to purchase GBP at an average blended rate of 1.1567 for dates from July 2017 until May 2018. Analysis of Derivative Financial Instruments Credit/(Charge) to administration expenses in the Consolidated Income Statement Euro forward contracts Euro forward contracts – matured in the period 2017 £’000 2016 £’000 776 (1,963) (1,930) (1,154) 519 (1,444) Forward exchange contracts are considered by management to be part of economic hedge arrangements but have not been formally designated as such and hence hedge accounting is not used. Derivative financial instruments Current liabilities Derivative financial instruments – euro forward contracts 2017 £’000 (404) (404) 2016 £’000 (1,180) (1,180) The net gain at fair value of financial instruments held at the balance sheet date that has been recorded through the consolidated income statement is £776,000 (2016 loss: £1,963,000). Foreign currency risk The Group conducts most of its day to day financial activities in either the euro (which is the functional currency of the active subsidiaries in Germany, Italy, Spain, Austria and The Netherlands), sterling (which is the functional currency of the UK parent entity) and Swiss francs (which is the functional currency of the Swiss subsidiary). Some costs are denominated in US dollars and some income is denominated in Canadian dollars. The Group carries bank balances in the following currencies: Sterling Euro US dollars Canadian dollars Swiss franc 98 2017 £’000 18,232 3,411 96 11 372 2016 £’000 8,423 3,496 11,233 9 245 22,122 23,406 Financial Statements 24. Financial instruments continued Foreign currency denominated financial assets and liabilities, translated into sterling at closing rates, are as follows: Current Financial assets Financial liabilities Short term exposure Non- current Financial liabilities Long term exposure Sterling £’000 2017 Euro £’000 Other £’000 Sterling £’000 2016 Euro £’000 Other £’000 20,574 7,113 (7,471) (6,284) 13,103 829 – – (3,227) (3,227) 707 (264) 443 – – 9,637 (5,351) 4,286 7,558 (6,966) 11,727 (203) 592 11,524 – – (3,327) (3,327) – – The following table illustrates the sensitivity of the net result for the year and the equity of the Group with regard to its financial assets and liabilities and the euro to sterling exchange rate. Foreign exchange movements over the last two years have been considered and an average taken, and on this basis a 10% movement is considered to be a reasonable benchmark. For 2016, a 10% movement was also used. 2017 £’000 2016 £’000 If sterling had strengthened against the euro by Effect on net results for the year Effect on other comprehensive income Effect on equity If sterling had weakened against the euro by Effect on net results for the year Effect on other comprehensive income Effect on equity 10% (151) (392) (543) 10% 184 477 661 10% 635 (470) 165 10% (776) 686 (90) Interest rate risk The Group finances its operations through operating cashflow, equity fundraising and overdraft facilities. Interest is charged at a floating rate on the overdraft facility. The overdraft facility is tailored in a way to give flexibility to the Group. This flexibility provides the Group with a higher level of the facility in the low sales season and allows it to pay down the facility in the high sales season. The following table illustrates the sensitivity of the net result for the year and equity to possible changes in interest rates of + 1% with effect from the beginning of the year on the remaining element of borrowings. Due to the current low interest rates it is not feasible to illustrate the results were the interest rates to fall by 1%. The sensitivities are considered to be reasonable given the current market conditions and the calculations are based on the financial instruments held at each balance sheet date, all other variables being held constant. Movement in net results for the year Equity 2017 £’000 + 1% (15) – (15) 2017 £’000 – 1% n/a n/a n/a 2016 £’000 + 1% (9) – (9) 2016 £’000 – 1% n/a n/a n/a 99 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 24. Financial instruments continued Credit risk Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Group. In order to minimise this risk, the Group endeavours only to deal with companies which are demonstrably creditworthy and this, together with the aggregate financial exposure, is regularly monitored. The maximum exposure to credit risk is the carrying value of the debtor. Credit risk on cash and cash equivalents is considered to be small as the counterparties are all substantial banks with high credit ratings. The maximum exposure is the amount of the deposit. Credit risk on assets derived from Financial derivatives are also considered to be small as the counterparties are all substantial banks with high credit ratings. The maximum exposure is the asset recognised. The credit quality of financial assets that are not past due or impaired are regularly reviewed by Management. Liquidity risk The Group’s capital management objectives are to ensure the Group’s ability to continue as a going concern, and to provide adequate funding for its day to day operations. Management has access to funding through a bank facility and continues to have the option to raise funds from the issue of equity shares to ensure the Group remains able to meet its commitments as they fall due. The Group’s bank facility (Note 22) is due for renewal in May 2018. As at 30 June 2017 the Group’s contractual maturities (undiscounted and including interest) are summarised as follows: 2017 £’000 Within 6 months 169 2,881 10,344 13,394 271 13,665 2017 £’000 6 to 12 months 169 – – 169 133 302 2016 £’000 Within 6 months 159 3,110 7,716 10,985 817 11,802 2016 £’000 6 to 12 months 159 – – 159 363 522 2017 £’000 1 to 5 years 2,566 291 2,857 2017 £’000 Later than 5 years 971 – 971 2016 £’000 1 to 5 years 2016 £’000 Later than 5 years 2,422 236 2,658 916 – 916 Current liabilities Borrowing facility Trade payables Other short term liabilities Derivatives Non-current liabilities Borrowing facility Other long term liabilities 100 Financial Statements 25. Operating lease commitments The following payments are due to be made on operating lease commitments: Within one year Two to five years Over five years Land & buildings Other Total 2017 £’000 982 3,038 2,352 6,372 2016 £’000 740 2,139 868 3,747 2017 £’000 536 449 – 985 2016 £’000 462 1,080 99 1,641 2017 £’000 1,518 3,487 2,352 7,357 2016 £’000 1,202 3,219 967 5,388 Of the operating lease commitments for the land and buildings of £6,372,000 (2016: £3,747,000), £2,021,000 relates to the UK premises (2016: £2,468,000). The production facility accounts for £1,828,000 (2016: £2,206,000) of this commitment and expires in December 2023. Premises in Spain account for £97,000 (2016: £132,000) expiring in 2020 and in Germany for £4,045,000 (2016: £316,000) expiring in June 2027. Of the other commitments, £756,000 (2016: £1,150,000) relates to leased vehicles all expiring within 5 years and none relate (2016:£99,000) to leased vehicles all expiring over 5 years. 26. Retirement benefit obligations Defined contribution scheme The Group operates a defined contribution pension scheme for certain employees in the UK. The assets of the scheme are held separately from those of the Group in an independently administered fund. The amount charged against the profits represents the contributions payable under the scheme in respect of the accounting period totalling £451,000 (2016: £341,000). Defined benefit scheme The Group operates a partly funded non-contributory defined benefit pension scheme for certain employees in Germany. The actuarial valuation was carried out by Swiss Life Pensions Management GmbH at 30 June 2017. The major assumptions used were as follows: 2017 % pa 2016 % pa Retail price inflation Salary increase rate Rate of pension increase Discount rate at the beginning of the year Discount rate at the end of the year Increase of social security contribution ceiling Average life expectancies Male, 65 years of age at the balance sheet date Female, 65 years of age at the balance sheet date Male, 45 years of age at the balance sheet date Female, 45 years of age at the balance sheet date 1.5 3.0 1.5 1.45 2.05 3.0 1.5 3.5 1.5 2.45 1.45 3.5 Years Years 19.8 23.8 39.5 44.6 19.6 23.7 39.4 44.4 101 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 26. Retirement benefit obligations continued The assets in the scheme and the expected rates of return were as follows: Fair value of plan assets Present value of scheme liabilities Deficit in the scheme 2017 £’000 1,346 (10,965) (9,619) 2016 £’000 1,248 (11,422) (10,174) The plan assets consist of long-term insurance policies held to cover the German pension obligation. The value of the plan assets is deducted from the value of the pension liability to give a net liability of £9.6m (2016: £10.2m). The basis used to determine the net interest cost is based on the net defined benefit asset or liability and the discount rate as determined by Swiss Life Pensions Management GmbH using the projected unit credit method. The actual gain on plan assets for the year is £50,000 (2016: £38,000). The pension charge generates an unrecognised deferred tax asset of £1,658,000 (2016: £2,021,000), however this is unrecognised in the Group accounts as there is uncertainty over the recoverability. The insurance contracts that form the plan assets are valued at fair value (market price) by the pension scheme administrators (SLPM) each year. SLPM value the insurance policies according to contractual arrangements (equivalent to cash surrender values). This is classified as level 2 in the fair value hierarchy. Long term insurance policies that do not qualify as plan assets are recognised as separate investment assets at fair value and represent a re-imbursement right as defined by IAS 19. See Note 17 for further details of these investment assets. 2017 £’000 2016 £’000 Amounts charged to operating profit Current service costs Amounts included in other finance expenses Interest income on plan assets Interest on pension scheme liabilities Net charge Amounts recognised in other comprehensive income Actual return less expected return on pension scheme assets Experience (losses)/gains arising on scheme liabilities Changes in assumptions underlying the present value of scheme liabilities Total amount relating to year Opening cumulative losses Remeasurement of net defined liability Cumulative net movement recognised Movement in assets during the year Balance as at 1 July Foreign currency differences Interest income on plan assets Remeasurement of net defined liability Contributions from employer Assets transferred to finance benefits paid Balance as at 30 June 102 366 251 (19) 170 151 31 (86) 1,555 1,500 (5,401) (3,901) (3,901) 2017 £’000 1,248 75 18 31 20 (26) 197 171 11 110 (1,809) (1,688) (3,713) (5,401) (5,401) 2016 £’000 1,045 185 26 11 17 (46) 1,346 (36) 1,248 Financial Statements 26. Retirement benefit obligations continued Movement in liabilities in the year Balance as at 1 July Foreign currency differences Current service costs Interest cost Remeasurement of net defined liability Benefits paid by employer Benefits paid from assets Balance as at 30 June 2017 £’000 (11,422) (654) (366) (170) 2016 £’000 (7,800) (1,621) (251) (197) 1,469 (1,699) 132 46 110 36 (10,965) (11,422) The expected contributions over the forthcoming year are £152,000. The significant actuarial assumptions for the determination of the defined benefit IAS 19.173(b) obligation are the discount rate, the salary growth rate and the average life expectancy. The calculation of the net defined benefit liability is sensitive to these assumptions. The following table summarises the effects of changes in these actuarial assumptions on the defined benefit liability at 30 June 2017: Changes in the significant actuarial assumptions Discount rate (Decrease)/increase in the defined benefit liability Salary Growth rate Increase/(decrease) in the defined benefit liability Average life expectancies of males Increase/(decrease) in the defined benefit liability Average life expectancies of females Increase/(decrease) in the defined benefit liability 2017 £’000 2017 £’000 2016 £’000 2016 £’000 Increase to 3.05% Decrease to 1.05% Increase to 2.45% Decrease to 0.45% (1,839) 2,238 (2,020) 2,484 Increase to 4.00% Decrease to 2.00% Increase to 4.50% Decrease to 2.50% 497 (455) 564 (517) Increase of one year Decrease of one year Increase of one year Decrease of one year 381 (377) 441 (433) Increase of one year Decrease of one year Increase of one year Decrease of one year 423 (422) 478 (475) 103 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 27. Issued share capital Authorised share capital Ordinary shares of 0.10p each 1 July and 30 June Deferred shares of 0.10p each 1 July and 30 June Issued and fully paid Ordinary shares of 0.10p At 1 July Issued during the year: Share options exercised Share placing At 30 June Issued and fully paid Deferred shares of 0.10p At 1 July Issued during the year At 30 June Issued share capital 2017 Shares 2017 £’000 2016 Shares 2016 £’000 790,151,667 790 790,151,667 790 9,848,333 10 9,848,333 10 589,158,508 589 545,847,919 546 4,959,260 – 5 – 594,117,768 594 9,848,333 – 9,848,333 10 – 10 603,966,101 604 2,305,089 41,005,500 589,158,508 9,848,333 – 9,848,333 599,006,841 2 41 589 10 – 10 599 The deferred shares have no voting rights, dividend rights or value attached to them. Share options were exercised in the year with proceeds of £33,000 (2016: £2,000). On 17 November 2015, 41,005,500 new ordinary shares of 0.1 pence each were placed with institutional and other investors at a fixed price of 28p per share, raising £11 million net for the purpose of investing in new product development. 28. Share based payments The Group has a Long Term Incentive Plan (‘LTIP’) under which Executive Directors and senior employees may receive an annual provisional award of performance vesting shares. The Group has two plans: the initial 2005 Plan and the 2013 Plan. The 2013 LTIP plan was adopted by the Board on 20 March 2013, the Board having consulted major shareholders. Awards were made under the new 2013 plan during the year. For the 2013 Plan, performance criteria for each award are set by the remuneration committee. An award shall vest at 100% if at the end of the plan cycle the share price has increased by 25% has been satisfied. If the share price increase is less than 10% then no shares will vest. If the share price increase is between 10% and 25%, share distributions will be on a straight line basis between 25% and 100% of the initial award. Each plan cycle will comprise a period of three years. An award will be forfeited if the employee leaves the Group before the shares vest. For awards under the 2013 Plan during the years ended 30 June 2014 and 2015, the performance criteria are based on a combination of share price performance and adjusted earnings growth. 104 Financial Statements 28. Share based payments continued Share options were granted to employees and Directors under earlier schemes. The vesting periods are usually from one to three years. The vesting of some options is dependent on the Group’s TSR performance as for the LTIP Plans detailed above. The options are settled in equity once exercised. If the options remain unexercised after a period of 10 years from the date of the grant, the options expire. Options are forfeited if the employee leaves the Group before the options vest. During the current year, LTIP grants were provisionally awarded in December 2016 under the 2013 plan subject to performance criteria being met. The following table sets out share options outstanding which are unrelated to the LTIP awards and have been disclosed separately to avoid distorting the weighted average exercise price (WAEP): Outstanding at the beginning of the year Exercised during the year Lapsed during the year Outstanding at the year end Exercisable at the year end 2017 WAEP 2016 WAEP Number Price (£) Number Price (£) 852,539 (517,248) (296,552) 38,739 38,739 0.14 852,539 0.14 – – – – 0.18 0.18 852,539 852,539 – – 0.14 0.14 The share options outstanding at the end of the year have a weighted average remaining contractual life of 2.3 years (2016: 3.3 years) and all have an exercise price of £0.18: 30 June 2017 Number 30 June 2016 Number Exercise price (p) 6-45 38,739 852,539 The movement in low cost options (LTIP awards that have been converted to share options redeemable at par) during the year was as follows:- 2017 Number 2016 Number Outstanding at the beginning of the year Converted in the year from LTIPs Exercised during the year Lapsed during the year Outstanding at the year end Exercisable at the year end 6,170,038 - (4,442,012) (80,000) 1,648,026 1,648,026 - 8,475,120 (2,305,082) - 6,170,038 6,170,038 For low cost options exercised during the year, the weighted average share price at the date of exercise was £0.19 (2016: £0.25). Outstanding shares provisionally awarded under the Long Term Incentive Plan, with a low cost exercise price, are as follows: 2017 Number 2016 Number Outstanding at the beginning of the year Awarded during the year Converted to options Lapsed during the year Outstanding at the year end 11,862,500 15,193,750 – (5,850,000) 21,206,250 22,192,500 – (8,475,120) (1,854,880) 11,862,500 105 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 28. Share based payments continued The fair value of the Long Term Incentive Plan shares conditionally awarded in October 2014 has been arrived at using the share price at the date of grant and applying a vesting probability for the performance conditions. The assumptions made to value shares awarded were as follows: Date of grant End of plan cycle Expected life (years) Exercise price (£) 01/10/2014 30/06/2017 3 0.001 Share price at grant (£) 0.192 Probability of meeting performance tests (%) Probability of awards vesting – allowing for expected leavers (%) 36.75 33.1 Fair value (£) 0.070 Number outstanding 3,900,000 The fair values of Long Term Incentive Plan shares conditionally awarded in December 2016 were determined using a Monte Carlo simulation (with 5,000 iterations) that takes into account factors specific to the share incentive plans. A discount has been applied for lack of marketability to the portion of the awards that would have to be retained for three years after vesting. The following principal assumptions were used in the valuation: Date of grant Excercisable from Excercisable to Exercise price (£) 30/12/2016 24/09/2019 24/09/2026 0.001 30/12/2016 24/09/2019 24/09/2026 0.001 30/12/2016 24/09/2019 24/09/2026 0.001 30/12/2016 24/09/2019 24/09/2026 0.001 Share price at grant (£) Risk-free rate (2.5 years) 0.209 0.209 0.209 0.209 0.11% 0.11% 0.11% 0.11% Volatility 47% 47% Probability of meeting performance targets (non market conditions) 66.20% 66.20% Fair value (£) 0.055 0.192 0.091 0.192 Number outstanding 3,258,125 3,258,125 4,338,750 4,338,750 The share-based payment charge assumes an employee attrition rate of 5% per annum. The Group recognised total expenses of £703,000 (2016: £327,000) related to equity-settled share based payment transactions during the year. 29. Contingent liabilities Allergy Therapeutics (UK) Ltd, a subsidiary of Allergy Therapeutics plc, has given a guarantee in lieu of deposits for leases on cars and rented office space of Bencard Allergie GmbH. The amount as at 30 June 2017 was €107,426; £94,391 (2016: €107,426; £89,099). A cross-guarantee exists between Allergy Therapeutics (Holdings) Ltd, Allergy Therapeutics (UK) Ltd, Bencard Allergie GmbH, Allergy Therapeutics Italia srl. and Allergy Therapeutics Iberica SL. in which the liabilities of each entity to the Royal Bank of Scotland Plc are guaranteed by all the others. On 23 February 2015, the Company received notification that The Federal Office for Economics and Export (“BAFA”) had made a decision to reverse their preliminary exemption to the increased manufacturers rebate in Germany for the period July to December 2012. The Company was granted a preliminary exemption to the increased rebate for this period by BAFA in 2013. The Company recognised revenue of €1.4m (£1.1m at that time, now £1.2m) against this exemption in the year ended 30 June 2013. All other preliminary exemptions (granted for periods up to 30 June 2012) have previously been ratified as final by BAFA. After taking legal advice, the Company has lodged an appeal against this decision and is confident that the exemption will be re-instated. Therefore, as at 30 June 2017, no provision has been recognised for the repayment of the rebate refund. This position will be kept under review. 106 Financial Statements 29. Contingent liabilities continued The European Commission has concluded its investigation into whether the exemption of pharmaceutical manufacturers from the increase in rebates in Germany constitutes state aid. The European Commission has determined that the exemptions do not constitute state aid. Subsequent to this announcement, the Group has been advised that an appeal has been lodged at the EU Court against this decision. If successful, and the exemptions are determined to be illegal state aid, then the exemption refunds may have to be repaid. The maximum sum to be repaid would be approximately £5m (including the £1.2m referred to above); however, the Group considers this to be an unlikely outcome and consequently has not recognised any provision as a result. 30. Capital commitments The Group’s capital commitments at the end of the financial period, for which no provision has been made, are as follows: 30 June 2017 £’000 30 June 2016 £’000 Capital commitments 201 227 Included in the above is £192,000 for on-going factory refurbishments in the UK (2016: £78,000); £2,000 for new plant and machinery (2016: £106,000) and £7,000 for IT equipment and systems upgrades (2016: £43,000). 31. Related party transactions and ultimate control Allergy Therapeutics plcs’ related parties include its subsidiary companies and its key management. Key management personnel are the Company’s Directors, and as such, full disclosure of their remuneration can be found in the Directors’ Remuneration table on page 49. At 30 June 2017, the Company’s subsidiary undertakings were: Subsidiary undertaking Allergy Therapeutics (Holdings) Ltd Allergy Therapeutics (UK) Ltd Country of incorporation UK UK Principal activity Holding Company Manufacture and sale of pharmaceutical products Bencard Allergie GmbH Germany Sale of pharmaceutical products Bencard Allergie (Austria) GmbH Allergy Therapeutics Italia s.r.l. Allergy Therapeutics Iberica S.L. Teomed A.G. Austria Italy Spain Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Switzerland Sale of pharmaceutical products Allergy Therapeutics Netherlands BV Netherlands Sale of pharmaceutical products Allergy Therapeutics Argentina S.A. Argentina Marketing of pharmaceutical products Bencard Allergy Therapeutics Unipessoal LDA Portugal Sale of pharmaceutical products Percentage of shares held Class of shares held 100 100 100 100 100 100 100 100 100 100 Ordinary and deferred Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary In the prior year, Allergy Therapeutics Iberica SL took out a new loan with Santander for €2m at a fixed rate of 2.5% for a term of 7 years with a 2-year capital repayment delay. A warranty with regard to this loan was provided by Allergy Therapeutics Plc. 107 allergytherapeutics.comFinancial Statements Notes to the Financial Statements continued 31. Related party transactions and ultimate control continued During the year, Group companies entered into the following transactions with related parties that are not members of the Group: Related Party Laboratorios Synthesis S.A.S. Gynopharm de Venezuela C.A. Laboratorio Internacional Argentino S.A. Total Sales of goods 2017 £’000 2016 £’000 – – – – – – – – Amounts owed by/(to) related parties 2017 £’000 (73) (60) – (133) 2016 £’000 (73) (60) – (133) Laboratorios Synthesis S.A.S., Gynopharm de Venezuela C.A. and Laboratorio Internacional Argentino S.A. are wholly-owned subsidiaries of CFR Pharmaceuticals SA. CFR Pharmaceuticals SA is a major investor in Allergy Therapeutics plc. Sales of goods to related parties were made on normal commercial terms. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties. There is no overall ultimate controlling party. 108 Financial Statements Company Balance Sheet Fixed assets Investments Current assets Debtors: amounts falling due within one year Total assets Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Net assets Capital and reserves Called up share capital Share premium account Other reserves – share based payments Profit and loss account Total equity 30 June 2017 £’000 30 June 2016 £’000 Note 3 4 5 1,641 1,469 615 2,256 (271) 344 1,985 1,985 659 2,128 (241) 418 1,887 1,887 6 604 599 102,420 102,392 1,268 741 (102,307) (101,845) 1,985 1,887 The Company’s loss for the period was £798,000 (2016: £11,452,000 loss). These financial statements were approved by the Board of Directors and authorised for issue on 27 September 2017 and were signed on its behalf by Manuel Llobet Chief Executive Officer Nicolas Wykeman Finance Director Registered number: 05141592 109 allergytherapeutics.comFinancial Statements Statement of Changes in Equity (Company) At 30 June 2015 Loss for the period after tax Share based payments Shares issued Share issue costs Transfer of lapsed options to retained earnings Transfer of EBT reserve to retained earnings At 30 June 2016 Loss for the period after tax Share based payments Shares issued Transfer of lapsed options to retained earnings At 30 June 2017 Issued Capital £’000 Share premium £’000 Reserve – shares held in EBT £’000 Reserve – share based payment £’000 Retained earnings £’000 Total equity £’000 556 91,463 67 591 (90,636) 2,041 – – 43 – – – – – 11,441 (512) – – 599 102,392 – – 5 – – – 28 – 604 102,420 – – – – – (67) – – – – – – – (11,453) (11,453) 327 – – (177) – – – – 177 67 327 11,484 (512) – – 741 (101,845) 1,887 – 863 – (798) – – (336) 336 (798) 863 33 – 1,268 (102,307) 1,985 110 Financial Statements Notes to Company Balance Sheet 1. Accounting policies Basis of preparation The separate financial statements of the Company have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (FRS 101) and the Companies Act 2006. FRS 101 sets out a reduced disclosure framework for a ‘qualifying entity’ as defined in the standard which addresses the financial reporting requirements and disclosure exemptions in the individual financial statements of qualifying entities that otherwise apply the recognition, measurement and disclosure requirements of EU-adopted IFRS. As permitted by the Companies Act, the separate financial statements have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention. The prior year was the first financial statements of the Company prepared in accordance with FRS 101. The Company’s date of transition to FRS 101 is 30 June 2014. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to business combinations, financial instruments, capital management, presentation of comparative information in respect of certain assets, presentation of a cash flow statement, standards not yet effective, impairment of assets and related party transactions. Where required, equivalent disclosures are given in the consolidated financial statements of Allergy Therapeutics plc. In accordance with section 408 of the Companies Act 2006, no separate income statement has been presented for the Company. The principal accounting policies adopted in the preparation of this financial information are set out below. These policies have been consistently applied to all the financial years presented, unless otherwise stated. Going Concern After making appropriate enquiries, which included a review of the annual budget, considering the cash flow requirements for the foreseeable future, noting the renewed overdraft facility, and the effects of sales and foreign exchange sensitivities on the Group and Company’s funding plans, the Directors continue to believe that the Group and Company will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance. Investments Investments in shares in subsidiary undertakings are included at cost less any provision for impairment. Foreign currencies Transactions in foreign currencies are recorded using an average exchange rate for the period. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange ruling at the balance sheet date and the gains or losses on translation are included in the profit or loss account. Deferred taxation Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events have occurred at that date that will result in an obligation to pay more, or a right to pay less, tax. Deferred tax assets are recognised only to the extent that the Directors consider that it is more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Deferred tax is measured on an undiscounted basis at the tax rates and laws that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. 111 allergytherapeutics.comFinancial Statements Notes to Company Balance Sheet continued 1. Accounting policies continued Employee Benefit Trust (EBT) In the prior year the financial statements included the assets and liabilities of a trust set up for the benefit of the Group’s employees. The balance in the EBT reserve related to the historic purchase and disposal of Company shares. No transactions had passed through the EBT since 2009. No shares were held by the EBT. The remaining balance on the EBT reserve was transferred to retained earnings in the prior year. Share based payments Share based payments made in respect of the Company’s shares to employees of its subsidiaries are reported as an increase in investment. All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). If vesting periods or non-market based vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of share options expected to vest. Estimates are revised subsequently if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. If market based vesting conditions apply, the expense is allocated over the relevant period, usually the period over which performance is measured. Vesting assumptions and resulting expenses are fixed at the date of grant, regardless of whether market conditions are actually met. Any adjustment for options which lapse prior to vesting is recognised in the current period. No adjustment to expense recognised in prior periods is made if fewer share options ultimately are vested than estimated, however the expensed value of these lapsed shares is transferred from the share based payment reserve to the profit and loss reserve. Full details of the Group’s share based payments are set out in Note 28 of the consolidated financial statements. 2. Loss for the financial period The Company has taken advantage of s.408 of the Companies Act 2006 and has not included its own income statement in these financial statements. The Company’s loss for the period was £0.8 million (2016: £11.5 million loss). 3. Investments Cost Investment brought forward Additions Diminution in value Investment carried forward Shares in subsidiary undertaking £’000 1,469 863 (691) 1,641 The additions relate to share based payments in respect of the Company’s shares to employees of its subsidiaries. 112 Financial Statements 3. Investments continued The diminution in value represents the shortfall in the net assets of the shares in the subsidiary undertakings’ own statutory financial statements as compared to the carrying value in the Company’s books. At 30 June 2017 the Company’s subsidiary undertakings were: Subsidiary undertaking Allergy Therapeutics (Holdings) Ltd Allergy Therapeutics (UK) Ltd Country of incorporation UK UK Principal activity Holding Company Manufacture and sale of pharmaceutical products Bencard Allergie GmbH Germany Sale of pharmaceutical products Bencard Allergie (Austria) GmbH Allergy Therapeutics Italia s.r.l. Allergy Therapeutics Iberica S.L. Teomed A.G. Austria Italy Spain Sale of pharmaceutical products Sale of pharmaceutical products Sale of pharmaceutical products Switzerland Sale of pharmaceutical products Allergy Therapeutics Netherlands BV Netherlands Sale of pharmaceutical products Allergy Therapeutics Argentina S.A. Argentina Marketing of pharmaceutical products Bencard Allergy Therapeutics Unipessoal LDA Portugal Sale of pharmaceutical products Percentage of shares held Class of shares held 100 100 100 100 100 100 100 100 100 100 Ordinary and deferred Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Allergy Therapeutics (Holdings) Ltd is fully owned by Allergy Therapeutics plc. All other subsidiary undertakings except Bencard Allergie (Austria) GmbH and Allergy Therapeutics S.A. are fully owned by Allergy Therapeutics (Holdings) Ltd. Bencard Allergie (Austria) GmbH is fully owned by Bencard Allergie GmbH. 4. Debtors Amounts falling due within one year Amount owed by subsidiary undertakings Prepayments and accrued income 30 June 2017 £’000 30 June 2016 £’000 180 435 615 170 489 659 The amount owed by subsidiary undertakings is stated net of provisions of £100,646,170 (2016: £100,480,276). 5. Creditors – amounts falling due within one year Accruals 30 June 2017 £’000 30 June 2016 £’000 271 271 241 241 6. Called up share capital Full details of the Company’s share capital are set out in Note 27 of the consolidated financial statements. 7. Share based payments Allergy Therapeutics plc (the Company) does not have any employees. All share based payments are recharged to the respective Group employing subsidiary. Full details of the Company’s share based payments are set out in Note 28 of the consolidated financial statements. 113 allergytherapeutics.comFinancial Statements Notes to Company Balance Sheet continued 8. Directors’ emoluments Full details of the Company’s Directors’ emoluments are set out in the Directors’ Remuneration Report on pages 47 to 50. 9. Contingent Liabilities Full details of the Company’s contingent liabilities are set out in Note 29 of the consolidated financial statements. 10. Related party transactions In accordance with the provisions of FRS101, the Company is exempt from the requirements in IAS 24 (Related party Disclosures) to disclose related party transactions entered into between members of a group, as all parties to the transactions are wholly owned by the Company Details of other related party transactions can be found in Note 31 to the Consolidated financial statements. 114 Financial Statements Shareholder Information Registered office Dominion Way Worthing West Sussex BN14 8SA Advisers Nominated Adviser and Broker Panmure Gordon & Co 1 New Change London EC4M 9AT Auditor Grant Thornton UK LLP St Johns House Crawley West Sussex RH10 1HS Lawyers Covington and Burling LLP 265 Strand London WC2R 1BH Cooley’s (UK) LLP Dashwood 69 Old Broad Street London EC2M 1QS Actuary Swiss Life Pensions Management GmbH Swiss Life Gruppe Berliner Strasse 85 80805 München Germany Registrars Capita IRG plc The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Bankers The Royal Bank of Scotland plc South East Corporate Centre Turnpike House 123 High Street Crawley West Sussex RH10 1DQ Public Relations Advisers Consilium Strategic Communications 41 Lothbury London EC2R 7HG 115 allergytherapeutics.com 116 Dominion Way Worthing West Sussex BN14 8SA