Circor International Inc Annual Report 2018

FY2018 Annual Report · Circor International Inc

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Building on
our progress

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Circassia in brief
Circassia is a world-class specialty pharmaceutical
business focused on respiratory disease. The Company
sells its novel, market-leading NIOX® asthma management
products directly to specialists in the United States,
United Kingdom, China and Germany, and in a wide
range of other countries through its network of partners.
In the United States, Circassia has a commercial
collaboration with AstraZeneca in which it has the
commercial rights to chronic obstructive pulmonary
disease (COPD) treatments Tudorza® and Duaklir®.
Circassia also has the US and Chinese commercial
rights to the late-stage ventilator-compatible nitric
oxide product AirNOvent. For more information please
visit www.circassia.com.

Investment proposition

Strategic report

10 Operational and financial highlights
12 Operating review
20 Focused strategy; efficient business model
22 Financial review
26 Corporate social responsibility
28 Risks and risk management

Corporate governance

34 Board of Directors
36 Corporate governance report
44 Audit and Risk Committee report
51 Nomination Committee report
52 Remuneration Committee report
65 Directors’ report
67 Statement of directors’ responsibilities

in respect of the financial statements
Independent auditors’ report

Group financial statements

74 Consolidated statement of comprehensive income
75 Consolidated statement of financial position
76 Parent Company statement of financial position
Consolidated and Parent Company statement
77
of cash flows

78 Consolidated statement of changes in equity
79 Parent Company statement of changes in equity
80 Notes to the financial statements
124 Advisors and contact details

Strengthening our portfolio

See page 2

Advancing our COPD partnership

See page 4

Expanding our global footprint

See page 6

Transforming our business

See page 8

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Approved products

We have NIOX®, Tudorza® and Duaklir® approved in
the US and have the potential for a fourth approval
with AirNOvent

Investment proposition

We are broadening and strengthening our portfolio
of innovative products as part of our strategy to build
a successful specialty pharmaceutical company.
We made good progress during 2018, which we have
continued in the first quarter of 2019.

Acquiring full US commercial rights to Tudorza®

Building on our profit share arrangement with
AstraZeneca for chronic obstructive pulmonary disease
(COPD) treatment Tudorza®, we exercised our option
to acquire the product’s full US commercial rights at the
end of 2018. This followed a filing in the first half of the
year to include positive clinical data from the ASCENT
study in the product’s label, which was recently approved
by the US Food and Drug Administration (FDA). We are
now looking forward to the transfer of Tudorza®’s licence
from AstraZeneca to Circassia in the coming weeks.

Preparing Duaklir® for launch

As part of our original collaboration with AstraZeneca,
we acquired the US commercial rights to COPD
combination therapy Duaklir®. During 2018, AstraZeneca
submitted a New Drug Application for the product, which
was recently approved by the FDA. As a result, we plan
to launch the product during the second half of the
year, further strengthening our portfolio of respiratory
medicines in the United States.

Adding AirNOvent to the portfolio

In early 2019, we announced the acquisition of the
US and Chinese commercial rights to the ventilator-
compatible nitric oxide product AirNOvent from
AIT Therapeutics Inc ("AIT"). Following a successful
pre-submission meeting with the FDA, AIT plans to
submit the product for approval in the US for use in
the treatment of hypoxic respiratory failure associated
with persistent pulmonary hypertension of the newborn.
Once approved, we anticipate launching AirNOvent
in the United States in the first half of 2020.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018
Strengthening
our portfolio

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Advancing our
COPD partnership

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Investment proposition continued

During 2018, we built on our transformational US
commercial collaboration with AstraZeneca for chronic
obstructive pulmonary disease (COPD) treatments
Tudorza® and Duaklir®. In 2018 we amended our original
agreement, AstraZeneca subscribed for additional new
ordinary shares in Circassia and we exercised our option
to take full US commercial control of Tudorza®.

Establishing a dedicated COPD sales force

Taking full commercial control of Tudorza® in the
United States provides us with additional flexibility in
managing the composition of our sales force, customer
targeting, product detail prioritisation, territory definition,
distribution strategy, pricing and market access priorities.
As a result, we have launched a dedicated COPD sales
force to promote Tudorza®, and following its launch later
in the year, Duaklir®. Alongside this sales force our device
promotional team will focus on NIOX® and prepare for
the launch of AirNOvent, which we anticipate in 2020,
once approved.

Presenting new clinical data

At the prestigious 2018 American Thoracic Society
conference scientists presented positive clinical
data from the Tudorza® phase IV ASCENT and Duaklir®
phase III AMPLIFY studies. Both studies met their
primary endpoints, with ASCENT demonstrating
Tudorza® is effective at reducing COPD exacerbations
with no increase in major cardiovascular adverse events,
and AMPLIFY showing Duaklir® achieved significantly
greater improvements in lung function compared
with its individual monotherapy components.

COPD exacerbations

In the ASCENT study Tudorza® significantly reduced
the rate of moderate to severe COPD exacerbations
during the first year of treatment

COPD hospitalisations

Tudorza® also significantly reduced hospitalisations
due to COPD exacerbations in the same period

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

China team

100

We significantly expanded our commercial
organisation in China and most of our approximately
100-strong team is now in place

Direct sales territories

We are expanding our direct sales capabilities,
and have the potential to add Italy to our
direct markets

Investment proposition continued

During 2018 we grew our commercial footprint around
the world, significantly expanding our team in China and
adding new partners in a number of countries. We aim
to leverage this commercial platform, increasing sales
of our existing products and adding further products
via in-licensing, acquisition or partnering.

Launching our direct sales team in China

In the second half of 2018, we made great progress
recruiting, training and launching our new NIOX® direct
sales team in China. This built on, and significantly
expanded, our established Beijing-based commercial
team, which previously focused on supporting local
partners. With NIOX® already installed in approximately
400 top hospitals in China, our new commercial team
is targeting the approximately 2,000 leading institutions
where the product was not available previously.

Expanding our network of partners

Alongside our direct sales teams in the United States,
United Kingdom, Germany and China, we sell our
products in more than 35 additional countries through
our international network of partners. During 2018,
we strengthened this network, with the addition
of new partners in several territories, including
Malaysia, Mexico and Thailand.

Growing our European presence

During 2018, we expanded our direct sales capabilities
in the UK with the addition of new key account managers
and further training expertise. Our European sales
teams based in the UK and Germany are supported by
dedicated commercial operations functions, which we
are strengthening with additional marketing and analytics
experts. Complementing our direct presence in the
UK and Germany, we recently appointed a commercial
Director in Italy, who will play a key role in finalising
our commercial strategy in the country.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Expanding our
global footprint

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Transforming our
business

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Investment proposition continued

During 2018, we continued our transition into
a commercially-focused specialty pharmaceutical
business. We maintained our focus on controlling
costs, reduced R&D expenditure, contained
administrative spending and invested in our commercial
platform. With our revenues continuing to grow,
despite headwinds in the second half of the year,
we continued our trajectory towards profitability.

Growing revenues

During 2018 we continued to grow our revenues,
which increased by approximately 4% to £48.3 million,
despite higher Tudorza® rebates in US federal channels
and disruption in China following the establishment of
the Company’s new direct sales team in the second half.
In the coming year, we look forward to building on the
progress of 2018, as we take full control of Tudorza®’s
commercialisation in the US and our commercial team
in China sells NIOX® direct.

Containing costs and commercial investment

In April 2018, we announced a refocused investment
strategy designed to accelerate our transition into
a commercially-focused business. As part of this strategy
we halted spending on our in-house respiratory pipeline
and focused R&D expenditure on product support, while
containing corporate costs and increasing investment
in our commercial platform. During the year we have
implemented this approach, with our underlying R&D
costs reducing by 19% and only modest growth in
administrative expenditure due to increased support
for our expanded China commercial team. With these
combined costs reduced during the period, we grew
our underlying sales and marketing investment
by 10%, reflecting our commercial team in the
United States and expansion in China.

Revenues

£48.3m

We grew our revenues to £48.3m during 2018
and aim to build on this in the coming year

Reduction in R&D spend

£2.5m

We reduced our underlying R&D expenditure
by 19% as part of our cost containment strategy

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018
Operational and financial highlights

NIOX® progress
— Sales increased 5% to £27.4 million

(2017 CER¹: £26.2 million)

— Clinical (non-research²) revenues
increased 7% compared with
2017 CER¹

— China sales decreased 11% vs

Commercial platform progress
— China direct sales force launched;
commercial team expansion to
approximately 100 near completion

— UK team expanded; Commercial
Director hired in Italy; European
commercial operations strengthened

2017 CER¹ following destocking and
disruption during transition to direct
sales; new sales model now in place

— US dedicated COPD and device
teams launched to prepare for
product launches

— Q1 2019 unaudited revenues

increased 38% vs Q1 2018 CER¹

US COPD portfolio progress
— Tudorza® profit share revenues
increased 11% to £20.9 million
(2017 CER¹: £18.8 million)

— Q1 2019 unaudited revenues

increased 31% vs Q4 2018 CER¹
following option exercise at year end;
prescriptions stable

— Tudorza® option exercised acquiring
product’s full commercial rights

— Tudorza® ASCENT study data filed
for inclusion in label; FDA approved
March 2019

— Duaklir® NDA filed; FDA approved

March 2019

Corporate progress
— AstraZeneca subscription raising

$26.7 million completed

Post-period highlights
— US and China commercialisation

rights to novel nitric oxide product
AirNOvent³ acquired January 2019

— Move to AIM completed

February 2019

— AstraZeneca five-year loan

addresses outstanding COPD
transaction consideration, option
and R&D payments

+5%

NIOX® sales increased 5% to £27.4 million
(2017 CER¹: £26.2 million)

+11%

Tudorza® profit share revenues increased 11%
to £20.9 million (2017 CER¹: £18.8 million)

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Financial highlights

Key performance
indicators
Revenue
R&D
G&A
S&M
Loss for the year
Net cash5 outflow
Cash5 at year end

2018 underlying
continuing operations
£48.3m
(£10.8m)
(£11.4m)
(£54.4m )
(£25.9m)
(£18.8m)
£40.7m

2017 underlying
continuing operations
£46.3m
(£13.3m4)
(£10.7m4)
(£49.5m4)
(£34.5m4)
(£57.9m)
£59.5m

2018
total
£48.3m
(£89.4m)
(£11.8m)
(£57.3m)
(£117.1m)
(£18.8m)
£40.7m

2017
total
£46.3m
(£103.0m)
(£11.1m)
(£50.1m)
(£99.1m)
(£57.9m)
£59.5m

Constant exchange rates (CER) for
2017 represent reported numbers
re-stated using 2018 average
exchange rates; management believes
CER comparisons better represent
underlying performance due to
currency fluctuations against sterling

Clinical revenues represent sales to
clinicians, hospitals and distributors;
research revenues represent sales to
pharmaceutical companies for use in
clinical studies

AirNOvent is not an approved name
and may not be the final name
submitted for approval

Underlying operations restated
to show the results of in-house
respiratory development in
discontinued operations

Cash, cash equivalents and
short-term deposits

£48.3m

Revenues increased by £2.0 million to £48.3 million
(2017: £46.3 million)

£18.8m

Net cash out flow reduced to £18.8 million
(2017: £57.9 million)

£40.7m

Cash5 at year end was £40.7 million
(2017: £59.5 million)

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Operating review

Strategic overview

In 2018 Circassia made good progress implementing
its strategy. The Company completed its transition
into a commercially-focused specialty pharmaceutical
business, and has continued to build on this positive
momentum. The Company has refocused its R&D
expenditure, with device development, regulatory,
medical affairs, quality and supply chain functions
focused on supporting its commercial products, and
spending on its in-house respiratory pipeline halted.
In parallel, Circassia has maintained investment in
its commercial platform, dramatically increasing its
presence in China and strengthening its team in Europe.
The Company also expanded its product portfolio,
exercising its option to take full US commercial control
of chronic obstructive pulmonary disease (COPD)
treatment Tudorza® at the end of 2018, and acquiring
the US and Chinese commercial rights to late-stage
ventilator-compatible nitric oxide product AirNOvent
at the start of 2019.

Circassia also made good corporate progress. It amended
its commercialisation agreement with AstraZeneca for COPD
products Tudorza® and Duaklir®, and AstraZeneca increased
its equity stake in Circassia to 19.9% following a subscription
of new shares. As part of the approval process for this
related-party transaction, the Company agreed with the
UK Financial Conduct Authority (FCA) to seek shareholder
approval to move to AIM if the percentage of its shares held
in public hands did not reach the level required for the Main
Market. Circassia’s shareholders subsequently approved this
move to AIM and it was completed in early 2019. The move
also provides potential strategic advantages as AIM’s more
flexible regulatory regime may help the Company acquire,
partner or in-license additional products more efficiently
to leverage its commercial platform.

Alongside the Company’s strategic and corporate
progress, the past year was also a period of financial
transition. Circassia continued to grow its revenues
despite headwinds in the second half, controlled its non-
commercial costs, reduced the net loss in its underlying
business and dramatically decreased its net cash outflow.
As a result, Circassia is continuing to advance towards its
strategic objective of building a self-sustaining specialty
pharmaceutical business.

“ We made good progress
in 2018 completing our
strategic transition into a
commercially-focused specialty
pharmaceutical business
focused on respiratory disease.
Our revenues continued to
grow and we maintained our
commercial investment and
broad cost control activities.
As a result, we dramatically
reduced our net cash outflow
and decreased the loss in our
underlying business.”

Steven Harris
Chief Executive Officer

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Increasing access
Circassia is working to increase NIOX® market access in a
number of countries. In the United States, payor coverage
grew significantly during 2018 and the market access team is
targeting a number of additional healthcare plans to increase
this further. In the US and UK, the Company’s commercial
teams are working with pharmacy chains to explore the
potential of providing NIOX® testing in convenient locations.
In China, reimbursement for FeNO testing was recently
granted in Beijing, providing an opportunity to target the
more than 100 top level hospitals in the city. In Australia,
the Company’s partner plans to grow the local market
following the introduction of reimbursement for FeNO
testing alongside spirometry.

Geographic expansion
Outside its direct sales territories, Circassia sells NIOX®
through a network of international partners. During 2018
the Company added new partners in Malaysia, Mexico,
Saudi Arabia and Thailand and has now received approvals
in each of these countries.

NIOX® asthma management products

NIOX® is the leading point-of-care system for measuring
fractional exhaled nitric oxide (FeNO), an important biomarker
of the major underlying cause of asthma, type 2 airway
inflammation. NIOX® is used around the world to improve
asthma diagnosis and management, and Circassia sells the
product directly in the United States, UK and Germany, and
following the recent launch of its local sales team, in China
also. In addition, the Company promotes NIOX® through its
network of international partners, which extends across more
than 35 countries.

Sales growth
NIOX® sales continued to grow during 2018. Global revenues
of £27.4 million were 5% (CER) higher than the year before,
with sales for clinical use increasing 7% and less predictable
sales for use in pharmaceutical company clinical studies
declining 6%. Overall growth was held back by lower sales in
China, which decreased 11% with destocking and distributor
disruption during the transition to the Company’s direct sales
model. In Germany and the UK, revenues grew 8% and 27%
(CER) respectively, while in the United States sales declined
by 1% (CER) due to disruption at the end of the year caused
by territory realignment as the Company launched dedicated
COPD and NIOX® sales teams.

With much of this disruption now complete, NIOX® revenue
growth has accelerated significantly during the first quarter
of 2019, and global sales were 38% higher at CER compared
with the same period the year before.

NIOX® revenues
continued to grow
during 2018

During 2018 the
Company added new
partners in Malaysia,
Mexico, Saudi Arabia and
Thailand and has now
received approvals in
each of these countries

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Operating review continued

NIOX® support
Circassia supports its partners’ NIOX® promotion via
a dedicated commercial team. During 2018, the team
launched a new NIOX® marketing campaign at the European
Respiratory Society International Congress, where it also held
a partner meeting to provide training on the new materials.
The Company also provided training in South Korea and
recently held training sessions at the Chest World Congress
in Thailand.

During 2018 Circassia’s commercial team also continued
NIOX® brand building activities in its direct markets, including
the roll out of its digital strategy with online advertising,
e-shots, refreshed web resources and the launch of a new
NIOX.com web portal. In the UK, Circassia is providing
healthcare professionals with training via its Asthma
Masterclass programme, which is delivered by a specialist
respiratory nurse advisor. It is also working with the Primary
Care Respiratory Society to offer members exclusive benefits
when purchasing NIOX®.

In the US, the Company has partnered with reimbursement
specialists to provide support for NIOX® customers.
This new service offers coding and reimbursement support
via a dedicated hotline team of certified coders. Additionally,
Circassia has launched a dedicated NIOX® promotional team
in the US to improve targeting and promotional efficiency.
The team includes telesales and customer service
professionals working alongside the dedicated
field-based sales force.

US collaboration with AstraZeneca

In 2017, Circassia established a US commercial
collaboration with AstraZeneca for COPD products Tudorza®
and Duaklir®. Under the agreement, Circassia acquired
the commercialisation rights to Duaklir® and entered a profit
share arrangement for Tudorza® in which the Company
was responsible for the product’s promotion and
AstraZeneca its manufacture, distribution,
pharmacovigilance and regulatory activities.

Agreement amendment and option exercise
During 2018, the companies amended the original
agreement, and AstraZeneca increased its shareholding
in Circassia to 19.9% via subscription for newly-issued
ordinary shares. Circassia used the $26.7 million
consideration to pay a $20.0 million R&D contribution
due to AstraZeneca by 31 December 2018 and to part
settle the final $25.0 million payable by the end of 2019.
The remaining $18.3 million of this final R&D payment is
addressed by a five-year loan provided by AstraZeneca.

At the end of 2018, Circassia issued a notice of option
exercise to acquire the full US commercialisation rights to
Tudorza®. This completed as anticipated on 31 December
2018, and from 1 January 2019 Circassia has recorded
Tudorza®’s in-market sales and costs and retained the full
profits from commercialisation. The option exercise triggered
an initial payment obligation of $5 million, and following
the approval of Duaklir® a final option payment of
$20 million became payable to AstraZeneca. These payment
obligations are addressed by a five-year loan provided by
AstraZeneca under the companies’ agreement. This loan
facility provided by AstraZeneca also addresses the final
consideration of $100 million due under the companies’
agreement, in addition to the R&D payment outlined above.

The team launched a
new NIOX® marketing
campaign at the
European Respiratory
Society International
Congress, where it also
held a partner meeting
to provide training on the
new materials

FeNO
KNOWHOW

Testing for inflammation insight

Clinical Guidelines
for the interpretation
of FeNO levels

“ During 2018, our global NIOX®
business continued to grow,
and following the launch of
our direct sales team in China
we look forward to expanding
our presence in this significant
market.”

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Regulatory progress
Following the successful completion of the phase IV ASCENT
study at the end of 2017, Tudorza® has made good regulatory
progress. The study met both its primary endpoints, and
during the first half of 2018 a supplemental New Drug
Application (sNDA) was submitted to the FDA requesting
inclusion of the data in the product’s prescribing information.
The FDA recently completed its review of the filing and
approved the sNDA at the end of March.

As a result, Tudorza®’s expanded label now includes
unique data from ASCENT. The study, which was conducted
in patients with moderate to very severe COPD and
cardiovascular disease and / or significant cardiovascular
risk factors, demonstrated that Tudorza® is effective at
reducing COPD exacerbations with no increase in major
cardiovascular events and at reducing hospitalisations
due to COPD exacerbations in this at-risk population.
Cardiovascular disease is the most common and significant
co-morbidity of COPD, with approximately 30% of COPD
patients dying from cardiovascular conditions. Tudorza®
is the only LAMA in the United States with these data in
its label, which Circassia plans to use in payor discussions
as part of its market access strategy.

Tudorza® collaboration

Tudorza® contains the long-acting muscarinic antagonist
(LAMA) aclidinium bromide, which is administered twice-daily
via the easy-to-use inhaler Pressair® for the maintenance
treatment of COPD. In the United States, the market
for LAMA therapies totalled an estimated $2 billion
in 2018 presenting a significant opportunity for Tudorza®.
With the product’s prescriptions making up approximately
2.6% of the market, a modest increase in volumes
or uptake in higher value channels could substantially
grow the product’s sales, which would be of material
importance to the Company.

Commercial progress
Following the establishment of the Tudorza® collaboration
in 2017, Circassia’s sales force rapidly achieved its target
call volumes as part of the Company’s plan to turn round
the product’s previously declining prescriptions. During 2018
the prescription rate continued to stabilise, although the
£20.9 million profit share revenues for the year were impacted
by higher rebates in federal channels during the second
half. In the final quarter of the year the Company refined
its physician targeting strategy and during piloting the
new prescription rate per call responded positively.

Circassia plans to build on this progress during the coming
year. Following the exercise of its option to acquire the full US
commercial rights to Tudorza® at the end of 2018, first quarter
revenues in 2019 increased 31% at CER compared with the
final quarter the previous year. With the imminent transfer
of the product’s licence to Circassia, the Company will have
significant additional flexibility in managing its sales force
composition, customer targeting, product detail prioritisation,
territory definition, distribution strategy, pricing and market
access activities. Circassia is leveraging this increased
flexibility and recently refocused its US sales capabilities
launching a dedicated COPD sales force to improve targeting
and promotional efficacy.

Circassia recently
refocused its US
sales capabilities
launching a dedicated
COPD sales force to
improve targeting and
promotional efficacy

In the United States,
the market for LAMA
therapies totalled an
estimated $2 billion
in 2018 presenting a
significant opportunity
for Tudorza®

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Operating review continued

Duaklir® collaboration

Commercial infrastructure progress

Duaklir® is a fixed-dose combination of the LAMA aclidinium
bromide and long-acting beta agonist (LABA) formoterol
fumarate, which is administered twice-daily via the breath-
actuated Pressair® inhaler for the maintenance treatment
of COPD. Duaklir® targets the rapidly growing $850 million
US LAMA / LABA market, which represents an important
commercial opportunity for the Company.

Regulatory progress
During 2018, Duaklir® made good regulatory progress following
the successful completion of the AMPLIFY phase III study the
prior year. In the first half of 2018, a New Drug Application
was submitted for Duaklir®, which was approved in March
2019 by the FDA. The approval is based on a broad clinical
database, including data from AMPLIFY and two earlier
phase III studies, ACLIFORM and AUGMENT. The label also
includes clinical data from the phase IV ASCENT study, which
shows aclidinium therapy is effective at reducing COPD
exacerbations. As a result, Duaklir® is the only twice-daily
LAMA / LABA in the United States with COPD exacerbation
data included in its prescribing information.

Commercial progress
Circassia plans to launch Duaklir® in the second half of 2019
through its dedicated COPD sales force. The Company is
making good progress with its preparations and is working
with specialist agencies and an advisory board of medical
experts as it finalises its launch plans. The team has
completed market research to inform the product’s value
proposition, brand messaging and creative campaign, and
is developing Duaklir®’s market access contracting strategy
and payor value propositions while public relations specialists
finalise the communications strategy.

During 2018 Circassia continued to develop its commercial
infrastructure to increase revenues from its existing portfolio
and provide a platform to attract additional products. In
China it significantly expanded its team, launching a direct
sales team at the end of the year. This represents a significant
change to the Company’s business model in the country,
with Circassia’s previously modest team focusing solely on
distributor support, marketing and market access activities.
During the second half of the year, the Company recruited a
full range of commercial and back office functions to support
its direct sales field force, and by the end of the year the
vast majority of the 100-strong commercial team was in
place. Following the launch of this direct sales capability,
Circassia now commercialises NIOX® using a mixed business
model in China. In major cities the sales force works with
logistics providers to supply customers directly, while in
secondary cities the team works alongside distributors and
in remoter regions the Company uses distribution partners.
This new approach represents a significant opportunity for
the Company to significantly increase its gross margin and
expand its overall sales.

The launch and transition to this new model in China resulted
in disruption and destocking at the end of 2018 impacting
revenues. However, with this now complete and Circassia
focusing promotion significantly beyond the 400 hospitals
where NIOX® was previously installed, as well as capturing
additional margin from selling directly, the Company
anticipates continued strong sales growth in China.

“ We also advanced our US
COPD portfolio, and in the first
half of 2018 our partner filed
for Duaklir® approval and an
expanded label for Tudorza®.
We are delighted that both
filings were successful and
we now look forward to
enhancing our Tudorza®
promotion and launching
Duaklir® later this year.”

Circassia now
commercialises NIOX®
using a mixed business
model in China. In major
cities the sales force
works with logistics
providers to supply
customers directly,
while in secondary
cities the team works
alongside distributors
and in remoter regions
the Company uses
distribution partners

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Post-period highlights

Portfolio expansion
As part of its strategy to leverage its commercialisation
platform, Circassia is actively pursuing opportunities
to add to its portfolio through partnering, in-licensing
or acquisition. The Company continued its business
development programme throughout 2018, and at the
beginning of 2019 announced the acquisition of the exclusive
US and Chinese commercialisation rights to AirNOvent
from AIT Therapeutics Inc. AirNOvent is a late-stage,
ventilator-compatible novel inhaled nitric oxide product,
initially targeting use in the treatment of hypoxic respiratory
failure associated with persistent pulmonary hypertension
of the newborn (PPHN).

Under the terms of the agreement, Circassia paid AIT initial
consideration of $7.35 million, and a further $3.15 million
following the successful completion of a pre-submission
FDA meeting. Both payments were satisfied through the
issuance of new ordinary shares in the Company to AIT.
Further deferred contingent consideration, also payable
in Circassia shares, will become due on the achievement
of certain milestones, including $12.6 million following
FDA approval, $8.4 million on US approval of a related
indication and $1.05 million on the product’s launch in China.
Additionally, the Company will pay tiered royalties based
on gross profits from future product sales.

Circassia is also strengthening its presence in Europe.
The UK sales force expanded to increase coverage in the
South East and add dedicated territories in the South West
and Republic of Ireland. In Italy, the Company recently
appointed a Commercial Director with significant respiratory
and market access experience who will play a key role
in finalising the commercialisation strategy in the country,
including the potential for direct sales. Additionally, the
Company is recruiting further marketing, analysis and
operations expertise to support local promotional activities.

Investment strategy

In 2018, the Company refocused its investment approach
as part of the strategy to transition into a self-sustaining,
commercially-focused specialty pharmaceutical business.
As a result, Circassia focused investment on its commercial
platform while halting R&D expenditure on its in-house
respiratory pipeline and aligning its regulatory, medical
affairs, quality and supply chain resources to support the
Company’s marketed and late-stage products. The Company
reduced its underlying R&D expenditure by nearly 20%, with
headcount decreasing by over 50%, and increased its sales
and marketing investment by 10% with growth focused in
the United States and China. At the same time, the Company
controlled its underlying administrative expenditure, which
increased only marginally following increased office costs
to support the Company’s significant expansion in China.

During 2019, Circassia plans to maintain its commercial
investment alongside an ongoing focus on cost containment.
With the refocusing of its investment strategy now complete,
the Company anticipates ongoing control of non-commercial
expenditure, and sales and marketing costs reflecting
the larger team in China and upcoming launch of Duaklir®
in the United States.

Circassia acquired
the exclusive
US and Chinese
commercialisation
rights to AirNOvent
from AIT Therapeutics
Inc. AirNOvent is a
late-stage, ventilator-
compatible novel inhaled
nitric oxide product

The Company is
recruiting further
marketing, analysis and
operations expertise
to support local
promotional activities

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Operating review continued

AirNOvent overview
AirNOvent is a portable system that utilises an electric
voltage to produce precise quantities of nitric oxide from
the nitrogen and oxygen in air. Inhaled nitric oxide is a
pulmonary vasodilator, which is approved in the United
States for use as part of a regimen in the treatment of hypoxic
respiratory failure associated with PPHN. PPHN is the failure
of normal circulatory transition after birth, which occurs in
approximately 1,500 – 26,200 newborns in the United States.
The condition is potentially fatal and management can be
complex involving a number of treatments, which in addition
to supplemental oxygen can include the administration
of inhaled nitric oxide.

The currently available product, INOMAX®, is used
in neonatal intensive care units (NICUs) and its delivery
system administers nitric oxide from pressurised cylinders
in conjunction with ventilator systems. The product
generated US revenues estimated at over $400 million
in 2018. AirNOvent offers a number of potential benefits
over the existing competition. It is cylinder-free and is smaller,
significantly lighter and more convenient, and unlike nitric
oxide cylinder-based systems does not require special
storage and handling. As a result, it has the potential for
use by NICUs, as well as smaller clinics without the facilities
required to manage nitric oxide cylinders.

Under the companies’ agreement, AIT is responsible
for the product’s development, US regulatory filings and
manufacture, with Circassia managing the regulatory process
in China. AIT plans to submit AirNOvent to the FDA in
the coming weeks for Premarket Approval (PMA) for use
in the treatment of PPHN, and Circassia anticipates launching
the product in the first half of 2020 following approval.

AirNOvent commercialisation
Circassia intends to leverage its existing commercial
platform in the United States to commercialise AirNOvent
and anticipates modestly expanding its commercial team,
adding further key accounts and medical affairs experts.
The Company plans to target top hospitals with NICUs,
many of which are called on by the existing dedicated device
sales team. Additionally, the team will target facilities that
do not currently use inhaled nitric oxide, such as those
without the appropriate handling facilities.

Move to AIM
AstraZeneca’s subscription for additional equity in 2018
decreased the ‘free float’ in the Company’s shares to
approximately 10%. The free float excludes holdings by
directors and shareholdings of over 5%, and the Financial
Conduct Authority’s (FCA) Listing Rules require a level of at
least 25%. As a result, the Company committed to the FCA
that if the free float did not meet this required level within six
months it would seek shareholder approval to move to AIM,
which does not have the same requirement.

During the subsequent months, there was little movement
in the free float and consequently Circassia sought approval
to move to AIM. This was granted at a shareholder meeting
on 4 January 2019 and the Company’s shares were removed
from trading on the London Stock Exchange’s Main Market
and admitted to trading on AIM on 4 February 2019.

PPHN is the failure
of normal circulatory
transition after birth,
which occurs in
approximately 1,500 –
26,200 newborns in the
United States

The Company plans to
target top hospitals with
NICUs, many of which
are called on by the
existing dedicated device
sales team

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Board changes
Following six years as Non-Executive Chairman,
Dr Francesco Granata has informed the Company of his
intention to retire from Circassia’s Board in order to focus
on his other business commitments. Francesco will continue
as Chairman while the Company completes the ongoing
search for his replacement. Additionally, following 12 years
as Non-Executive Director, Russ Cummings has informed
the Company he will not stand for re-election to the Board
at the forthcoming Annual General Meeting. The Board
wishes to express its sincere appreciation to Francesco
for his leadership and significant contribution to the
Company’s development during his time at Circassia
and to Russ for providing strategic insight and extensive
financial market experience during his significant time
as a Non-Executive Director.

In parallel with the ongoing Chairman search process,
the Company is further strengthening its commercial focus
through the creation and appointment of a Chief Operating
Officer. The COO will lead Circassia’s global commercial
strategy and operational management and will be appointed
to the Company’s Board. The Company intends to announce
the appointment of both the new Chairman and COO
in due course.

Summary and outlook

During 2018, Circassia continued to make good progress
implementing its strategy. The Company grew its revenues,
despite headwinds in the second half, and maintained
its financial strategy focusing on commercial investment
and cost containment elsewhere. As a result, it reduced
net cash outflow significantly and decreased the loss
in its underlying business despite increased investment
in its commercial infrastructure.

During the year, the Company’s products also made
progress, with the NIOX® business continuing to grow
and filings in the US COPD portfolio resulting in the recent
approval of Duaklir® and label expansion for Tudorza®.
With dedicated NIOX® and COPD sales teams in the US,
direct sales capabilities in China and a broader commercial
platform in Europe, Circassia anticipates building on the
encouraging Q1 2019 sales with strong revenue growth in
the coming year. In the coming months, the Company looks
forward to further progress, with the upcoming US filing for
AirNOvent and launch of Duaklir® in the second half of 2019.

Over the last three years, the Company has completed
its transformation from an R&D-based organisation into a
strong commercially-focused business. The Company now
features a unique commercial platform promoting compelling
respiratory products across the world’s largest markets.
With a clear strategy focused on building a self-sustaining
specialty pharmaceutical business, combined with growing
revenues, Circassia is well positioned to continue its drive
towards profitability.

Steven Harris
Chief Executive Officer

1 May 2019

Circassia anticipates
continued strong
revenue growth in the
coming year. In the
coming months, the
Company looks forward
to further progress, with
the upcoming US filing
for AirNOvent and launch
of Duaklir®

“ During 2019 we have
maintained our momentum,
taking full commercial control
of Tudorza®, adding late-
stage product AirNOvent to
our portfolio, significantly
increasing NIOX® revenues
and boosting our commercial
platform. As a result, we are
making good progress building
a robust business with growing
revenue potential and an
exciting commercial future.”

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Focused strategy; efficient business model

Strategy

Our strategy is focused on building a self-sustaining
world-class specialty pharmaceutical company, following
an efficient business model that leverages our in-house
commercialisation capabilities.

Clear objectives

Our strategy has three clear objectives as part
of our ambition to become a leading business
in our field.

1. To market novel specialty products direct

in key markets.

2. To build a broad and balanced portfolio

of products.

3. To deliver products to the market.

Good progress

Since the beginning of 2018, we have continued to make
good progress against our objectives. The launch of our
direct sales team in China at the end of the year expands
our direct sales capabilities, complementing those in the US,
UK and Germany. In 2019 we have continued our progress,
with the addition of AirNOvent to our portfolio and the recent
approval of Duaklir® in the US, which we plan to launch in the
second half of the year.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Business model

As a commercially-focused specialty pharmaceutical
business, we implement our strategy following an
efficient business model.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Financial review

During 2018 revenues continued to grow, increasing
4% to £48.3 million, while the Company maintained
control of overall costs, reducing R&D expenditure,
containing administrative costs and investing in the
commercial platform.

The table overleaf sets out the Group’s results for the year
ended 31 December 2018, separated into continuing and
discontinued operations. Continuing operations are further
divided into underlying and non-underlying operations.
Continuing underlying operations include revenues from
the Tudorza® collaboration with AstraZeneca and sales
of NIOX®, as well as the costs of the underlying business.
These key performance indicators are used by management
to manage the business and measure performance.

Non-underlying operations include irregular and
non-recurring expenditure, such as those relating to
restructuring the US field force into dedicated NIOX®
and COPD units, the prior year’s R&D contribution to
AstraZeneca and other non-cash gains and losses relating
to the deferred consideration payable to AstraZeneca.
Discontinued operations include direct costs and
overheads associated with the in-house respiratory
pipeline which ceased in April 2018 and residual costs
from the allergy programmes for which all development
ceased in April 2017.

Revenue

Circassia’s revenues of £48.3 million (2017: £46.3 million)
include Tudorza® revenues of £20.9 million (2017: £19.0
million) and NIOX® sales of £27.4 million (2017: £27.3 million).

During 2018, Tudorza® revenues derived from the profit share
arrangement with AstraZeneca. AstraZeneca recorded in-market
sales, cost of sales and other operational costs while Circassia
recorded the costs of the field force and promotion and the
companies each recorded 50% of the resultant profit.
On 31 December 2018, Circassia completed the exercise
of its option to take full commercial control of Tudorza®
in the United States, and during 2019 will receive the full
benefits of commercialisation and will record both the
product’s sales and costs.

NIOX® revenues include sales for use in clinical practice
of £23.4 million (2017: £22.8 million), sales for use
in pharmaceutical company research of £3.7 million
(2017: £4.1 million) and other revenues such as freight
of £0.3 million (2017: £0.4 million).

Gross profit

Gross margin increased from 78% to 82%. This was mainly
due to the contribution of revenues from the AstraZeneca
collaboration for the full year, which due to the agreement
structure have a 100% gross margin. Gross profit on NIOX®
sales was £18.5 million (2017: £17.3 million), with a gross
margin of 68% (2017: 63%). This increase mainly reflects
the weakening of sterling against the dollar.

“ During 2018 revenues
continued to grow, increasing
4% to £48.3 million, while
the Company maintained
control of overall costs,
reducing R&D expenditure,
containing administrative
costs and investing in the
commercial platform.”

Julien Cotta
Chief Financial Officer

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018 Underlying operations

2018

£m

2017
Restated2
£m

Non-underlying
operations

2018

£m

2017
Restated2
£m

Total continuing

2018

£m

2017
Restated2
£m

Discontinued
operations 1

2018

£m

2017
Restated2
£m

2018

Total

2017

£m

Revenue
Cost of sales
Gross profit
Gross margin
Research and development
Sales and marketing
Administrative expenditure
EBITDA
Operating loss
Other gains and (losses)
Finance costs
Finance income
Loss before tax
Taxation
Loss for the financial year

Cash3

48.3
(8.9)
39.4
82%
(10.8)
(54.4)
(11.4)
(32.8)
(37.2)
1.9
(0.1)
0.3
(35.1)
9.2
(25.9)

46.3
(10.0)
36.3
78%
(13.3)
(49.5)
(10.7)
(32.3)
(37.2)
(1.1)
(0.1)
0.4
(38.0)
3.5
(34.5)

–
–
–
–
–
(2.9)
(0.3)
(3.2)
(3.2)
(5.6)
(11.9)
–
(20.7)
–
(20.7)

–
–
–
–
(45.1)
–
0.1
(45.0)
(45.0)
11.5
(2.7)
–
(36.2)
10.2
(26.0)

48.3
(8.9)
39.4
82%
(10.8)
(57.3)
(11.7)
(36.0)
(40.4)
(3.7)
(12.0)
0.3
(55.8)
9.2
(46.6)

46.3
(10.0)
36.3
78%
(58.4)
(49.5)
(10.6)
(77.3)
(82.2)
10.4
(2.8)
0.4
(74.2)
13.7
(60.5)

–
–
–
–
(78.6)
–
(0.1)
(78.7)
(78.7)
(0.1)
–
–
(78.8)
8.3
(70.5)

–
–
–
–
(44.6)
(0.6)
(0.5)
(45.7)
(45.7)
(0.2)
–
–
(45.9)
7.3
(38.6)

48.3
(8.9)
39.4
82%
(89.4)
(57.3)
(11.8)
(114.7)
(119.1)
(3.8)
(12.0)
0.3
(134.6)
17.5
(117.1)

46.3
(10.0)
36.3
78%
(103.0)
(50.1)
(11.1)
(123.0)
(127.9)
10.2
(2.8)
0.4
(120.1)
21.0
(99.1)

40.7

59.5

1 Disclosed as a single amount in the consolidated statement of comprehensive income.
2 Restated to show the results of the respiratory business in discontinued operations, see note 10 to the consolidated financial statements.
3 Includes cash and cash equivalents and short-term deposits.

Gross margin

82%

Gross margin increased from 78% in 2017
to 82%

“ Gross margin increased from
78% to 82%. This was mainly
due to the contribution of
revenues from the AstraZeneca
collaboration for the full year,
which due to the agreement
structure have a 100%
gross margin.”

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Financial review continued

Sales and marketing

Administrative expenditure

Sales and marketing costs increased to £57.3 million
(2017: £50.1 million). This was mainly due to a full year
of investment in the US field force promoting Tudorza®
versus nine months in 2017, as well as significant expansion
of commercial operations in China during the second half
of the year. Sales and marketing costs of £2.9 million included
in non-underlying continuing operations represents the
re-organisation costs associated with restructuring the
US field force into dedicated NIOX® and COPD teams.

R&D activities

Research and development activities include the costs
associated with regulatory, quality and medical affairs support
for marketed products, device development, and depreciation
and amortisation. Research and development costs
from underlying operations decreased to £10.8 million
(2017: £13.3 million) mainly as a result of significantly
lower headcount.

Discontinued operations include costs relating to
the in-house respiratory pipeline of £78.6 million
(2017: £44.6 million) most of which relates to an impairment
charge of the associated intangible assets as set out below.
The impairment costs have no impact on cash.

Impairment of intangibles

Goodwill
Flixotide substitute
Seretide substitute
Spiriva substitute
Technology

Total

Total R&D expenditure reduced to £89.4 million
(2017: £103.0 million).

£m

4.4
21.1
22.1
8.5
18.9

75.0

Administrative expenditure, which includes overheads
relating to corporate functions, centrally managed support
functions and corporate costs, increased to £11.8 million
(2017: £11.1 million). This was mainly due to the costs
associated with the transfer of the Company’s shares
to AIM and increased business development costs.

Other gains and losses

Other losses increased to £3.8 million (2017: £10.2 million gain).
This was mainly due to unrealised foreign exchange losses
relating to deferred consideration payable to AstraZeneca
following the weakening of sterling against the dollar.

Net finance costs

Net finance costs were £11.7 million (2017: £2.4 million)
for the year. This mainly relates to a non-cash charge to the
income statement for the period reflecting the difference in
the discounted and actual deferred consideration payable to
AstraZeneca recorded on the statement of financial position.
The discounted amount reflects the time value of money.

Taxation

Taxation for the year was a credit of £17.5 million
(2017: £21.0 million) of which £9.2 million (2017: £3.5 million)
relates to underlying continuing operations. Included in
underlying continuing operations is an R&D tax credit of £1.0
million (2017: £3.5 million) which is lower than the previous year
because of a decrease in qualifying R&D expenditure. Also
included is a deferred tax credit of £8.2 million (2017: £nil)
which has arisen on an increase in recognised carried-forward
tax losses in the Group.

An R&D tax credit of £10.2 million was included in non-
underlying continuing operations in 2017, which related
to the R&D contribution paid to AstraZeneca.

Revenues

During 2018 revenues continued to grow,
increasing 4% to £48.3 million

“ Research and development
costs from underlying operations
decreased to £10.8 million
(2017: £13.3 million) mainly as
a result of significantly lower
headcount.”

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Taxation for discontinued operations increased to a credit
of £8.3 million (2017: £7.3 million credit), mainly due to a
reduction in the deferred tax liability following the impairment
of intangible assets in the respiratory pipeline.

Loss after tax and loss per share

Basic loss per share for the period was 34p (2017: 31p)
reflecting a loss of £117.1 million (2017: £99.1 million), with
the increase mainly due to impairment of intangible assets in
the in-house respiratory portfolio. Loss per share for continuing
operations decreased to 14p (2017: 19p) reflecting a loss
for the financial period of £25.9 million (2017: £34.5 million).

Statement of financial position

The Group’s net assets at 31 December 2018 were
£125.9 million (31 December 2017: £224.8 million).
The decrease was mainly due to impairment of the in-house
respiratory intangible assets and lower trade receivables
and deposit balances, combined with an increase in
the recognised non-contingent consideration payable
to AstraZeneca reflecting the time value of money.

Current liabilities at the end of the period were
£124.4 million (31 December 2017: £30.8 million).
The increase at 31 December 2018 was mainly due to
reclassification of the $100 million deferred non-contingent
consideration payable to AstraZeneca as a current liability
payable due within one year.

Current tax assets at 31 December 2018 were £1.0 million
(31 December 2017: £6.5 million), representing the R&D tax
credit due from HM Revenue and Customs. An R&D tax
credit of £10.9 million was received in July 2018.

Cash flow

The Group’s cash position, including cash equivalents
and short-term deposits, decreased from £59.5 million
at 31 December 2017 to £40.7 million at 31 December 2018.

Cash position

£40.7m

The Group’s cash position, including cash
equivalents and short-term deposits, decreased from
£59.5 million at 31 December 2017 to £40.7 million
at 31 December 2018

Cash used in operations decreased to £51.3 million
(2017: £66.4 million), reflecting higher revenues and a net
decrease in the overall cost base of the business. Cash used
in operations in 2017 included settlement of the $17.5 million
(£13.1 million) R&D contribution due to AstraZeneca. In 2018,
the contribution of $20.0 million (£15.3 million) was satisfied
through the issue of new shares to AstraZeneca.

Other significant cashflows included an R&D tax credit of
£10.9 million (2017: £8.9 million) and proceeds from the issue
of share capital of £20.4 million (2017: £nil), which were used
to pay the AstraZeneca R&D contribution of $20.0 million and
the remainder part paying the final tranche of $25.0 million due
by the end of 2019. The remaining $18.3 million of this final
R&D payment, plus the $125.0 million consideration payable,
is addressed by a five-year loan provided by AstraZeneca.

Outlook

In the coming year, Circassia anticipates significant sales
growth with a number of factors expected to contribute
to the increase. In particular, the Company expects higher
NIOX® revenues in China following the implementation
of direct sales in the country, increased Tudorza® revenues
following the exercise of the option at the end of 2018 and
initial Duaklir® sales later this year following the product’s
approval by the FDA at the end of March. The Company
also plans to continue its cost control and commercial
investment strategy and as a result, Circassia looks forward
to continuing its trajectory towards profitability.

Julien Cotta
Chief Financial Officer

1 May 2019

“ Circassia looks forward
to ongoing financial
transformation during 2019,
as the Company continues its
trajectory towards profitability.”

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate social responsibility

The Board has responsibility for all matters relating to
corporate social responsibility. The directors recognise
the importance of corporate social responsibility and
seek to take account of the interests of all the Group’s
stakeholders, including its investors, customers,
suppliers, partners, and employees when operating
the business. The Board believes that fostering an
environment in which employees act in an ethical and
socially responsible fashion is critical to its long-term
success. The Group strives to be a good corporate
citizen and respects the laws of the countries
in which it operates.

People

Attracting, motivating and retaining a highly skilled workforce
is key to the Group’s long-term success. The policies put
in place by the Group accord with best practice, and stipulate
that there should be equal opportunities and an absence
of discrimination for all employees.

Values

Our values, and the behaviours that underpin them, describe
the culture of our business.

Passion
Our passion for delivering products to improve patients’ lives
energises us to attain our goals.

Recognition
We recognise and acknowledge the contribution of teams
and individuals in achieving our goals.

Integrity
We act with honesty and fairness at all times and always
strive to do the right thing.

Drive
We set ambitious goals and go for them, believing this drives
extraordinary behaviour.

Effectiveness
We understand key business drivers and manage our
resources effectively.

Diversity

The importance of diversity within the Group is also reflected
in its policies and procedures. The Group does not have
formal diversity quotas but recognises that a diverse
employee profile is of significant benefit.

The table below shows the gender profile at different levels
of the Group as at 31 December 2018.

Member

Male

Female

Total

%
Male

%
Female

plc Board including
Non-Executive Directors
Employees in other senior
executive positions
Directors of subsidiary
companies not included
in above
Total Senior Managers
excluding directors
All other employees
Total

–

12
111
132

4
98
106

16
209
238

–

75
53
55

–

25
47
45

Employee welfare and involvement

Employees are regularly provided with information about the
Group, for example through regular ‘open house’ sessions
at which the Chief Executive Officer and other members of
the management team present on various topics such as
strategic and operational progress, and employee-related
policies. Feedback is frequently sought by line managers
and the Senior Management Team through team meetings.
Feedback is also provided through an annual employee
engagement survey.

Employment, training, career development and
promotion of disabled persons

The Board recognises the value of diversity at all levels of the
Group. The Group has an Equal Treatment, Equal Opportunities
and Diversity policy which extends to the Board. This provides
that the Group will employ and promote employees on the basis
of their abilities and qualifications without regard to age, disability,
gender, marriage and civil partnership, pregnancy and maternity,
race (including colour, nationality and ethnic or national origins),
religion or belief or sexual orientation. The Group appoints, trains,
develops and promotes on the basis of merit alone.

Health and safety

The Group is committed to protecting the health and safety
of its employees and endeavours to maintain an effective
health and safety culture.

The Group provides ongoing training to individuals who are
responsible for health and safety and all staff are notified of
health and safety practices. The Group continuously monitors
its health and safety policy and practices to ensure they are
robust, appropriate, and reflect changes in best practice.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Ethical and social policies

Greenhouse gas emission

The Group is a pharmaceutical and medical devices group
and accordingly operates in a highly regulated ethical
framework. It complies fully with these laws and regulations.
The Company has a clear anti-bribery policy which is
monitored by the Compliance department.

Sunshine Act

The Group is committed to promoting transparency of its
relationships with healthcare providers. It collects, tracks
and reports payments to healthcare professionals and
organisations in compliance with the US Physician Payment
Sunshine Act and equivalent legislation in other countries
such as France.

Human rights

The Group support the UN Universal Declaration of Human
Rights and recognises the obligation to promote universal
respect for and observance of human rights and fundamental
freedoms for all, without distinction. The Group complies
with all applicable human rights laws.

Product development

The Group commissions third-party laboratories to conduct the
minimum necessary pre-clinical product safety testing in animal
models as required by regulatory authorities before commencing
clinical studies. The Group works according to the 3Rs policy
relating to preclinical testing (Refine, Reduce, Replace).

Environment

The Group is committed to minimising the impact of its
activities on the environment. The majority of the Group’s
employees operate out of modern office suites, although it
also has warehouses in Uppsala, Sweden and Morrisville, USA.
Accordingly, the Group believes that efficient use of energy
and materials in those premises, and responsible disposal
of hazardous waste, are the most important means of climate
protection currently available to it. Office-based initiatives
to reduce waste have also been adopted, which include
recycling of paper waste, cans, plastics, batteries and printer
toners/ cartridges. The Group does not possess or make use
of corporate jets or private planes.

This section of the Annual Report constitutes the Group’s
disclosure of its greenhouse gas (GHG) emissions in
accordance with the Companies Act 2006 (Strategic
Report and Directors’ Report Regulations 2013). The Group
considers that its current activities have a low environmental
impact. Nonetheless, it still actively seeks to make energy
savings in a fashion which is environmentally responsible
and cost effective.

Emissions for 2018 are slightly lower than those in 2017 due
to exiting the Solna office in Sweden at the end of March
2017. The Group’s emissions are largely a function of the
heating and lighting of leased office premises.

equivalent emissions –
²

CO
scope 2 (tonnes)
Intensity ratio
(kg/m2 of office space)

2018

2017

194

231

GHG emissions are reported in metric tonnes of carbon
dioxide equivalents and calculated using the Defra
conversion factors.

Gas and electricity usage information has been obtained from
purchase invoices and verified by reference to meter readings.

In order to express annual emissions in relation to a
quantifiable factor associated with the Group’s business,
an intensity ratio has been calculated which shows emissions
reported per square metre of the office space occupied
by the Group. This is shown in the table above.

Political and charitable donations

The Group does not make political or charitable donations,
although charitable fundraising by employees is encouraged.

Slavery and human trafficking statement

The Group is committed to combatting slavery and human
trafficking.

As part of its initiative to identify and mitigate risks it performs
due diligence on potential suppliers and distributors and
protects whistleblowers, who can raise concerns anonymously
through an externally provided reporting service. The Group’s
suppliers and distributors are provided with its Partner Code
of Conduct which makes it clear that the Group expects them
to comply with the requirements of the Modern Slavery Act.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018
Risks and risk management

The management of risks is a key responsibility of the
Board of Directors of the Company. The Board ensures
that the risks taken by the Group are understood and are
appropriate in the light of its strategy and objectives, and
that internal controls are in place to effectively identify,
assess, and manage important risks.

The risk management strategy adopted by the Company
has a number of facets. A risk register has been created
and is updated on an annual basis by those individuals
in the business who manage risks on a day to day basis.
This identifies each risk, assesses the likelihood of its
occurrence and the level of impact on the business.
This process is coordinated by the Chief Financial Officer.
The register is reviewed by the Senior Management Team
and subsequently reviewed by the Audit and Risk Committee
and reported to the Board.

There is a particular emphasis on ensuring that the risk
appetite of the Board is fully understood by the Senior
Management Team. The register also sets out activities
and controls which are designed to mitigate the identified
risks, and again the Board and the Senior Management
Team analyse these mitigation strategies and ensure that
the approach taken is consistent with the nature and degree
of risks which are considered acceptable by the Board.
Aside from the review, risk owners across the business
are responsible for reporting any significant issues on an
ongoing basis to the Senior Management Team and for
ensuring that other members of their teams are aware of the
risk management process. The Senior Management Team,
which meets weekly, receives summary weekly updates
from all areas of the business, and updates the Board on a
timely basis where important developments occur. The US
Commercial Team, Commercial Team for Rest of the World,
the Quality Team, Compliance Committee, and Health and
Safety Committee meet regularly. Relevant output or matters
arising are documented in reports which are circulated to the
Senior Management Team.

The risk management system is designed to manage risks,
rather than eliminate them at the expense of achieving
corporate objectives. Accordingly, it can only provide a
reasonable and not an absolute assurance against material
misstatement or loss.

Principal risks

The main risks relevant to the Group have been identified
below, together with an explanation of how they are
managed and controlled. Some risks are common across
the pharmaceutical industry, while others reflect the Group’s
specific strategy. The Company considers all of these risks
relevant to any decision to invest in it.

Commercial success

The Group’s competitors – many of whom have considerably
greater financial and human resources – may develop safer or
more effective products or be able to compete more effectively
in the markets targeted by the Group. New companies may
enter these markets and novel products and technologies may
become available which are more commercially successful
than those being developed by the Group.

Tudorza®, the long-acting muscarinic antagonist (LAMA)
which the Group sells in the United States, competes with
other LAMAs. There are currently three other LAMA products
marketed in the United States, namely Spiriva® (sold by
Boehringer Ingelheim), Incruse® (sold by GSK), and Seebri®
from Sunovion. Tudorza® competes directly with all these
products. Accordingly, there is no guarantee that the Group will
be able to maintain or increase its share of the LAMA market.

Later in 2019, the Group plans to launch Duaklir®, the fixed-
dose combination of the long-acting muscarinic antagonist
(LAMA) aclidinium bromide and long-acting beta-agonist
(LABA) formoterol fumarate. Duaklir® will compete with
Stiolto® (sold by Boehringer Ingelheim), Anoro® (sold by GSK),
Bevespi® (sold by AstraZeneca) and Utibron® from Sunovion.
There is no guarantee that the Group will be able to take
a share of the LAMA/LABA market.

AstraZeneca’s rights to Tudorza® and Duaklir® are the subject
of a head licence between AstraZeneca and Almirall, and
Circassia has a sub-licence under this head licence. Both
the licence and sub-licence contain customary diligence
obligations. A continued failure to perform these diligence
obligations could ultimately lead to termination of the head
licence or sub-licence.

The Group’s NIOX MINO® and NIOX VERO® devices compete
in Europe with products made by Bedfont Limited, Bosch
Healthcare Solutions GmbH (based in Germany), and
Spirosure Inc. (headquartered in the United States). In China,
a competing product is supplied to the market by Sunvou
Medical. In the United States, Spirosure Inc.’s product has
been approved by the FDA and is, therefore, a potential
competitor to the Group’s NIOX VERO® device.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018In 2020, the Group plans to launch in the United States
AirNOvent, the novel cylinder free system for nitric oxide
generation for use as part of the treatment regimen for
hypoxic respiratory failure associated with persistent
pulmonary hypertension of the newborn. AirNOvent will
compete with INOMAX® (sold by Mallinckrodt) and potential
future new competitors to the market. There is no guarantee
that the Group will be able to take a share of this market in
the countries where it has commercial rights, namely the
United States and China.

The Group may not be able to sell its products profitably
if reimbursement from third party payers such as private
health insurers and government health authorities is restricted
or not available. For example, it may prove difficult to build
a strong enough economic case based on the burden
of illness and population impact. Third party payers are
increasingly managing costs to both their organisations as
well as patients, and as a result pharmaceutical products
in competitive markets can be denied or limited in terms of
coverage and reimbursement. Moreover, even if the products
can be sold profitably, they may not be accepted by patients
and the medical community.

The Group has expanded its operations significantly in
China and moved to a direct sales model. However, there
is no guarantee that this will lead to commercial success
in the Chinese market. The economic system of China is
very different from the economies of developed countries
in many respects, including government involvement,
level of development, growth rate, control of foreign trade
and allocation of resources. Any changes to the political,
economic and social conditions in China or in the policies
of the Chinese government may have a material adverse
impact on the Group’s business in China.

Outside the United States, United Kingdom, China and
Germany the Group relies on distributors to sell its NIOX®
devices and such relationships must be carefully managed
in order to ensure the commercialisation services provided
are of a sufficiently high quality and an appropriate level
of resources is applied by the distributor to the marketing
of the devices.

Other factors that may undermine the Group’s efforts to
commercialise its products include: the inability to train
and retain effective sales and marketing personnel; a failure
to persuade prescribers to prescribe products; and higher
costs of marketing and promotion than are anticipated by
the Group.

Mitigating activities
The Group and its partner AstraZeneca have established
a Joint Steering Committee which meets regularly to
review the development and commercialisation of Tudorza®
and Duaklir®. Promotional efforts are focused on current
prescribers of Tudorza® and high volume prescribers of
other LAMAs. A dedicated team concentrates on selling the
product to larger public and private institutions under fixed
term contracts.

Plans put in place in order to mitigate against the risk
of the launch of Duaklir® being unsuccessful include,
recruitment of managers with the relevant commercial
experience, establishment of a dedicated COPD field force,
a detailed launch plan identifying the target market, product
positioning and messaging, contract negotiation with payers,
supply chain strategy, and measurement and monitoring
of performance.

To mitigate the risks of termination of the products’ head
licence or the sub-licence, Circassia and AstraZeneca have
both agreed to use all reasonable efforts to ensure the
relevant obligations under the head licence from Almirall
are performed. Both the head licence and sub-licence
contain customary provisions relating to cure periods
and dispute resolution.

With regard to its NIOX® franchise, the Group continues
to apply significant resources to sales of the device.
In the United States there is a dedicated commercial
team, including sales representatives, selling NIOX®.
The products are also sold directly by the Company’s
teams in China, the United Kingdom and Germany who
manage local commercialisation activities. Distributor
markets are managed by an experienced Senior Director
of Distributor Management.

The Group is in the process of preparing plans to
mitigate against the risk of the launch of AirNOvent being
unsuccessful. These will include: recruitment of appropriate
managers with the relevant commercial experience; launch
by an experienced field force; and preparation of a clear
marketing and launch plan.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Risks and risk management continued

Compliance with healthcare regulations

Regulatory approvals

The Group must comply with complex regulations in
relation to the marketing of its device and drug products.
These regulations are strictly enforced. Failure by the
Group (or its commercial partners) to comply with relevant
legislation and regulations, including the US False Claims
Act, Anti-Kickback Statute and the US Foreign and Corrupt
Practices Act and regulations relating to data privacy
(amongst others) and similar legislation in countries outside
the United States, such as China, may result in criminal
and civil proceedings against the Group.

In 2019, as a result of the Group exercising its option
in December 2018 to take full ownership of Tudorza®,
the provision of Tudorza® samples to healthcare practitioners
will transition to the Group from AstraZeneca. As a result,
in 2019 the Group will need to implement its own sample
management programme.

Mitigating activities
The Group has an internal Compliance function, which
comprises the General Counsel and Chief Compliance
Officer together with dedicated Compliance resources
in the United States and China. The General Counsel and
Chief Compliance Officer have a direct reporting line to the
Chair of the Audit and Risk Committee. Activities in this area
are reviewed by the Senior Management Team on a quarterly
basis. The Compliance function works with a network of
external advisers in the relevant territories to ensure local
regulations are understood. Robust processes are in place
to ensure that sales compliance requirements are met and
any failures or allegations of failure are swiftly investigated.
This includes training of employees, ride-alongs with sales
representatives, due diligence on distributors and suppliers
prior to contracting with them, compliance oversight of
sampling activities, and audits of distributors and suppliers.

The Group may not obtain regulatory approval for its
products and devices that are in development. Even where
products are approved, subsequent regulatory difficulties
may arise, or the conditions relating to the approval may
be more onerous or restrictive than the Group expects,
or existing approvals might be withdrawn.

The pharmaceutical and medical device industries are
highly regulated. Regulatory authorities across the world
enforce a range of laws and regulations which govern the
testing, approval, manufacturing, labelling and marketing
of such products. Stringent standards are imposed which
relate to the quality, safety and efficacy of these products.
These requirements are a major determinant of whether
it is commercially feasible to develop a drug substance or
medical device given the time, expertise, and expense which
must be invested, and whether it is possible to commercialise
products effectively or at all. Moreover, approval in one
territory offers no guarantee that regulatory approval will
be obtained in any other territory.

If the Group acquires further development-stage products,
it may be necessary to successfully complete supporting
clinical studies to support applications to regulatory
authorities for the grant of regulatory approval. Clinical
studies are typically expensive, complex and time-
consuming, and have uncertain outcomes. Conditions
in which clinical studies are conducted differ, and results
achieved in one set of conditions could be different from
the results achieved in different conditions or with different
subject populations. Regulatory authorities or institutional
review boards may suspend or terminate clinical studies
at any time if the subjects participating in such studies are
being exposed to unacceptable health risks or may require
additional studies to be performed. Difficulties or delays
in the enrolment of subjects could result in significant
delays in the completion of those studies and even
in their abandonment.

The Group already holds regulatory approvals for its NIOX
MINO® and NIOX VERO® devices in certain key countries
such as the United States, Japan, China, the United Kingdom
and Germany but approvals are still pending for the VERO®
in a number of other countries. Delays or complications
in any of these regulatory applications could adversely
affect the Group’s business.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Mitigating activities
The Group’s medical devices are subject to rigorous
testing procedures. A robust device vigilance plan is in
place to ensure any safety issues are identified and reported.
Insurance is in place to cover product liability claims which
may arise during the conduct of clinical trials or sales of the
Group’s NIOX MINO® and NIOX VERO® products and sales
of Tudorza® and Duaklir®.

AstraZeneca administers the global safety database
for Tudorza® and will administer the global safety database
for Duaklir® and a Safety Data Exchange agreement
is in place between the parties.

Supply chain

The Group relies on third parties for the supply of key
materials, finished products and services, including shipping.
Problems at these contractors, such as technical issues,
contamination, and regulatory actions may lead to delays or
even loss of supply or inadequate supply of these materials,
products and services either prior to launch or during
commercialisation. Some materials may only be available
from one source, as is currently the case for the NIOX®
devices and the sensors contained in those devices,
and regulatory requirements may make substitution
costly and time-consuming.

The supply chain for Tudorza® and Duaklir® is controlled
by AstraZeneca, and AstraZeneca is the sole source of
supply for these products.

Additionally, AIT is responsible for the manufacture and
supply of AirNOvent, which it outsources to third-party
contract manufacturers.

Mitigating activities
Audits of contractors are routinely conducted
according to procedures set out in the Group’s quality
system. Dual sourcing is investigated where this is
practicable. Manufacturing sites are well established
FDA-approved facilities.

Regulatory approval for the Group’s ventilator-compatible
nitric oxide product, AirNOvent, might be delayed or refused
in the territories where it has commercial rights, being the
United States and China.

The Group relies on partners, such as its AirNOvent partner
AIT, third party sub-contractors and service providers for
the execution of most aspects of development programmes.
Failure of these third parties to provide services of a suitable
quality within acceptable timeframes – for example due
to technical reasons or bankruptcy of the provider – may
cause the failure or delay of these development programmes.
Even where approval is obtained, regulatory authorities
may still impose significant restrictions on the indicated
uses or marketing of a product or impose costly, ongoing
requirements for post-marketing surveillance or post-approval
studies, or may even withdraw the approval if new concerns
over safety and efficacy arise.

Mitigating activities
The Group manages its regulatory risk by employing
highly experienced professionals who, where appropriate,
will commission advice from external advisers and consult
with the regulatory authorities on the design of any
pre-clinical and clinical programmes that may be required.
These in-house experts would ensure that high quality
protocols and other documentation are submitted during
the regulatory process, and that well-reputed contract
research organisations with global capabilities are retained
to manage the trials.

The application for AirNOvent approval in the United
States will be managed by AIT and follows a recent
successful pre-submission meeting with the Food and
Drug Administration. The AIT team members have regulatory
and device development expertise as well as experience
in the development of nitric oxide system technology.

Unforeseen side effects

Unforeseen side effects may result from the use of the
Group’s products and devices.

There is a risk of adverse reactions with all drugs and there
is a risk that the malfunction of a medical diagnostic or
device may have an adverse impact on patients. If any of
the Group’s products are found to cause adverse reactions
or unacceptable side effects or risk of misdiagnosis, then
product sales may be adversely impacted, and, in extreme
circumstances, it may prove necessary to suspend sale
and/or withdraw the product from the market.

Adverse events or unforeseen side effects or device
malfunction may also potentially lead to product liability
claims being raised against the Group as the seller
of the product.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Mitigating activities
Important products are covered by a range of different patents
or patent families and attacks on patents are defended using
expert external patent attorneys and lawyers. A robust system
is in place which ensures patents are renewed on time.
Third party patent filings are monitored to ensure the Group
continues to have freedom to operate and oppositions are filed
where this is considered expedient. Confidential information
(both belonging to the Group and to third parties) is protected
through use of confidential disclosure agreements with third
parties, and suitable provisions relating to confidentiality and
intellectual property exist in the Group’s employment contracts.

Licences are monitored for compliance with their terms.

Organisational capabilities and capacity

The Group may be unable to successfully implement its plans
for growth if it does not attract and retain employees with the
requisite capabilities and experience, in appropriate numbers.
The Group depends on the skills and experience of its current
management team and employees, and is generally subject
to competition for, and may fail to retain, skilled personnel.

Existing employees, investigators, consultants and
commercial partners may engage in misconduct or improper
activities, including non-compliance with regulatory
standards and laws.

Where the Group acquires complementary technologies,
products, or businesses it may not be able to integrate those
acquisitions effectively or realise their expected benefits.

The Group may be vulnerable to disruption and damage
as a result of failures of its computer systems.

Mitigating activities
Remuneration packages for employees are competitive,
and incentive plans based on the contingent award of shares
are in place to attract, motivate and retain staff.

Disciplinary and whistleblowing policies exist to address
misconduct by employees and officers.

To address IT and cyber risks, a disaster recovery plan
has been developed.

Data is backed up daily on off-site servers and the
Group operates from a number of physically separate sites.
In addition, the Group maintains up to date anti-virus,
anti-malware and anti-spyware software.

Risks and risk management continued

Research and development risks

The Group is dependent upon external collaborators
for the development of its NIOX® and AirNOVent devices.
The Group relies upon its collaborations with PHC
Corporation for the development of the NIOX® device,
upon IT Dr. Gambert GmbH for the development
of the sensors contained in the NIOX® devices,
and upon AIT Therapeutics, Inc. for the development
of the AirNOvent device.

Mitigating activities
The development collaborations with PHC Corporation
and AIT are managed by steering committees which include
representatives from the Group. In addition, the Group
will seek, through business development activity, to identify
opportunities which would expand and diversify its portfolio.

Intellectual property, know how, and
trade secrets

The Group may be subject to challenges relating to the
validity of its patents or third-party patents to which it has
rights. If these challenges are successful then the Group
may be exposed to generic competition.

The Group could also be sued for infringement of third party
patent rights. If these actions are successful then it would
have to pay substantial damages and potentially remove its
products from the market. Such litigation, particularly in the
United States, involves significant costs and uncertainties.

It is possible that the Group will not be able to secure
intellectual property protection, or sufficient protection,
in relation to products which are acquired or in development.
Similarly, a failure by the Group to maintain or renew key
patents would lead to the loss of such protection. In both
cases the potential of the Group to earn revenue from its
products could be compromised as it would be less difficult
for third parties to copy the products.

The Group may rely upon know how and trade secrets to
protect its products and maintain a competitive advantage.
This may be especially important where patent protection
is limited or lacking. Conversely, the Group may be subject
to claims that its employees or agents have wrongfully
used or disclosed the confidential information of third parties
which could lead to damages or injunctions which affect
particular products.

The Group licences certain intellectual property rights from
third parties. The rights which are licensed to the Group as
part of the collaboration with AstraZeneca relating to Tudorza®
and Duaklir®, and the rights which are licensed to the Group
as part of the collaboration with AIT relating to AirNOvent,
fall within this category. If the Group fails to comply with its
obligations under these licence agreements it may enable
the other party to terminate the agreement.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Financial operations

Brexit

The Group has incurred significant losses since the
inception of its various businesses and anticipates that
it will continue to do so for a further period due to the high
level of expenditure required to develop its NIOX® business,
to promote Tudorza® and launch Duaklir® and AirNOvent.

Foreign exchange fluctuations may adversely affect the
Group’s results and financial condition. The Group records
its transactions and prepares its financial statements in
pounds sterling, but a significant proportion of its income
and expenditure is in United States dollar, Swedish krona,
euros and Chinese yuan.

Adverse decisions of regulators, including tax authorities,
or changes in tax treaties, laws, or the interpretation of those
laws, could reduce or eliminate research and development
tax credits which the Group currently receives in the
United Kingdom.

Mitigating activities
At the end of each year, the Board reviews and approves
a budget for the following year and reviews the 10 year plan.
As part of the review the Board considers the robustness
of the Group taking into account its current position, potential
future developments, the principal risks facing it, and the
effectiveness of mitigation plans and controls. The review
also encompasses the potential impact of significant credible
scenarios on the business model and future performance
of the business. Forward purchases of foreign currencies
are made when exchange rates are favourable to provide
for expenditure in those currencies. Markets are constantly
monitored and an external commentary is provided by
HSBC and Investec on a daily basis. If tax credits are
lost in the future then action would be taken to reduce
discretionary expenditure to help ensure there remained
sufficient cash to support the business through
to profitability.

There continue to be political and economic uncertainties
following the United Kingdom’s vote to leave the European
Union (EU) at the referendum held on 23 June 2016.
The Group continues to face a range of risks associated
with this decision. For example, the vote to leave the
EU may lead to changes in the regulatory system by which
medical devices and pharmaceutical products are approved
for use. The Group’s NIOX® product is currently CE marked
in accordance with European regulations and it is possible
that this registration will need to be changed in some way
once the United Kingdom has left the EU, to permit sales
of the device to continue in the United Kingdom.

Brexit may also result in restrictions on the movement
of people which may make it harder for the Group to attract
the talent it needs to support the business. The general
economic uncertainty created by the process may also
make it harder to enter into strategic partnerships with
European companies.

The uncertainties surrounding Brexit also caused a significant
depreciation in the value of sterling and continue to result in
further foreign exchange volatility. This may affect the Group
as indicated in the more general risk relating to financial
operations set out above.

Mitigating activities
The Group continues to monitor developments relating
to Brexit and receives updates from its legal and regulatory
advisers on a frequent basis. The Group already has
established subsidiaries in Sweden (Circassia AB), where
the Group’s NIOX® inventory for the EU and other markets
outside the United States is held and Germany (Circassia AG)
and so the Group will still have a presence in the EU even
after Brexit comes into effect. In addition, a 3-month supply
of NIOX® inventory is held in the United Kingdom to help
mitigate against the disruption in supply. The risks relating to
currency volatility are mitigated through the actions described
above under the heading financial operations risk.

Circassia Pharmaceuticals plcAnnual Report and Accounts 20184 Dr Rod Hafner
Director and Senior Vice President Research
& Development
Dr Rod Hafner joined Circassia on 1 March 2007
and became Senior Vice President of Research
& Development and a Director on 10 March 2008.
Rod has many years of experience at a senior level
in the life sciences industry and is a named
inventor on numerous granted patents and patent
applications. Before joining Circassia, he led the UK
operating company of the Scandinavian drug delivery
business, OptiNose AS (now OptiNose US Inc.) and
prior to that was Director of Programme Management
and Vice President of Research & Development
Portfolio Management at PowderJect. Other roles
have included Head of Project Management at
Cortecs International Limited and positions at Wyeth
Pharmaceuticals, Inc. (now Pfizer) and The Procter
& Gamble Company. Rod has led Circassia’s research
and development function since joining in 2007.
He has a BSc (Hons) in Biochemistry from Edinburgh
University and a PhD in Biochemistry from the
University of Cambridge.

Corporate governance
Board of Directors

1 Dr Francesco Granata
Chairman
Dr Francesco Granata, joined Circassia as Chairman
on 1 September 2013. He is also Chairman of the
Nomination Committee. Francesco is an advisor
at Helsinn Investment Fund S.A. SICAR. Prior
to this he was senior advisor at Warburg Pincus
International LLC, and before that he was Executive
Vice President at Biogen Idec Inc. Previously, he
served as Group Vice President and President
responsible for Canada and major European
markets at Schering-Plough Corporation as Regional
President for Northern Europe and Middle East
and Africa at Pfizer Inc., and as Managing Director
of Pharmacia & Upjohn Inc. in Italy. He is currently
a Board member of Diadem, an Italian company
developing a test for Alzheimer’s disease; Italfarmaco
SpA, a leading Italian pharmaceutical group that
operates in both the pharma and chemical sectors;
Utility Therapeutics Limited, a company focused
on developing and commercialising antibiotics in
the US; Prismic Pharmaceuticals Inc., a US based
medical food company; Quanta Dialysis Technologies
Ltd., a UK company that has developed advanced
haemodialysis systems for use in the home and clinic;
Helsinn Investment Fund, a venture capital fund
focused on healthcare; and a member of the strategic
advisory committee at Lupin, a leading Indian global
pharmaceutical company. He is also a director and
founder of Micromega Limited and Chairman of Kiowa
Kirin International plc. Prior to his career in industry,
Francesco practised as a medical doctor specialising
in cardiology. He holds a degree in medicine
and surgery from the University of Pavia, Italy,
and was formerly a member of the Board
of the European Federation of Pharmaceutical
Industry Associations.

2 Steven Harris
Chief Executive Officer
Steven Harris co-founded Circassia on 19 May
2006 and has led the Company as Chief Executive
Officer since then. Steven has extensive experience
of leading specialty pharmaceutical companies.
Prior to co-founding Circassia, he was a founding
member of the management team that grew
Zeneus Pharma Limited into a successful specialty
pharmaceutical company and managed its
acquisition by Cephalon Inc. (now part of Teva
Pharmaceutical Industries Limited). Prior to this
he served for seven years as Chief Financial Officer
of PowderJect Pharmaceuticals plc and was a key
member of the management team which grew the
organisation from a private biotechnology company
to the world’s fifth largest vaccines business,
before it was acquired by Chiron Corporation in 2003.
He holds a BSc from Southampton University and
is a Chartered Accountant and a member of the
Institute of Chartered Accountants of England
and Wales (ICAEW). Steven is also a Chairman
of the Audit Committee and a member of the
Management Engagement Committee of Woodford
Patient Capital Trust plc and Chairman of Synchrony
Pharma Limited.

3 Julien Cotta
Chief Financial Officer
Julien Cotta joined Circassia as Chief Financial
Officer on 5 January 2012 and was appointed
a Director on 26 November 2013. Julien has
significant financial management experience
in the healthcare industry. Prior to joining Circassia,
he was Chief Financial Officer of the Finnish medical
technology company, Inion Oy, and before this Group
Financial Controller at Whatman plc (now part of GE
Healthcare). Previously, he served as Vice President
of Financial Accounting at Chiron Corporation
and Group Financial Controller at PowderJect
Pharmaceuticals plc (prior to its acquisition by
Chiron in 2003). Before this he held senior financial
management roles at Scotia Pharmaceuticals
Limited, and Sanofi S.A., having begun his
pharmaceutical career as a sales representative at
Merck Sharpe & Dohme Corporation. He completed
his accountancy training at Coopers & Lybrand
(now PricewaterhouseCoopers LLP). Julien holds
a BSc (Hons) in Pharmacology from University
College London and is a Chartered Accountant
and a member of the ICAEW.

Circassia Pharmaceuticals plcAnnual Report and Accounts 20187 Sharon Curran
Independent Non-Executive Director
Sharon Curran was appointed to the Board as an
Independent Non-Executive Director on 8th February
2018. She was most recently Vice President, Global
Customer Excellence & Specialty at Abbvie Inc.,
and brings extensive commercial and specialty
pharmaceutical experience to the Company. She
has held a number of senior roles during her career,
including Vice President, Specialty, Global Marketing
& Commercial Operations at Abbvie, Global Brand
Director, Anesthesia at Abbott and Division Head,
Ireland at Eli Lilly. She holds an Executive Master of
Science, Business Administration from Trinity College
Dublin and a Bachelor of Science in Biotechnology
from Dublin City University.

5 Jo Le Couilliard
Independent Non-Executive Director
Jo Le Couilliard was appointed to the Board as an
Independent Non-Executive Director on 8 February
2018. She was most recently Senior Vice President,
Global Commercial Transformation at GSK and
brings significant commercial and international
pharmaceutical industry experience to Circassia.
She previously held a number of senior roles at GSK,
including Senior Vice President and Area Head,
Asia Pacific and Senior Vice President, Corporate
Development. Prior to this she was Chief Operating
Officer at General Healthcare Group where she had
operational responsibility for 49 private hospitals in
the UK. She is currently a Non-Executive Director of
Cello Health plc and Alliance Pharma plc. Previously,
she was Non-Executive Director at the Duke NUS
Medical School in Singapore. She was previously
a Non-Executive Director of the Frimley Park Hospital
NHS Foundation Trust and holds a Masters degree
in Natural Sciences from the University of Cambridge.
She is a Chartered Accountant and a member
of the ICAEW.

6 Russell Cummings
Non-Executive Director
Russell Cummings joined Circassia as a
Non-Executive Director on 25 January 2007.
Until November 2017 he was Chief Executive
Officer of Touchstone Innovations plc, having joined
as Chief Investment Officer in 2006. From 2003 to
2006, he held roles at the growth equity and venture
capital firm Scottish Equity Partners LLP, and prior to
this spent 16 years at the international venture capital
company 3i Group plc, latterly as a Director in its UK
Technology Group. He is currently Non-Executive
Director of British Patient Capital Limited. He holds
a BSc (Eng) in Mechanical Engineering from Imperial
College, London.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Corporate governance
Corporate governance report

Dear shareholders,

On behalf of the Board, I am pleased to present Circassia’s Corporate governance report for the year ended
31 December 2018.

High standards of corporate governance are fundamental to our business and are implemented and supported through
appropriate internal policies and procedures. The responsibility for ensuring this framework is effective lies with the Board,
and we are constantly striving to improve standards while building a successful company.

During 2018, two of our long-serving Non-Executive Directors, Dr Jean-Jacques Garaud and Mr Marvin Samson,
decided not to stand for re-election. We are very grateful to Jean-Jacques and Marvin for their significant contributions over
the years. In addition, Ms Lota Zoth and Dr Heribert Staudinger have retired from the Board following the transfer to AIM.
We also extend our thanks to Lota and Heribert for the excellent support and guidance they have provided.

Maintaining good communication with our shareholders is extremely important to us. During the year, Steven Harris,
our CEO has held a number of meetings with investors and current shareholders and presented at several conferences
which were attended by existing and potential shareholders. Communications with shareholders are coordinated by
the Head of Corporate Communications, who reports directly to the CEO.

Dr Francesco Granata
Chairman

1 May 2019

Dr Francesco Granata
Chairman

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance statement

Statement of Compliance with the Quoted Companies Alliance Code (the “Code”)
On 4 February 2019, Circassia Pharmaceuticals plc transferred its shares from the Main Market to Alternative Investment
Market (AIM) and adopted compliance with the QCA Corporate Governance Code with effect from this date. This report
follows the structure of these guidelines and explains how we have applied the guidance.

1) Establish a strategy and business model which promote long-term value for shareholders
The Group’s values are stated within the Corporate social responsibility report on page 26 and the Group’s strategy and
business model are explained in detail in the Strategic report on pages 20 to 21.

2) Seek to understand and meet shareholder needs and expectations
Dialogue with shareholders
Steven Harris, Chief Executive Officer, is responsible for the day to day management of the Group and for implementing the
strategy which has been reviewed and approved by the Board. He is also responsible for ensuring effective communication
with shareholders, brokers, and analysts.

Shareholder presentations, which include information on our markets and strategy, are available to all stakeholders on the
Group’s website. In addition to statutory reporting of material matters, the Group publishes general news on products,
technologies and commercial opportunities on the Group’s website.

The Board maintains regular communication with shareholders. Meetings between material shareholders and the Executive
Directors take place throughout the year. The Chairman and other directors are available to meet with major shareholders
on request.

All meetings with shareholders are held in a manner which ensures price sensitive information which has not been made
available to shareholders generally, is protected from disclosure.

The Chief Executive Officer and the Chief Financial Officer give annual and bi-annual presentations to institutional investors,
analysts, and the media. These presentations are available on the website. Annual and interim reports and all press releases are
also published on the website as are the terms of reference of the three Board Committees and matters reserved for the Board.
Paper copies of the report and accounts are mailed to those shareholders who have elected to receive them in hard copy.

The directors receive a report from the Corporate Communications department at each Board meeting giving information
on material changes in shareholdings and collating feedback from the Company’s brokers and investors.

Annual General Meeting
The Annual General Meeting (AGM) provides an opportunity for all shareholders to meet Board members and ask about the
proposed resolutions and the business in general.

Notice of the AGM is posted to shareholders no less than 21 clear days prior to the date of the AGM and is also available to
shareholders on the website at www.circassia.com. The letter accompanying the notice will include details of the proposed
resolutions and an explanation of their content.

At the AGM the number of proxy votes cast for, against, or abstaining from each resolution will be disclosed. Results
of voting are announced to the market and posted on the website as soon as possible after the AGM.

The Group does not currently consider it appropriate to introduce mandatory poll voting on all resolutions put to the
shareholders but will keep this position under review.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Corporate governance report continued

3) Take into account wider stakeholder and social responsibilities and their implications for long-term success
The Group is aware of its corporate social responsibilities and the need to maintain effective working relationships across
a range of stakeholder groups. These include the Group’s employees, partners, suppliers and regulatory authorities.
The Group’s operations and working methodologies take account of the need to balance the needs of all stakeholder groups
while maintaining focus on the Board’s primary responsibility to promote the success of the Group for the benefit of its
members as a whole.

The Group endeavours to take account of feedback received from stakeholders, making amendments to working
arrangements and operational plans where appropriate and where such amendments are consistent with the Group’s
longer-term strategy.

The Group takes due account of any impact that its activities may have on the environment and seeks to minimise this
impact wherever possible. Through the various procedures and systems it operates, the Group ensures full compliance
with health and safety and environmental legislation relevant to its activities.

The Group’s Corporate social responsibility report can be found on page 26.

4) Embed effective risk management, considering both opportunities and threats, throughout the organisation
Risk management system
A description of the risk management system is set out in the Strategic report. The system is designed to manage risks,
not to eliminate them completely, and can only provide a reasonable degree of assurance against material misstatement
or loss. Inherent in the concept of reasonable assurance is the recognition that the cost of a control procedure should
not exceed its anticipated benefits.

The Group’s principal risks are outlined in the Strategic report on page 28.

Internal controls
The Audit and Risk Committee reviews the Group’s risks and mitigating actions on an annual basis and makes
recommendations to the Board where improvements are required. The efficacy of control systems are reviewed
by the full Board as required by the Code.

The Board confirms that it has conducted a review of the Group’s risk management and internal controls systems,
including financial, operational and compliance controls and has found them to be effective.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

5) Maintain the Board as a well-functioning, balanced team led by the chair
The role of the Board
The Board is responsible for the leadership and long-term success of the business. It has a schedule of matters which are
reserved for its review. These include the review and approval of strategic plans, financial statements and budgets, financing,
acquisitions and disposals, major capital expenditure, dividend policy, making key risk decisions, monitoring risks and
compliance, monitoring health, safety and environmental performance, and Executive remuneration and appointments.

At each meeting, the Board assesses the progress of the Group when measured against its objectives, particularly those
which relate to its commercial performance, and reviews financial performance against the budget.

Roles and responsibilities
The Board is currently composed of the Chairman, three Executive Directors, and three Non-Executive Directors.
The biographies of the current members of the Board are set out on pages 34 to 35 of this report.

The Executive Directors have direct responsibility for the business operations of the Group. The Non-Executive Directors,
by virtue of their wide range of industry experience and skills, bring an informed view to the decision-making process.

The roles of the Chairman and Chief Executive Officer are clearly delineated. This division of responsibilities has been
set out in writing and approved by the Board.

The Board is supported by three Committees (the Audit and Risk Committee; the Nomination Committee; and the
Remuneration Committee) that have the necessary skills and knowledge to discharge their duties and responsibilities
effectively.

Chairman
Dr Francesco Granata, the Chairman, is responsible for the leadership of the Board and its effectiveness by ensuring that:

— the agenda for meetings is appropriate, and the Board is provided with the information it needs for high quality decision

making in a timely fashion;

— the Board plays a full and constructive role in shaping the strategy of the Group;

— the Board environment is productive and utilises the skills and experience of all members;

— the Board complies with the appropriate standards of corporate governance;

— the Committees are properly structured and resourced;

— the performance of the Board, its Committees, and individual directors are evaluated each year; and

— there is effective communication with shareholders.

The Chairman and the Non-Executive Directors met in the absence of the Executive Directors at the end of each
Board meeting which occurred in 2018.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Corporate governance report continued

Chief Executive Officer
Steven Harris, Chief Executive Officer, is responsible for the day to day management of the Group and for implementing
the strategy which has been reviewed and approved by the Board. He is also responsible for ensuring effective
communication with shareholders, brokers, and analysts.

Non-Executive Directors
The role of the Non-Executive Directors, and of the Committees of which they are members, is to scrutinise the performance
of management, satisfy themselves that the financial and risk control mechanisms are robust, and determine appropriate
levels of Executive pay. They have wide ranging experience of industry and bring their judgement to bear in the
decision-making process of the Board.

Their seniority and range of skills ensure that no one individual can dominate this process.

Independence
The Board considers itself to be sufficiently independent. The Code suggests that a board should have at least
two independent Non-Executive Directors. As at the date of signing this report, including the Chairman there are four
Non-Executive Directors, of which only Mr Russell Cummings is deemed non-independent on the grounds of being
a Board member for over 10 years.

Board meetings
The Board aims to meet at least four times during the year, with monthly conference calls taking place in the intervening period.
Additional meetings may be arranged where urgent matters arise. These additional meetings may be held by telephone.

The table below sets out the attendance of the directors, while they were Board members, at scheduled meetings which
occurred during the year to 31 December 2018.

Committee
Memberships

Independent
status

Board

Nomination
Committee

Audit and Risk
Committee

Remuneration
Committee

Executive Directors

Steven Harris
Julien Cotta
Rod Hafner

Non-Executive Directors

Francesco Granata
Russell Cummings
Jean-Jacques Garaud3
Lota Zoth4
Marvin Samson8
Jo Le Couilliard
Heribert Staudinger12
Sharon Curran

n/a
n/a
n/a

N(Chair)
–
A, R
N5, A(Chair)6, R(Chair)7
N, A, R(Chair)
N9, A(Chair)10, R11
N13
A14, R(Chair)15

n/a
n/a
n/a

Yes
No
Yes
Yes
Yes
Yes
Yes
Yes

4 (4)
4 (4)
4 (4)

4 (4)
4 (4)
1 (2)
4 (4)
1 (2)
4 (4)
4 (4)
4 (4)

2 (2)1
2 (2)2
–

2 (2)
–
–
0 (0)
0 (0)
2 (2)
1 (2)
–

3 (3)1
3 (3)2
–

–
–
0 (1)
3 (3)
1 (1)
2 (2)
–
2 (2)

3 (3)1
3 (3)2
–

–
–
2 (2)
3 (3)
1 (2)
1 (1)
–
1 (1)

N = Nomination Committee, R = Remuneration Committee, A = Audit Committee
Figures in brackets represent the total number of meetings (occurring during the year to 31 December 2018 when the director was in office).
1 By invitation.
2 In the capacity of Secretary to the Committee.
3 Until 30 May 2018, when he retired from the Board (not having put himself forward for re-election at the AGM).
4 Until 4 February 2019, when she retired from the Board following the transfer to AIM.
5 Until 30 May 2018, when she retired as a member of the Nomination Committee.
6 Until 30 May 2018, when she stepped down from Chair of the Audit and Risk Committee. She remained a member of the Audit and Risk Committee

until 4 February 2019 when she retired from the Board following the transfer to AIM.

7 From 30 May 2018, when she was promoted from member to Chair of the Remuneration Committee, until 4 February 2019, when she retired from the Board following

the transfer to AIM.

8 Until 30 May 2018, when he retired from the Board (not having put himself forward for re-election at the AGM).
9 From 30 May 2018, when she was appointed to the Nomination Committee.
10 From 30 May 2018, when she was appointed as Chair of the Audit and Risk Committee.
11 From 30 May 2018, when she was appointed to the Remuneration Committee.
12 Until 4 February 2019, when he retired from the Board following the transfer to AIM.
13 From 30 May 2018, when he was appointed to the Nomination Committee until 4 February 2019, when he retired from the Board following the transfer to AIM.
14 From 30 May 2018, when she was appointed to the Audit and Risk Committee.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

6) Ensure that between them the directors have the necessary up-to-date experience, skills and capabilities
Appointments to the Board
The procedure for appointment of new directors to the Board is formal, rigorous and transparent. The process
is led by the Nomination Committee which is led by the Chairman. Shortlisted candidates are interviewed by members
of the Nomination Committee before a recommendation is made to the Board.

The biographies of the current members of the Board are set out on pages 34 to 35 of this report.

The Board is satisfied that, between the directors, it has an effective and appropriate balance of skills, experience
and time to perform its duties.

Advisors
The Board obtains independent assistance and advice from external advisors if deemed necessary. In the current
year, the Remuneration Committee appointed MM&K Limited to observe and review the Group’s remuneration policy.
Further information can be found within the Remuneration Committee report on page 52.

Diversity
The Board recognises the value of diversity at all levels of the Group. The Group has an Equal Treatment, Equal
Opportunities and Diversity policy which extends to the Board.

Further information around the Group’s diversity can be found within the Corporate social responsibility report on page 26.

Induction and training
Upon appointment, each Director receives a comprehensive induction package which includes written materials relevant
to their responsibilities. In addition, meetings are organised with other Board members and with members of the Group’s
management team.

All directors have direct access to the advice of the Company Secretary. Whenever it is considered necessary, the Company
Secretary can arrange the appointment of professional advisers at the Group’s expense to assist Board members in their roles.

Directors receive frequent updates on commercial developments affecting the business as well as regulatory and legislative
changes. Directors are invited, during the annual evaluation procedure, to identify any training which they feel might
benefit them.

Information
In advance of each Board meeting, Directors receive a full agenda and a comprehensive set of papers which include
commercial and functional reports. A procedure is in place to ensure that these materials are delivered to the Board
in a timely fashion. Senior employees of the business regularly attend meetings in order to enhance the Non-Executive
Directors’ understanding of current issues and give them the opportunity to ask detailed questions.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Corporate governance report continued

7) Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement
Performance evaluation
Formal Board evaluations are carried out once a year, and informal evaluations are carried out on a continuing basis
throughout the year. The formal evaluation commences with the circulation of a written questionnaire which is prepared by
the Company Secretary. This invites directors to rate and comment on the performance of the Board in a number of areas,
including the conduct of Board meetings; the standard and timeliness of information; the balance of skills of the members
of the Board; the roles and responsibilities of individual directors; and compliance with good corporate governance
practices. A detailed, anonymised analysis of these responses is then prepared by the Company Secretary and reviewed
and discussed by the Board who then debate the responses and agree upon the actions required.

The most recent Board evaluation concluded that the Board was operating effectively. Areas highlighted for improvement
included greater formalisation of succession planning across the functions, and a review of the remuneration policy. Steps
are currently being taking to formally document succession planning. Additionally, MM&K have been appointed as external
advisors to the Remuneration Committee to benchmark Board and Senior Management remuneration and review the
remuneration policy following the move to AIM. Further information can be found within the Remuneration Committee
report on page 52.

The Nomination Committee is responsible for overseeing succession planning requirements, including the identification
and assessment of potential Board candidates and making recommendations to the Board for its approval. All continuing
directors stand for re-election on an annual basis. External recruitment is currently the most likely source of immediate
replacements for any of the Executive Directors.

8) Promote a corporate culture that is based on ethical values and behaviours
The Board aims to lead by example and do what is in the best interests of the Group, its stakeholders and shareholders.
The Executive Directors strive to act in a manner which is professional and ethical and has published its ethical policies
for all employees to observe and comply with.

9) Maintain governance structures and processes that are fit for purpose and support good decision-making
by the Board
Board Committees
The Board has three Committees to which it delegates specific responsibilities; the Audit and Risk Committee;
the Nomination Committee; and the Remuneration Committee. The reports of these Committees and details of their
composition form part of the Corporate governance report. Each Committee has full terms of reference which have been
approved by the Board and also appear on the website at www.circassia.com. These terms of reference are reviewed
annually. The Board provides the Committees with sufficient resources, including access to external advisers, as may
be required in order to fulfil their roles.

Nomination Committee
The Code requires that a majority of the members of the Committee should be Independent Non-Executive Directors
and the Committee should be chaired by the Chairman or an Independent Non-Executive Director.

From 1 January 2018 until 30 May 2018, the Committee was comprised of Dr Francesco Granata (Chairman and Chair
of the Committee); Ms Lota Zoth and Mr Marvin Samson. On 30 May 2018, Mr Marvin Samson retired from the Board
(not having put himself forward for re-election at the AGM) and Ms Lota Zoth retired as a member of the Nomination
Committee. Their positions were taken by Ms Jo Le Couilliard and Dr Heribert Staudinger.

On 4 February 2019, Dr Heribert Staudinger retired from the Board following the transfer to AIM.

The Committee is therefore made up of Independent Non-Executive Directors and complies with the requirements of the Code.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Remuneration Committee
The Code advises that an effective Committee should comprise of Non-Executive Directors, all of whom should
be independent.

For the period from 1 January 2018 until 30 May 2018, the Committee members were: Mr Marvin Samson
(Chair of the Committee); Dr Jean-Jacques Garaud and Ms Lota Zoth. All members are considered to be independent.

Mr Marvin Samson and Dr Jean-Jacques Garaud did not seek re-election at the 2018 AGM, and their positions were taken
effective from 30 May 2018 by Ms Sharon Curran and Ms Jo Le Couilliard. On this date, Ms Lota Zoth was promoted to
Chair of the Remuneration Committee. All members are considered to be independent.

On 4 February 2019, Ms Lota Zoth retired from the Board following the transfer to AIM. Her position as Chair
of the Remuneration Committee was taken effective on this date by Ms Sharon Curran.

As at the date of signing this report, the Committee is made up of two Non-Executive Directors. The Board considers
that the size and composition of the Committee is appropriate for the size of the Company.

The Committee is therefore made up of Independent Non-Executive Directors and complies with the requirements of the Code.

Audit and Risk Committee
The Code recommends that the Committee should be made up of Independent Non-Executive Directors, with the size
of the Committee being proportionate to the complexity of the company and its business and the risks it faces.

For the period from 1 January 2018 until 30 May 2018, the Committee members were: Ms Lota Zoth (Chair of the
Committee); Mr Marvin Samson and Dr Jean-Jacques Garaud. All members are considered to be independent.

Mr Marvin Samson and Dr Jean-Jacques Garaud did not seek re-election at the 2018 AGM, and their positions on the Audit
and Risk Committee were taken effective from 30 May 2018 by Ms Jo Le Couilliard and Ms Sharon Curran, who are both
Independent Non-Executive Directors.

Ms Lota Zoth was Chair of the Audit and Risk Committee from 1 January 2018 to 30 May 2018, at which point
Jo Le Couilliard was appointed as Chair.

Ms Lota Zoth remained a member of the Audit and Risk Committee until 4 February 2019, when she retired from
the Board following the transfer to AIM.

The Committee is therefore made up of Independent Non-Executive Directors and complies with the recommendations
of the Code.

10) Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders
and other relevant stakeholders
The Board believes that corporate governance is more than just a set of guidelines; rather it is a framework which underpins
the core values for running the business in which we all believe. The Board has formal responsibilities and agendas and three
sub-committees; in addition, strong informal relations are maintained between Executive and Non-Executive Directors.
Non-Executive Directors meet with other senior managers and give advice and assistance between meetings. Board dinners
are held from time to time to provide opportunities for broader discussions.

The Chief Executive Officer and Chief Financial Officer regularly meet with investors after results announcements have been
made and at other shareholder participant events. They also meet regularly with the Group’s Nomad/broker and discuss any
shareholder feedback – the Board is briefed accordingly.

All directors attend the AGM and engage both formally and informally with shareholders during and after the meeting.
The results of voting at the AGM are communicated to shareholders via RNS and on the Group’s website.

The Chief Executive Officer and the Chief Financial Officer make presentations to institutional shareholders and analysts
each year immediately following the release of interim and full year results. The slides used for such presentations are made
available on the Group’s website under the financial reports section.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Audit and Risk Committee report

Dear shareholders,

On behalf of the Board I am pleased to present Circassia’s Audit and Risk Committee report for the year ended
31 December 2018.

This report sets out how the Committee has discharged its responsibilities under the Quoted Companies Alliance Code
(the “Code”). It also contains a summary of the activities of the Committee throughout the year.

Jo Le Couilliard
Chair of the Audit and Risk Committee

1 May 2019

Jo Le Couilliard
Chair of the Audit and
Risk Committee

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Responsibilities

The Committee has responsibility for monitoring the integrity of the financial statements of the Group, and for reviewing
the effectiveness of the Group’s internal control systems and risk management systems, including reviewing its risk profile.

Accordingly, the Committee performs a review of the interim and annual financial statements, considering whether the
accounting policies have been applied properly and consistently and whether the disclosures made in the Annual Report
and Accounts are compliant with financial reporting standards, and with corporate governance and regulatory requirements.

The Committee also manages the relationship with the external auditors on behalf of the Board. It monitors the
independence of the auditor and reviews the effectiveness of the audit procedure. The Committee makes recommendations
to the Board regarding the appointment of the external auditors and reviews their terms of engagement. The Committee
has access to the services of the external auditors and where appropriate challenges the views of the external auditors.
If necessary, the Committee may appoint external accounting and legal advisers to assist it with its work.

The Group markets approved medical devices to healthcare professionals in a number of markets around the world
and after taking full commercial control of Tudorza®, the Group also promotes this approved drug in the United States.
Compliance with healthcare laws and regulations has therefore become and will continue to be a key risk area for
the business. The Chief Compliance Officer has a direct reporting line to the Chair of the Audit and Risk Committee
and provides updates in this area to her.

The Committee’s terms of reference are available on the Company’s website. They cover issues such as membership
and the frequency of meetings, together with requirements for a quorum and the right to attend meetings. The duties
of the Committee as set out in the terms of reference include: financial and regulatory reporting; internal controls;
evaluating the need for an internal audit function; external audit; risk management; and reporting responsibilities.

Membership

The names of the members of the Audit and Risk Committee, their dates of appointment, and the number of meetings
attended during the year are set out in the table below:

Member

Date of appointment

Meetings attended (held)

L S Zoth (resigned 4 February 2019)
J-J Garaud (resigned 30 May 2018)
M Samson (resigned 30 May 2018)
J Le Couilliard (Chair of the Committee)
S Curran

27 February 2015
21 February 2014
26 May 2017
30 May 2018
30 May 2018

3 (3)
0 (1)
1 (1)
2 (2)
2 (2)

Mr Marvin Samson and Dr Jean-Jacques Garaud did not seek re-election at the 2018 AGM, and their positions
on the Audit and Risk Committee were taken effective from 30 May 2018 by Ms Jo Le Couilliard and Ms Sharon Curran,
who are both Independent Non-Executive Directors.

Ms Lota Zoth was Chair of the Audit and Risk Committee from 1 January 2018 to 30 May 2018, at which point
Ms Jo Le Couilliard was appointed as Chair.

Ms Lota Zoth remained a member of the Audit and Risk Committee until 4 February 2019, when she retired from
the Board following the transfer to AIM.

The Code provides that all members of the Audit and Risk Committee should be Independent Non-Executive Directors.
The Board considers that all members are independent and therefore this requirement has been satisfied.

The biographies of the current members of the Audit and Risk Committee are set out on pages 34 to 35 of this report.

The Company Secretary acts as the Secretary to the Committee. The Chief Executive Officer attends Committee
meetings at the invitation of the Chair. The Committee meet with the external auditors at least once a year
in the absence of management.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Audit and Risk Committee report continued

A summary of the matters considered by the Committee since the last financial statements is shown in the table below
and explained in further detail in the subsequent text:

Area of review

Activities undertaken

Financial reporting

Review of the interim and full year results.

Consideration of whether the Annual Report is fair, balanced, and understandable.

Review of the external auditors’ reports for the full year results.

Review of significant accounting judgements and estimates (see overleaf).

Review of anticipated changes in accounting standards and their impact.

Review of the going concern basis of preparation of the financial statements.

External auditor

Review of external auditors’ independence.

Review of auditors’ compliance with ethical and professional guidance on audit
partner rotation.

Assess effectiveness of audit process.

Recommend re-appointment of auditors.

Risk management and
internal control

Review of risk, risk management systems, internal controls, and whistleblowing
policy.

Review of compliance activities.

Governance

Review of the Committee’s terms of reference.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Financial reporting

During the year to 31 December 2018 and up to the date of this report, the Committee reviewed the interim report
and accounts for the period ended 30 June 2018 and the preliminary announcement and Annual Report and Accounts
for the year ended 31 December 2018.

Significant accounting matters

The Committee considered the following key accounting issues, judgments and disclosures during the course of the year:

— Accounting for the Tudorza® option exercise

— Goodwill and intangibles impairment assessment

— Investments in subsidiaries impairment assessment

— Going concern and cash flow

Accounting for the Tudorza® option exercise
Following the exercise of the Tudorza® option, a Purchase Price Allocation exercise was performed focusing on the following
key accounting areas:

— Determination of the consideration

In the previous accounting period, it was determined that under the collaboration agreement the maximum total
consideration payable to AstraZeneca was $230 million plus future sales-based royalties. For the purposes of IFRS 3,
the total consideration included in the valuation consisted of $50 million for shares issued to AstraZeneca, $100 million
deferred non-contingent consideration and the fair value of royalties payable to AstraZeneca. It did not include the amount
(up to $80 million) that would be paid to exercise the Tudorza® option, which was to be accounted for once exercised.
The allocation of consideration between both products was based on a relative fair value approach. This was determined
using a bottom-up business valuation for both products and allocating the amount expected to be paid proportionately
between both products. This resulted in the consideration allocated to Tudorza® being recognised as a prepayment for
business combination.

Once the Tudorza® option was exercised, additional consideration of $25 million became payable of the maximum
$80 million. This amount was added to the prepayment for business combination, giving the total consideration
for the Tudorza® option.

— Initial valuation and subsequent measurement of Tudorza® CMP

The Excess Earnings Method approach was determined to be the most appropriate methodology to use for the
valuation of the Currently Marketed Product (CMP). The CMP asset was valued at $122.9 million with a remaining useful
life of 13 years. At 31 December 2018, management performed an impairment review of the CMP, using a Net Present
Value (NPV) methodology and concluded there was sufficient headroom in the AstraZeneca cash generating unit
("CGU") to not warrant an impairment.

— Initial valuation and subsequent measurement of royalties

As part of the transaction, Circassia will pay royalties to third-parties on future sales of Tudorza® in the United States.
Under IFRS 3, these royalties have been classified as additional consideration and initially recognised as CMP asset
with a corresponding contingent liability. The CMP is subsequently amortised over its remaining useful economic life,
and the contingent liability is revalued at the end of each period with gains/losses recognised through the statement
of comprehensive income. The value of the CMP asset was calculated by management using a tax-effected NPV of the
future royalty cash outflows at the date of the transaction and at 31 December 2018. A CMP asset and corresponding
contingent liability of $3.6 million was recognised on the statement of financial position at the date of acquisition.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Audit and Risk Committee report continued

Goodwill and intangibles impairment assessment
In line with IAS 36 Impairment of Assets, the carrying value of each CGU including the allocated goodwill was tested
for impairment. Impairment assessments were performed on each CGU (NIOX®, Respiratory and AstraZeneca) and at
an individual intangible asset level. Management concluded that impairment was required to the Respiratory CGU due
to the inability to find an out-licensing partner for the product candidates in the respiratory portfolio. This resulted in
an impairment of £4.4 million to goodwill, and £70.6 million to intangible assets. See notes 15 and 16 for further details.

Investments in subsidiaries impairment assessment
In line with IAS 36 Impairment of Assets, the carrying value of each investment held by Circassia Pharmaceuticals plc
in its subsidiaries was tested for impairment. Management concluded that impairment was required to the investments
held in Circassia Limited, Prosonix Limited, Circassia Pharmaceuticals Inc and Circassia AB. This is related to the impairment
of the in-house respiratory portfolio, and the halting of investment in the allergy programmes in the prior year. This resulted
in an impairment of £210.3 million. See note 17 for further details.

Going concern and cash flow
Following a review of Group cash flows for the next 12 months, taking account of the Group’s current position
and the potential impact of the principal risks identified earlier in this report the directors have a reasonable expectation
that the Group will be able to continue in operation and meet its liabilities as they fall due over the period to 1 May 2020.

In making this statement, the directors have considered the robustness of the Group, taking account of its current
position, potential future developments, the principal risks facing it, and the effectiveness of mitigation plans and controls.
Their assessment has encompassed the potential impact of significant credible scenarios on the business model, future
performance, solvency and liquidity over the period to 1 May 2020.

The Group’s annual budget was approved by the Board at its December 2018 meeting and the 10 year plan was reviewed
at the same meeting.

The directors also considered it appropriate to prepare the financial statements on the going concern basis, as explained
in the Basis of preparation paragraph in note 1 to the accounts.

The directors note that as at 31 December 2018, the Group is in a net current liability position. This is mainly due
to the $125 million consideration payable to AstraZeneca. Payment of these amounts will be addressed by a loan
provided by AstraZeneca.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Risk management and internal control

The Board has overall responsibility for the review of the Group’s risk management framework and the level of risk which
is acceptable in order to achieve its strategic objectives. The Committee, on behalf of the Board, undertakes the detailed
monitoring of the risk management framework and system of internal controls and reports to the Board on their suitability
and efficacy annually.

In order to discharge its duties in this respect, the Committee receives and reviews reports from the Group’s management team.

The Committee continues to assess what is an acceptable level of risk in key areas, and the best strategy for mitigating
those risks given the cost and time constraints which exist.

During the year, as is required by the Code, the Committee performed a detailed assessment of the principal risks faced
by the Group and how these are managed and mitigated. An annual review of the effectiveness of the Group’s monitoring
and review systems was carried out at the December Committee meeting.

Whistleblowing
A confidential whistleblowing procedure exists to enable employees to raise concerns regarding possible improprieties
in relation to financial or other matters. This procedure has been communicated to all staff. Reports can be made through
an online tool or a telephone helpline operated by a third-party provider. The Committee has reviewed these arrangements
and is satisfied that the current procedure allows for proportionate and independent investigation of such disclosures,
and for appropriate follow up actions to be taken. In accordance with the current policy, concerned employees may raise
matters directly with the Compliance team or directly with the Chair of the Audit and Risk Committee.

Anti-corruption and anti-bribery
The Group has an anti-corruption and anti-bribery policy which has been communicated to all staff. This policy ensures
full compliance with the UK Bribery Act 2010, the US Foreign Corruption Practices Act and other major anti-corruption
legislation. The policy extends to carrying out due diligence on new key business partners who are judged to be acting
on behalf of the Group in high risk areas.

Internal audit
This year, the Committee considered again whether there is a need for an internal audit function and concluded that, given
the scale of operations at this time, it is not currently necessary. The Committee deemed the internal control framework
adequate to mitigate financial risks. The Board accepted this recommendation. This decision will be kept under review.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Audit and Risk Committee report continued

External auditors

Effectiveness
The effectiveness of the external audit process is reviewed annually by the Committee. This review encompasses
an examination of the independence, qualifications, capabilities, and remuneration of the auditor. If issues are identified
which may affect the effectiveness of the process, then actions will be agreed. No such issues were identified in the year
to 31 December 2018 or up to the date of this report.

At the end of the audit for the year ended 31 December 2018, the Committee formally evaluated the performance of
PricewaterhouseCoopers LLP (PwC) who had been reappointed as auditors following a tender carried out in 2016.

To conduct this evaluation the Committee completed a questionnaire to assess the robustness of the audit process,
quality of its delivery, quality of reporting, and quality of the individuals and service. Moreover, the Committee takes
into account the quality of its interactions with the auditor in forming a view on their effectiveness.

Independence
The Group’s external auditor, PwC, is engaged to express its opinion on the Group and the Company’s financial statements.

The Committee is responsible for reviewing the independence and objectivity of the external auditor. Each year the external
auditor confirms its policies for ensuring its independence and provides the Committee with written confirmation that they
continue to be independent.

The Committee pays careful regard to whether non-audit work is carried out by the auditor to ensure that the provision
of such additional services does not impair its independence or objectivity.

A formal process exists for approving the use of the auditor for non-audit work. The auditor should not be appointed to
provide non-audit services which might put the auditor in the position of auditing its own work or create a mutual interest
between the Group and the auditor or result in the auditor acting as an advocate, manager, or employee of the Group.

The total fees paid to the auditor are shown in note 9 of the financial statements. PwC did not undertake any non-audit
services for the Group in the course of the year to 31 December 2018.

In summary, the Committee confirms that the Group has received an independent audit service in the year
to 31 December 2018 and up to the date of this report.

Audit partner rotation
PwC adheres to a rotation policy which complies with the ethical standards of the Audit Practices Board (the “APB”) and
the audit partner is rotated every five years. Simon Ormiston, the current audit partner was appointed for the year ending
31 December 2014 and is due for rotation after the completion of the audit for this year ending 31 December 2018.

Tendering
PwC has been the Company’s auditor since the year ended 31 December 2007. The Committee is actively monitoring
developments arising from the EU audit reform framework and the Competition and Markets Authority. In view of those
developments, the Committee conducted an audit tender process during the course of 2016 and recommended PwC
for re-appointment by shareholders at the 2017 AGM.

Committee evaluation
An internal review of the effectiveness of the Committee was carried out in December 2018 as part of the process of
evaluating Board effectiveness. The result of the evaluation concluded that the Committee was performing effectively.

Jo Le Couilliard
Chair of the Audit and Risk Committee

1 May 2019

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Nomination Committee report

Dear shareholders,

On behalf of the Board, I am pleased to present Circassia’s Nomination Committee report for the year ended
31 December 2018. The key objective of the Committee is to ensure the Board is made up of a range of individuals
who together have the appropriate mixture of skills and experience to lead the Group.

During 2018, two of our Non-Executive Directors, Dr Jean-Jacques Garaud and Mr Marvin Samson, decided not
to stand for re-election. We are very grateful to Jean-Jacques and Marvin for their significant contributions over the
years. Subsequently the Committee considered and made recommendations to the Board regarding the appointment
of Ms Sharon Curran, Ms Jo Le Couilliard, and Dr Heribert Staudinger as Independent Non-Executive Directors and
were appointed to the Board on 30 May 2018.

A summary of the activities of the Committee is set out below.

Dr Francesco Granata
Chair of the Nomination Committee

1 May 2019

Responsibilities

The Committee reviews the size, structure, and composition of the Board and the Committees evaluating the balance
of skills, experience, independence, and diversity of the Board as a whole. On the basis of this evaluation it will then make
recommendations to the Board on any appointments. As part of this process, the Committee will prepare a description
of the skills, experience and other characteristics required, and identify through a transparent procedure, individuals who
are capable of filling those roles.

The Committee also plans for the orderly succession of directors to the Board and recommends to the Board
the membership and chairmanship of the Audit and Risk and Remuneration Committees.

The full terms of reference of the Committee can be found on the website.

Membership

The names of the members of the Nomination Committee, their dates of appointment, and the number of meetings attended
during the year are set out in the table below:

Member

Date appointed

Meetings attended (held)

21 February 2014
Dr Francesco Granata (Chair of the Committee)
26 May 2017
Mr Marvin Samson (resigned 30 May 2018)
Ms Lota Zoth (resigned 30 May 2018)1
26 May 2017
Dr Heribert Staudinger (resigned 4 February 2019) 30 May 2018
30 May 2018
Ms Jo Le Couilliard

2 (2)
0 (0)
0 (0)
1 (2)
2 (2)

1 Ms Zoth resigned from the Nomination Committee only on this date and remained a director of the Company until 4 February 2019, when she retired

from the Board following the transfer to AIM.

Dr Heribert Staudinger resigned from the Nomination Committee and the Board on 4 February 2019, following the transfer
to AIM.

The Company Secretary acts as Secretary to the Committee.

The Chief Executive Officer may attend meetings by invitation.

The Committee is empowered to obtain external professional advice to assist in the performance of its duties.
However, during the year the Committee did not require any external services except for the search activities which
are described below.

Activities

The principal activities during the year were:

— Review of the structure, size and composition of the Board (including skills, experience, independence,

knowledge and diversity);

— Annual performance evaluation of the Board, its members and its Committees;

— Approval of the initiation of a search for new Non-Executive Directors; and

— Proposal for appointment of new Non-Executive Directors.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Remuneration Committee report

Dear shareholders,

Introduction
I am pleased to present my first Directors’ Remuneration Report and the first for Circassia following its transition from
the Main Market to AIM, which was approved by shareholders on 4 January 2019.

It has been an exciting year for Circassia. The Company has taken a number of positive strides towards achieving our vision,
strategy, ambitions and aspirations for the business. This was predominantly R&D focused but is now a strongly focused
commercial and sales driven operation. The Group continued to strengthen its product portfolio with the FDA approval
of Duaklir® granted in March 2019, acquiring the full US commercial rights to Tudorza®, along with the acquisition of the
exclusive commercialisation rights to AirNOvent from AIT Therapeutics Inc in early 2019. Circassia’s global presence is also
expanding, launching a new NIOX® direct sales team in China and expanding our network of partners globally.

Remuneration policy review
Last November, in light of Circassia’s change of business strategy and impending migration to AIM, the Committee
appointed independent remuneration consultants, MM&K Limited to conduct a review of the remuneration policy
and advise the Committee. MM&K provides no other services to the Group.

As a result, we are proposing to make changes to the previously approved policy, whilst also retaining some elements
of it. The Committee’s objective is to ensure that the remuneration policy is fit for purpose throughout the Company and
consistent with its current vision, strategy, risk appetite, culture and philosophy. Taking account of the significant changes
which have taken place in the business, we also wanted to minimise structural change and disruption.

The key policy changes for Executive Directors are summarised below:

New policy

Reason for change

Annual bonus

— Introduction of “Threshold”, “Target”
and “Over-performance” yardsticks.

— 25% payable at Threshold; 50 % at Target.

— 100% payable only for over-performance

against targets set.

— Fewer targets in score-card of corporate/team

and individual objectives.

— Deferral not related to personal shareholding.

— Mandatory deferral of 50 % for two years.

Long-term
incentive

— Maximum award level capped at 100% of salary

in 2019.

— Revised performance targets, based on share
price and sales revenue (weighted equally)
for 2019 awards.

— Technical changes to PSP rules to reflect

the Company’s status as an AIM constituent
(will be the subject of a separate resolution
at the AGM).

— Awards now have a vesting period of 3 years
and a holding period of 2 years other than
for the sale of shares to satisfy any tax liability
created on exercise.

We believe the changes make for a clear, simple
bonus policy which can be rolled-out across
the whole business, is focused on strategic KPIs,
and better reflects and recognises the respective
contributions of individual employees.

The Committee believes that, following these
changes, the PSP will provide an appropriate
long-term incentive for an AIM constituent.
Rule changes will enable the Committee to
make awards to the wider workforce and, in the
Committee’s view, share price and sales revenue
are currently the two most important measures
of the Company’s success in the medium to
long-term. The introduction of a 2 year holding
period further strengthens the link between
compensation and shareholder interests.

Pensions

— Company contribution rate reduced to 10 %

of salary.

This contribution rate is consistent with practice
among AIM constituents. Following an increase in
pension contribution rates for Senior Management
Team (SMT) members, contribution rates are now
aligned across the whole SMT.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Other important decisions taken by the Committee
The Committee has decided not to increase the Chief Executive’s base salary for 2019 and to manage until it reaches
market median level. Other Executive Directors’ base salaries have been increased by 3% in line with the general level
of increase across the business.

Having taken account of the performance levels achieved in relation to corporate targets set for 2018, the Committee
has decided to make bonus awards of between 40% and 48% of salary to the Executive Directors.

Philosophy and purpose
Circassia’s remuneration policy is designed to attract, retain and motivate the quality of directors and employees required
to develop and implement its business strategy and run a successful and sustainable commercially oriented business
for the benefit of all stakeholders. Incentives have been designed to reward growth, take account of risks and, through
equity participation, align employee rewards with shareholder returns.

Links to culture and strategy
The management culture is to be supportive and focused on successful outcomes. Business strategy is to achieve
successful outcomes by completing the transformation of Circassia from a business focused on R&D to a sustainable
commercial operation. Incentive remuneration is linked to strategic KPIs by which the Company measures its progress
towards the successful delivery of strategy. By linking the vesting of PSP awards to share price and sales growth,
long-term incentives align management, employees and shareholders in terms of both risks and rewards.

Application of policy to the wider workforce
This policy flows throughout the business and embraces the wider workforce. Annual incentive programmes are co-ordinated,
insofar as all participants are eligible to participate in an annual bonus plan linked to corporate and/or team and individual
targets, depending on their level and the focus of their contribution to the business. Substantially all employees will have
an opportunity to acquire an equity interest, which provides a sense of ownership and a share in the success of the
business as a whole.

Engagement with shareholders
We have engaged with and consulted our principal shareholders, who listened carefully and offered constructive responses
to our proposed remuneration policy for 2019 onwards. I am grateful to those with whom we have engaged for their support.

The Committee wishes to continue its shareholder engagement programme and will consult with our principal shareholders
on future material changes in policy.

Basis of preparation of this report

As a constituent of AIM, Circassia is not required to prepare a Directors’ Remuneration Report in accordance with the
Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. In accordance
with AIM Rule 26, Circassia has adopted the Quoted Companies Alliance (QCA) Corporate governance Code for Small and
Mid-Size Quoted Companies. A statement of compliance with the principles of the QCA code is available on the Company’s
website, as required by Rule 26. The UK Corporate Governance Code applied to the Company up until 4 February 2019.

The Board is committed to maintaining high corporate governance standards and in preparing this report, the Committee
has taken into account the principles of the QCA Code and of the QCA Remuneration Committee Guide for Small and
Mid-Size Quoted Companies.

The Committee operates within its terms of reference which are reviewed from time to time by the Board and are available
on the Company’s website.

2019 AGM
This Directors’ remuneration policy will be the subject of a binding vote at the AGM on 7 June 2019. Additionally,
the Annual Report on Directors’ Remuneration will be the subject of an advisory vote.

Shareholders will also be asked to vote on a separate ordinary resolution to approve proposed technical amendments
to the PSP rules to bring them up to date and to facilitate share awards to the wider workforce. The proposed amendments
are described in the AGM notice.

Sharon Curran
Chair of the Remuneration Committee

1 May 2019

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

Annual Report on Directors’ Remuneration

This section describes remuneration outcomes for Executive Directors for the year ended 31 December 2018, in accordance
with the remuneration policy applicable to that year. The Company’s revised future remuneration policy is described in the
following section of this report.

Remuneration Committee membership during the year
The members of the Remuneration Committee, their dates of appointment and the number of meetings attended during
the year are as follows:

Member

Date of appointment

Meetings attended (held)

Mr Marvin Samson (resigned 30 May 2018)1
26 May 2017
Ms Lota Zoth (resigned 4 February 2019)
27 February 2015
Dr Jean-Jacques Garaud (resigned 30 May 2018) 21 February 2014
Ms Sharon Curran2
Ms Jo Le Couilliard

30 May 2018
30 May 2018

1 (2)
3 (3)
2 (2)
1 (1)
1 (1)

¹ Mr Marvin Samson was Chair of the Remuneration Committee until 30 May 2018, when he was replaced by Ms Lota Zoth.
2 Ms Sharon Curran replaced Ms Lota Zoth as Chair of the Remuneration Committee on 4 February 2019. Ms Lota Zoth remained a member of the Remuneration

Committee until she resigned from the Board.

Single total figure of remuneration table for the year ended 31 December 2018 (Audited)

Director

Executive Directors

Steven Harris
Julien Cotta
Rod Hafner

Non-Executive Directors

Francesco Granata
Russell Cummings
Jean-Jacques Garaud
Lota Zoth
Marvin Samson
Jo Le Couilliard
Sharon Curran
Heribert Staudinger

Total

Salaries and fees
£’000

Pension
£’000

Benefits
£’000

Cash bonus
£’000

LTIP/PSP1
£’000

Total
£’000

422
264
284

151
47
27
71
29
55
49
46

63
40
43

–
–
–
–
–
–
–
–

1,445

146

2
2
2

–
–
–
–
–
–
–
–

169
121
122

–
–
–
–
–
–
–
–

13
7
13

–
–
–
–
–
–
–
–

669
434
464

151
47
27
71
29
55
49
46

412

2,042

Single total figure of remuneration table for the year ended 31 December 2017

Director

Executive Directors

Steven Harris
Julien Cotta
Rod Hafner

Non-Executive Directors

Francesco Granata
Tim Corn
Russell Cummings
Jean-Jacques Garaud
Lota Zoth
Marvin Samson
Charles Swingland

Total

Salaries and fees
£’000

Pension
£’000

Benefits
£’000

Cash bonus
£’000

LTIP/PSP1
£’000

Total
£’000

410
257
278

147
26
46
64
65
63
19

62
38
42

–
–
–
–
–
–
–

1,375

142

1
1
1

–
–
–
–
–
–
–

307
193
209

–
–
–
–
–
–
–

45
23
36

–
–
–
–
–
–
–

825
513
566

147
26
46
64
65
63
19

709

104

2,334

1 The amount shown relates to the gain, being the market value on the vesting date less the exercise price in respect of awards which vested during the relevant year.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Annual bonus for the year to 31 December 2018
For the year ended 31 December 2018, bonuses up to a maximum of 100% of base salary for Executive Directors
could be earned for performance against annual operational and development goals.

Performance objectives are agreed by the Board at the beginning of the year and the Remuneration Committee determines
the proportion of bonus payable to each Executive Director in the event that the objective is achieved. The Remuneration
Committee determines at the beginning of the year following the bonus year, the extent to which the objective has been
achieved and the proportion of the bonus earned. The bonus is calculated on base salary.

Objective 2018

Achievement

% Achievable

% Achieved

1. Commercial

– Global sales growth

– Gross margin

– Cash

– Global sales growth – Achieved

– Gross margin – Achieved

– Cash – Achieved

– Regional NIOX® sales growth

– Regional NIOX® sales growth –

Not achieved

– Other commercial targets, including:

– Other commercial targets – Not

– Pricing strategy
– Market access
– US field force HCP targeting

achieved

2. Progress R&D programmes to

achieve the following key milestones

2a. File Duaklir® NDA H1 2018

2b. File Tudorza® sNDA Q3 2018

Achieved

2c. Further development of in-house

respiratory programmes

No further development following
decision to cease further investment.

2d. Support transfer to Adiga

Achieved

if option is exercised

3. R&D – To expand NIOX® indications

Achieved

4. Acquisitions

Not achieved

Board approval to pursue at
least one acquisition/licensing
opportunities; target source and
process weightings applied.

Steven
Harris

Rod
Hafner

Julien
Cotta

Steven
Harris

Rod
Hafner

Julien
Cotta

35%

20%

30%

25%

40%

25% 12.5% 20% 12.5%

10%

20%

15%

20%

15%

20%

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

Objective 2018

Achievement

% Achievable

% Achieved

Steven
Harris

Rod
Hafner

Julien
Cotta

Steven
Harris

Rod
Hafner

Julien
Cotta

10%

20% 7.5% 7.5% 15%

5. Other functions – People, Quality

and Compliance

Alignment, recruitment and retention of
the required workforce for timely and
effective delivery of business objectives.

Establish systems and processes
to support current products and
organisation.

Implement electronic ordering, tracking
and bar-coding

Selection and implementation of ERP
system.

Maintain and manage a global system to
ensure the Group is fully compliant with
all applicable laws.

100% complete

R&D headcount reduced following
cessation of in-house respiratory
programme.

US field force right-sizing complete.

Recruitment of ~ 80 heads in China
complete.

100% complete

Systems and processes maintained
and no cyber-attacks.

0% complete

Subject to implementation of ERP
system.

50% complete

System selected, implementation in
progress. Go-live expected Q2 2019.

100% Complete

Existing systems and processes
operating effectively.

Total

100% 100% 100% 40% 42.5% 47.5%

Deferred share bonus awards are structured as conditional awards over shares which vest after three years. The level
of deferral is linked to the achievement of the Company’s shareholding guidelines as set out in the policy report.

Payments to past directors

There were no payments to past directors and no payments of compensation for loss of office.

TSR performance
The performance of the Company’s ordinary shares compared with the FTSE AIM 100 (the “Index”) for the period from
its IPO on 18 March 2014 up to 31 December 2018 is shown in the graph below:

140

120

100

Circassia
FTSE AIM 100

18 Mar 14

18 Mar 15

18 Mar 16

18 Mar 17

18 Mar 18

31 Dec 18

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Historical CEO remuneration

Total remuneration (£’000)

Bonus awarded
LTIP vesting

2018

669

40%
20%

2017

825

75%
21%

2016

458

Nil
n/a

2015

831

100%
n/a

2014

1,528

93%
100%

Percentage increase in remuneration of the CEO
The CEO’s salary increased by 3% between 31 December 2017 and 31 December 2018. This is in line with the average
percentage increase per employee.

Relative importance of expenditure on pay (audited)
The table below shows the expenditure by the Company on remuneration paid to all employees of the Group and
distributions to shareholders for the financial period.

Overall expenditure on pay
Dividend plus share buyback

Executive Directors’ share options granted in 2018

2018
£m

49.0
Nil

Directors

Type of award Basis of award

Steven Harris

Julien Cotta

Rod Hafner

Nominal
cost option
Nominal cost
option
Nominal cost
option

90.6%
of salary
85.2%
of salary
78.4%
of salary

Share price
at grant

No. of shares
over which award
was granted

% of shares
granted that
vest at threshold
performance

Face value
of shares over
which award was
made (£’000)

£0.90

425,000

12.50%

250,000

12.50%

250,000

12.50%

383

225

No directors exercised share options in the year to 31 December 2018.

Statement of directors’ share interests and shareholding requirements
The Executive Directors are required to hold shares worth 200% of salary.

2017
£m

41.1
Nil

Vesting period

3 years from
date of grant
3 years from
date of grant
3 years from
date of grant

Shares beneficially owned
as at 31 December 2018

Value of owned shares as
a percentage of salary
as at 31 December 2018

Shareholding requirement met?

Executive Directors
S Harris
J Cotta
R Hafner

Non-Executive Directors
F Granata

5,959,052
46,875
900,544

312,500

678%
9%
151%

n/a

Yes
No
No

n/a

Shareholder voting at the Annual General Meeting on 30 May 2018
The Annual Report on Remuneration was approved by Shareholders at last year’s AGM held on 30 May 2018 with the
following votes cast for and against.

Voting results at 2018 AGM

To approve the Annual Report on Remuneration

For (%)

79.49

Against (%)

Withheld (votes)

20.51

4,455,570

Following a 79.5% vote to approve the Annual Report on Remuneration at the AGM held on 30 May 2018, the Directors
appointed MM&K Limited to observe and review the Group’s remuneration policy in line with comparable AIM listed entities
and make recommendations regarding the remuneration structure for Executive and Non-Executive Directors, along with
Key Management.

Shareholder voting at the Annual General Meeting on 26 May 2017
The Annual Report on Remuneration was approved by Shareholders at the AGM held on 26 May 2017 with the following
votes cast for and against.

Voting results at 20178 AGM

To approve the Annual Report on Remuneration

For (%)

99.99

Against (%)

Withheld (votes)

0.01

998,360

A vote withheld is not a vote in law and is therefore not included in the percentages shown above.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

Statement of directors’ shareholding and share interests (audited)

Plan

Executive Directors

S Harris

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

J Cotta

2013 Unapproved Scheme

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

R Hafner

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

Awards granted,
and options held
as at 1 January 2018

Awards and options
granted, exercised,
lapsed, or cancelled
during year

Awards and options
held at 31 December
2018 and at the date
of this report

Date of grant

Vesting

during year

Vested

as at year end

Unvested

as at year end

Exercise price

(p)

Date from which

first exercisable

Expiry date

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

22-Oct-13

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

52,736

214,444

212,946

425,000

–

905,126

149,250

27,536

112,037

111,272

250,000

–

650,095

42,998

121,528

120,703

250,000

–

535,229

–

(171,555)

–

425,000

253,445

–

(89,629)

–

250,000

160,371

–

(97,222)

–

250,000

152,778

52,736

42,889

212,946

425,000

1,158,571

149,250

27,536

22,408

111,272

250,000

810,466

42,998

24,306

120,703

250,000

688,007

42,889

95,625

1,062,946

–

42,889

52,736

42,889

–

149,250

27,536

22,408

199,194

24,306

42,998

24,306

67,304

–

212,946

425,000

111,272

250,000

611,272

120,703

250,000

620,703

nil

0.08

242

nil

0.08

nil

0.08

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

22-Oct-16

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

21-Oct-23

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Statement of directors’ shareholding and share interests (audited)

Awards granted,

and options held

Awards and options

granted, exercised,

held at 31 December

lapsed, or cancelled

2018 and at the date

Date of grant

as at 1 January 2018

during year

of this report

Vesting
during year

Vested
as at year end

Unvested
as at year end

Exercise price
(p)

Date from which
first exercisable

Expiry date

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

22-Oct-13

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

12-Mar-14

26-Feb-15

19-May-16

17-May-17

17-May-18

52,736

214,444

212,946

425,000

–

905,126

149,250

27,536

112,037

111,272

250,000

–

650,095

42,998

121,528

120,703

250,000

–

535,229

–

(171,555)

425,000

253,445

(89,629)

250,000

160,371

(97,222)

250,000

152,778

52,736

42,889

212,946

425,000

1,158,571

149,250

27,536

22,408

111,272

250,000

810,466

42,998

24,306

120,703

250,000

688,007

–

42,889

–

52,736

42,889

–

212,946

425,000

42,889

95,625

1,062,946

–

22,408

–

149,250

27,536

22,408

–

22,408

199,194

–

24,306

–

42,998

24,306

–

24,306

67,304

–

111,272

250,000

611,272

–

120,703

250,000

620,703

nil

0.08

242

nil

0.08

nil

0.08

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

22-Oct-16

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

12-Mar-17

26-Feb-18

19-May-19

17-May-20

17-May-21

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

21-Oct-23

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

11-Mar-24

25-Feb-25

18-May-26

16-May-27

16-May-28

Plan

Executive Directors

2013 Unapproved Scheme

S Harris

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

J Cotta

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

R Hafner

2014 PSP

2015 PSP

2016 PSP

2017 PSP

2018 PSP

Total

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

Future policy table

Introduction
This section on future directors’ remuneration policy will be the subject of a binding vote at the AGM on 7 June 2019.

Remuneration policy table

Remuneration
element

Purpose, link to strategy
and operation

Opportunity and
performance metrics

Remuneration
Committee discretion

Salary

Essential to attract and retain key
executives.

Salary is benchmarked to
the relevant market median.

Normally, salary increases
for Executive Directors will
be generally in line with those
of the wider workforce.

The Committee will also
consider pay and employment
conditions in the wider workforce
when determining Executive
Directors’ salaries.

There is no formal maximum
limit as the value of insured
benefits will vary from year
to year based on the cost
from third-party providers.

If an Executive Director is based
outside the UK additional benefits
and assistance with relocation
may be provided which reflect
local market norms.

Benefits

Reviewed annually based on:

— role, experience and individual

performance;

— pay awards elsewhere in the

Group;

— external market; and

— general economic environment.

Helps attract and retain key
executives.

For Executive Directors this
includes private medical
insurance and life insurance.

Other employment benefits may
be provided from time to time on
similar terms as those of other
employees.

The Committee may provide
additional benefits, where
appropriate in the individual’s
particular circumstances
(for example relocation costs).

Pensions

Helps attract and retain key
executives.

Up to 10% of base salary (may
be provided as a cash allowance).

Executive Directors are eligible
to join a defined contribution
pension scheme.

Pension allowances are not
included in base salary for annual
bonus or other executive rewards.

Annual Bonus

Rewards achievement of annual
key performance indicators.

“Threshold”, “Target” and “Over-
performance” achievement
levels are designed to encourage
above-target growth.

The Remuneration Committee
has discretion to make
adjustments upwards and
downwards to ensure bonus
awards are consistent with the
underlying performance of the
business.

Up to 100% of salary; 25%
of the maximum is payable for
Threshold performance and
50% at Target.

Targets and weightings are
set annually; performance is
measured over a single year.

Bonus awards are determined
after the year-end based on
achievement against targets.

50% of any award is deferred for
two years and paid in shares.1

Malus and clawback
provisions apply.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Remuneration
element

Purpose, link to strategy
and operation

Opportunity and
performance metrics

Remuneration
Committee discretion

LTIP
(Performance
Share Plan) 1

Aligns the interests of
management and shareholders
and encourages retention.

Up to 150% of salary,
however capped at 100%
in 2019.

Conditional awards or options
may be granted annually.

Subject to performance against
strategic KPIs, awards vest after
a minimum period of three years.
and have a holding period
of two years.

The first awards will vest
subject to share price and
sales revenues targets, which
are weighted equally.

Malus and clawback
provisions apply.

The Committee may make an
award of up to 300% of salary in
exceptional circumstances (eg if
necessary to recruit an additional
Executive Director). The Committee
has discretion to make adjustments
upwards and downwards to
ensure the value of vested awards
is consistent with the underlying
performance of the business.

1 Deferred bonus will be awarded in the form of conditional share awards or options to acquire shares in the Company. A resolution to approve technical amendments to
the rules of the PSP to facilitate this, provide the flexibility to make share awards to the wider workforce and to bring the rules up to date will be put to shareholders at
the AGM on 7 June 2019.

Statement of consideration of employees’ pay and remuneration conditions elsewhere in the Group
The Company does not formally consult with employees on the matters of Executive Director remuneration. However,
the Committee is made aware of employment conditions in the wider Group.

The same broad principles apply to the remuneration policy for both Executive Directors and the wider employee population.
However, the remuneration for Executive Directors has a stronger emphasis on performance-related pay than for other
employees. In particular the following approach is used:

— Salaries, benefits and pensions are compared to appropriate market rates and set at approximately mid-market level

with allowance for role, responsibilities and experience.

— When setting salary levels for the Executive Directors, the Committee considers the salary increases provided to other

employees and in particular those based in the UK.

— An annual bonus plan is available to all employees and is based on business and individual performance.

Remuneration scenarios for Executive Directors based on current policy
The charts illustrate remuneration for the current Executive Directors in 2019 for “Fixed”, “Expected” and “Maximum”
scenarios.

The illustrations are based on the following assumptions:

— The Fixed scenarios show the fixed level of remuneration, assuming there is no performance-related pay;

— The Expected scenarios illustrate the amounts receivable if performance is in line with expectations. Bonus awards

are 50% of maximum bonus opportunity. PSP awards are 50% of maximum opportunity; and

— The Maximum scenarios illustrate the levels of remuneration which would be payable if maximum bonus awards

(100% of base salary) and maximum PSP awards (100% of base salary) are made.

As no awards will be made until after the AGM, it is not feasible to estimate the effects of future share price growth in this report.

Executive Directors’ recruitment policy
Remuneration packages for new Executive Directors are determined by the Remuneration Committee and designed in
accordance with the approved remuneration policy.

Terms of the Executive Directors’ service contracts
Executive Directors are engaged on rolling service contracts, which provide for 12 months’ written notice of termination
from either the individual or the Company.

Non-Executive Directors’ letter of appointment
Non-Executive Directors are engaged by letter of appointment terminable on three month’s written notice from either
the individual or the Company.

Termination policy
Any compensation payment made to an Executive Director for termination of employment will be determined with reference
to the terms of the individual’s service agreement and the rules of any incentive plan in which the individual is a participant.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

CEO

£’000

1600

1400

1200

1000

800

600

400

200

CFO

£’000

1000

900

800

700

600

500

400

300

200

100

1,310

32%

888

24%

466

100%

52%

36%

Senior VP R&D

£’000

1000

900

800

700

600

500

400

300

200

100

918

32%

623

24%

327

100%

52%

36%

Fixed

Scenarios
Expected

Maximum

Fixed

Scenarios
Expected

Maximum

Fixed

Annual bonus

Long-term variable remuneration

845

32%

573

24%

301

100%

52%

36%

Fixed

Scenarios
Expected

Maximum

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Remuneration policy for Non-Executive Directors
The Remuneration Committee is responsible for evaluating and making recommendations to the Board on fees payable
to the Chairman.

The Chairman does not participate in discussions in respect of fees. The Chairman and CEO are responsible for evaluating
and making recommendations to the Board on the fees payable to the Company’s Non-Executive Directors.

Remuneration element

Chairman’s fees

Purpose and link to strategy

Operation and maximum

To attract and retain a high calibre
individual with the requisite experience
and knowledge.

Non-Executive Director fees

To attract and retain high calibre
individuals with the requisite experience
and knowledge.

There is no formal maximum.

Fees are reviewed on a periodic basis against
those in similar sized companies to ensure
they remain competitive and adequately
reflect the time commitments and scope
of the role.

Any increase in fee levels may be above that
of the wider workforce in a particular year
to reflect the periodic nature of any review
and / or any change in responsibilities /
time commitments.

The Chairman may also receive limited
travel and / or hospitality related benefits
in connection with the role.

There is no formal maximum.

Fees are reviewed on a periodic basis against
those in similar sized companies to ensure
they remain competitive and adequately
reflect the time commitments and scope
of the role.

A Board fee is paid to each Non-Executive
Director. Supplemental fees are paid to the
Senior Independent Director and for the
Chairing and membership of Committees to
recognise the additional time commitments
and responsibilities of these roles.

Any increase in fee levels may be above that
of the wider workforce in a particular year
to reflect the periodic nature of any review
and / or any change in responsibilities /
time commitments.

Non-Executive Directors may also receive
limited travel and / or hospitality related
benefits in connection with the role.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Remuneration Committee report continued

Implementation of the future remuneration policy in 2019

Base salaries and benefits
There will be no change to the CEO’s salary. The salaries of the other Executive Directors will be increased by 3% in line with
increases to the wider workforce.

Annual bonus – summary of KPIs for 2019

2019 Bonus Structure

Corporate objectives

Individual objectives

25%

2019 Corporate and Individual KPIs
2019 corporate performance measures (75% of total potential award) are:

KPI

Sales revenue
Year-end cash
EBITDA

% of corporate element of bonus

50%
25%
25%

Individual performance measures (25% of total potential award) are specific to each role. Additional details, including
achievement against targets will be disclosed in next year’s report.

LTIP (PSP)
Awards may be made annually; the maximum award level for all Executive Directors in 2019 is 100% of base salary.
The first awards will be made following the 2019 AGM. These awards will have a three year vesting period, dependent
on growth in share price and sales revenue followed by an additional two year holding period thereafter.

This Directors’ Remuneration Report was approved by the Board on 1 May 2019 and signed on its behalf by:

Sharon Curran
Chair of the Remuneration Committee

1 May 2019

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Directors’ report

Directors’ report

In accordance with the Companies Act 2006, the directors present their report together with the financial statements
and the Independent auditors’ report for the year ended 31 December 2018.

Information included in Strategic report
The Company’s Strategic report is on pages 1 to 33 and includes the following information that would otherwise be required
to be disclosed in this Directors’ report:

Subject matter

Likely future developments in the business
Research and development
Employee involvement
Disclosures concerning greenhouse gas emissions
Events occurring after the reporting date (note 36)

Page reference

12 to 19
12 to 19
26
27
123

Corporate governance statement
The information that fulfils the requirements of the Corporate governance statement can be found in the Corporate
governance report on pages 36 to 43 and the Strategic report on pages 10 to 33 (and is incorporated into this Directors’
report by reference).

Results and dividend
The results for the year and the financial position as at 31 December 2018 are shown in the Consolidated statement of
comprehensive income and the Consolidated statement of financial position. The results of the Group are explained in more
detail in the Financial review.

The directors do not recommend the payment of a dividend for the year to 31 December 2018 (2017: £nil).

Directors and directors’ interests
The directors of the Company at the date of this report, together with their biographical details and dates of appointment
are set out in the Corporate governance report and the Board of Directors section.

The named directors served throughout the year and up to the date of this report with the exception of Dr Jean-Jacques
Garaud and Mr Marvin Samson who left the Board on 30 May 2018; Ms Sharon Curran, Ms Jo Le Couilliard, and Dr Heribert
Staudinger, who joined on 8 February 2018.

The Board confirms that each of the directors who served during the year has been subject to evaluation during this period.
In accordance with the Quoted Companies Alliance Code (the “Code”), all directors of the Company will stand for re-election
on an annual basis. Dr Heribert Staudinger and Ms Lota Zoth retired from the Board following the transfer to AIM on
4 February 2019.

Information on the directors’ remuneration and their interests in the share capital of the Company are set out in the
Remuneration report. None of the directors has a commercial interest in any material contract entered into by the Company.

As is permitted by sections 232 to 235 Companies Act 2006, and consistent with the Company’s Articles of Association,
the Company has maintained insurance cover for its directors and officers under a Directors’ and Officers’ Liability Policy.
Further, the Company has granted an indemnity to its directors against liability which arises due to claims brought by
third parties.

The directors may exercise their powers pursuant to the Articles of Association, the Companies Act 2006 and related
legislation, and any resolution of the shareholders. The Articles are available for review at the registered office.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Directors’ report continued

Share capital and shareholders
Share capital
At 1 January 2018 the Company had 333,466,262 ordinary shares in issue.

The share capital of the Company increased by 23,725,800 ordinary shares on 18 July 2018 as a result of shares issued to
AstraZeneca such that AstraZeneca’s holding increased from 14.2% to 19.9%. The share capital of the Company increased
by a further 94,372 as a result of share issues required to satisfy employee share awards.

The Company has only one class of shares which carry no right to fixed income. Each share carries the right to one vote at
general meetings of the Company. There are no restrictions on voting rights or on the holding or transfer of these securities.

Details of employee share schemes are set out in note 26 to the financial statements. The Circassia Pharmaceuticals plc
Employee Benefit Trust abstains from voting on the shares held by it. No shares were acquired by the Employee Benefit Trust
during the year (2017: 373,299), 63,672 were transferred out (2017: 32,157) and the balance of shares held at 31 December
2018 was therefore 544,351 (2017: 608,023).

Pursuant to the Articles of Association and vote of Shareholders at the AGM which took place on 30 May 2018 the Company
was granted authority to disapply pre-emption rights in respects of the Company’s issued share capital.

Lock up arrangements
There are currently no lock-up arrangements relating to the shares of the Company.

Share price
From 1 January 2018 to 31 December 2018 the share price ranged from a high of 103p to a low of 48p. The average price
for the period was 56.8p. The mid-market price of an ordinary share on 31 December 2018 was 48p.

Treasury management
The Company’s policy on the use of financial instruments and the management of financial risks is set out in note 2 to the
financial statements.

Going concern
The accounts have been prepared on a going concern basis. The budget is prepared annually and the 10 year plan is updated
annually. These are built from the bottom up and presented to the Board each year for review and approval. The directors
have reviewed the current and projected financial position of the Company, taking into account existing cash balances
and available financial facilities. On the basis of this review, the directors have not identified any material uncertainties
to the Group’s ability to continue to adopt the going concern basis of accounting for a period of at least 12 months from
the date of approval of the financial statements.

Employment and environment
The Company’s policies on health and safety, the environment, and employee-related matters are disclosed
in the Strategic report.

Greenhouse gas emissions have been calculated as carbon dioxide equivalents.

Political and charitable donations
There were no charitable or political donations in the year to 31 December 2018.

Auditor
PricewaterhouseCoopers LLP (PwC) has been re-appointed as auditor and a resolution to approve this re-appointment
will be put to the members at the forthcoming Annual General Meeting.

The directors who held office at the date of approval of this report confirm that, so far as they are each aware, there is no
relevant audit information of which the Company’s auditor is unaware, and each Director has taken all the steps a director
ought to have taken to make themselves aware of relevant audit information and to establish that the auditor is aware
of that information.

Annual General Meeting
The Annual General Meeting will be held at the offices of Circassia Pharmaceuticals plc on 7 June 2019
at 12:00 p.m. Details of the business to be transacted at the forthcoming AGM will be given in a separate
circular to shareholders.

By order of the Board

Julien Cotta
Company secretary

1 May 2019

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Statement of directors’ responsibilities in respect of the financial statements

Statement of directors’ responsibilities in respect of the financial statements

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable
law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have
prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union and Parent Company financial statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union. 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 of the Group and Parent Company
and of the profit or loss of the Group for that period. In preparing the financial statements, the directors are required to:

— select suitable accounting policies and then apply them consistently;

— state whether applicable IFRSs as adopted by the European Union have been followed for the Group financial

statements and IFRSs as adopted by the European Union have been followed for the Company financial statements,
subject to any material departures disclosed and explained in the financial statements;

— make judgements and accounting estimates that are reasonable and prudent; and

— prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group

and Parent Company will continue in business.

The directors are also responsible for safeguarding the assets of the Group and Parent Company and hence for taking
reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group
and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group
and Parent Company and enable them to ensure that the financial statements comply with the Companies Act 2006.

The directors are responsible for the maintenance and integrity of the Parent Company’s website. Legislation
in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation
in other jurisdictions.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Corporate governance
Independent auditors’ report to the members of Circassia Pharmaceuticals plc

Report on the audit of the financial statements

Opinion
In our opinion, Circassia Pharmaceuticals plc’s Group financial statements and Parent Company financial statements
(the “financial statements”):

— give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2018

and of the Group’s loss and the Group’s and the Parent Company's cash flows for the year then ended;

— have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted
by the European Union and, as regards the Parent Company's financial statements, as applied in accordance
with the provisions of the Companies Act 2006; and

— have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”),
which comprise: the Consolidated and Parent Company statements of financial position as at 31 December 2018;
the Consolidated statement of comprehensive income, the Consolidated and Parent Company statements of cash flows,
and the Consolidated and Parent Company statements of changes in equity for the year then ended; and the notes
to the financial statements, which include a description of the significant accounting policies.

Our opinion is consistent with our reporting to the Audit and Risk Committee.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law.
Our responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial
statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.

Independence
We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities,
and we have fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard
were not provided to the Group or the Parent Company.

Other than those disclosed in note 9 to the financial statements, we have provided no non-audit services to the Group
or the Parent Company in the period from 1 January 2018 to 31 December 2018.

Our audit approach
Overview
— Overall Group materiality: £3.0 million (2017: £6.0 million), based on 5% of loss before tax

and exceptional items.

Materiality

assets restricted so as not to exceed 95% of Group materiality.

— Overall Parent Company materiality: £2.8 million (2017: £5.4 million), based on 1% of total

— The Group’s accounting process is structured around local finance functions in each of

the Group’s reporting entities. These functions maintain their own accounting records and
controls (although transactional processing and certain controls for some reporting units
are performed by the head office finance team) and report to the head office finance team
through an integrated consolidation system.

— In establishing the overall Group audit strategy and plan, we determined the type of work
that needed to be performed at the reporting entities by the Group engagement team and
by component auditors from other PwC network firms. Where the work was performed by
component auditors, we determined the level of involvement we needed to have in the audit
work at those reporting entities so as to be able to conclude whether sufficient appropriate
audit evidence had been obtained as a basis for our opinion on the Group financial
statements as a whole.

— For each reporting entity we determined whether we required an audit of their reported
financial information (“full scope”). Those reporting entities where a full scope audit was
required included Circassia Inc (incorporated in the USA) and Circassia AB (incorporated
in Sweden), determined as individually financially significant because they both individually
contribute more than 15% of the Group’s revenue. We also undertook the statutory audit
of two further reporting units incorporated in the UK, Circassia Pharmaceuticals plc and
Circassia Limited. Circassia Pharmaceuticals plc is not a financially significant component
of the Group. Senior members of the UK engagement team attended planning meetings
with each engagement team and attended the audit closing meetings. The Group audit
team reviewed the working papers of the Swedish and US component team.

Audit
scope

Key audit
matters

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

— In addition to the work performed at the in-scope reporting entities, there is

a substantial amount of work performed at head office by the Group audit engagement
team. The Group consolidation, financial statement disclosures and a number of complex
items, prepared by the head office finance function, were audited by the Group engagement
team. These included goodwill, other intangible assets, investments, business combinations,
share-based payments, current and deferred tax and central adjustments recorded
as part of the consolidation process.

— In aggregate our audit procedures accounted for 95% of Group revenue.

— As a result of its structure and size, the Group also has a number of small reporting
entities that make up the remaining portion of the key coverage metrics. These small
reporting units are covered by the work performed by the Group audit engagement team,
where we perform analytical review procedures. A significant proportion of these remaining
reporting units not selected for local procedures were subject to an analysis of year on
year movements, at a level of disaggregation to enable a focus on higher risk balances
and unusual movements. Those not subject to analytical review procedures were
individually, and in aggregate, immaterial. This gave us the evidence we needed
for our opinion on the financial statements as a whole.

— Impairment of goodwill and intangibles (Group).

— Accounting for business combinations (Group).

— Impairment of investment in subsidiaries and intercompany balances (Parent Company).

The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the
financial statements.

Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the Group and industry, we identified that the principal risks of non-compliance with laws
and regulations related to the Medicines and Healthcare Product Regulatory Agency (MHRA) and, in the US, the Food
and Drug Administration (FDA), and we considered the extent to which non-compliance might have a material effect on
the financial statements. We also considered those laws and regulations that have a direct impact on the preparation of
the financial statements such as the Companies Act 2006 and UK tax legislation. We evaluated management’s incentives
and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and
determined that the principal risks were related to posting inappropriate journal entries to increase revenue or reduce
expenditure, unauthorised extractions of cash from the business and management bias in accounting estimates. The Group
engagement team shared this risk assessment with the component auditors so that they could include appropriate audit
procedures in response to such risks in their work. Audit procedures performed by the Group engagement team and/or
component auditors included:

— review of the financial statement disclosures to underlying supporting documentation, review of correspondence with
legal advisers, enquiries of management, including those outside of the finance function and review of significant
component auditors’ working papers.

There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws
and regulations is from the events and transactions reflected in the financial statements, the less likely we would become
aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one
resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations,
or through collusion.

Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the 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) identified by the auditors, including those which 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, and any
comments we make on the results of our procedures thereon, 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.
This is not a complete list of all risks identified by our audit.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Corporate governance
Independent auditors’ report to the members of Circassia Pharmaceuticals plc continued

Key audit matter

How our audit addressed the key audit matter

Impairment of goodwill and intangibles
(Group)
IAS 36 requires at least annual impairment
assessments in relation to goodwill and
intangible assets, with more regular
assessment should an impairment trigger
be identified.

An impairment trigger was identified for the
Respiratory cash generating unit due to the
inability to find an out-licensing partner for the
product candidates in the respiratory portfolio.
This resulted in an impairment of £4.4 million to
goodwill and £70.6 million to intangible assets.

No other impairment triggers were
considered to have occurred at the cash
generating unit level.

Goodwill of £9.3 million and intangible assets
of £221.4 million are significant balances to the
Group. Judgement is required in the impairment
assessment, specifically in forecasting the future
results of both marketed and in-development
products, including the growth rates applied.
Judgement is also required in determining the
discount rates to be applied to future cash flows.

Management have utilised a value-in-use
model for both goodwill and intangible asset
impairment testing.

Refer to pages 44 to 50 (Audit and Risk
Committee report), page 82 (Significant
accounting estimates and judgements),
and pages 102 to 105 in the notes.

Accounting for business combinations
(Group)
On 12 April 2017 the Group entered into a
Development and Commercial Agreement
('DCA') with AstraZeneca to acquire the rights
to commercial Duaklir® in the United States
of America and the right to acquire an option
to the rights remaining contractual rights and
economic benefit of Tudorza®. The option
to acquire Tudorza® became substantive
on 23 October 2018.

Our main area of focus and the area of most
complexity and judgement was the date
on which the option to acquire Tudorza®
became substantive, resulting in a business
combination. Where a business combination
had occurred, we then focused on the
identification and valuation of intangible
assets, including in relation to future
royalties payable to AstraZeneca, for which
a corresponding liability for contingent
consideration was recognised on initial
recognition and subsequently re-measured.

Refer to pages 44 to 50 (Audit and Risk
Committee report), page 82, (Significant
accounting estimates and judgements),
and pages 120 to 122 in the notes.

We assessed the level at which impairment testing was performed. Based on our
knowledge of the business, including the use of assets and internal reporting, we agreed
with management’s judgement that, for the assessment of the impairment of goodwill
and intangible assets, the Group has four cash generating units (CGU’s).

We obtained management’s impairment analyses and gained an understanding of the key
assumptions and judgements underlying the assessment. We assessed the appropriateness
of the methodology applied and tested the mathematical accuracy of the models, with no
exceptions identified. Management have applied a Value in Use method to calculate the
CGU’s and individual assets’ recoverable amount.

We concluded that this approach is appropriate.

We assessed the key assumptions, including:

– Future revenue streams: We used our experts to compare the forecast revenues
with market expectations for the NIOX® and AstraZeneca CGUs, where available.
We observed that the management sales forecasts, including the growth rates applied,
are close to market expectations.

– Expenses and overheads: We reviewed historical forecasting accuracy and assessed
the appropriateness of key assumptions, including in relation to the future sales force
utilisation. We identified and corroborated any differences in the historical forecasting
accuracy to conclude that forecasting accuracy is appropriate.

– Discount rate: We used our experts to recalculate management’s discount rates and
benchmark the rates against companies of a similar nature. We observed that the
rates used are at the low end of our expected range.

– We also obtained management’s sensitivity analysis and performed our own sensitivities
reflecting what we believed to be a range of reasonably individually possible alternative
outcomes over the forecast cash flows and discount rates, the results of which did not
indicate an impairment to goodwill or other intangible assets on a CGU basis.

We concluded management’s recognised impairment in relation to individual assets
is reasonable.

We obtained and reviewed the underlying DCA between the Group and AstraZeneca
and concurred with management that control of the Tudorza® business had passed
to the Group on 23 October 2018.

We assessed management’s accounting for the business combination under IFRS 3
“Business combinations”.

We obtained management’s valuation models and tested the mathematical accuracy.
We did not identify any exceptions in this testing.

We worked with our valuation experts to assess the reasonableness of management’s
assumptions by using our understanding of the business and the pharmaceutical
industry, and performing the following:

– We assessed the assumed peak sales and sales profile over the life cycle (taking

account of patent expiry dates);

– We recalculated management’s discount rates and benchmarked the rates against

companies of a similar nature;

– We obtained an understanding of the anticipated cash flows and costs used in the
acquisition model, on which the valuations were based, including discussions with
R&D specialists outside of the finance function;

– We evaluated the working capital assumptions included within the model; and

– We agreed the future royalty rates payable by the Group to other parties to the

underlying DCA.

In relation to the re-measurement of contingent consideration in respect of future royalties
payable to third-parties, we obtained management’s revised forecasts as at 31 December
2018, considered the reasonableness of changes to anticipated royalties, tested the
mathematical accuracy of the calculations and checked that the correct royalty rates
were applied from the underlying DCA, with no exceptions identified.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018
Key audit matter

How our audit addressed the key audit matter

Impairment of investment in
subsidiaries and intercompany balances
(Parent Company)
Investment in subsidiaries of £67.6 million is
a significant balance. In addition, the Parent
Company has net intercompany receivables
totalling £281.7 million from its subsidiary
companies. The market capitalisation of
the Group on 31 December 2018 was
£171.1 million, indicating the existence
of a potential impairment trigger.
Judgement is required in the impairment
assessment, specifically in forecasting the
future results of the subsidiaries. Judgement
is also required in determining the discount
rates to be applied to future cash flows.
Management have utilised value-in-use
models, consistent with the models used
for goodwill and intangible asset impairment
testing, for testing for possible impairment
of the investment in and balances with
subsidiary undertakings.

Refer to pages 44 to 50 (Audit and Risk
Committee report), page 82 (Significant
accounting estimates and judgements),
and pages 106 and 110 in the notes.

The market capitalisation of the Group is lower than the value of the company’s
investment in subsidiaries and intercompany receivables balances, which is a trigger for
management to perform a review of the balances for potential impairment.

After performing this review, management have recorded impairments of £210.3 million
and £91.4 million against the investment in subsidiaries balance and intercompany
receivables balances respectively in the year.

We have leveraged our analysis and understanding of key assumptions and judgements
in the value-in-use models used for testing for potential impairment of goodwill and
intangible assets in the consolidated financial statements.

In assessing the carrying value of investments in subsidiaries and intercompany
receivables balances, we compared the carrying value of these balances with
the cash flows expected to be generated from the value-in-use models for each
cash generating unit.

We concluded that the impairments of £210.3 million to investments in subsidiaries and
£91.4 million to intercompany receivables recorded by management are appropriate.

How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the Group and the Parent Company, the accounting processes
and controls, and the industry in which they operate.

Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and
extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect
of misstatements, both individually and in aggregate on the financial statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Overall materiality

£3.0 million (2017: £6.0 million).

How we determined it

5% of loss before tax and exceptionals.

Rationale for
benchmark applied

Auditing standards allow materiality to be based on a variety of measures
depending on the nature and business of the entity in question. The most
common benchmark is profit/loss before tax, although for R&D companies
at the development stage, expenses are sometimes used.

As the business has continued to pursue revenue generating activities
such as NIOX® trading and the AstraZeneca collaboration, we consider
a profit/loss-based metric to be the measure of most relevance to users
of the accounts. However, during the year there was an impairment
charge of £75 million in relation to intangible assets in the discontinued
Respiratory business, which is a material one-off item that is not
expected to be repeated. We consider this item to distort the view of
materiality for the users of the accounts and we have therefore excluded
this exceptional item to arrive at our adjusted profit-based benchmark
which is ‘Loss before tax and exceptionals’.

We highlight that there are a number of other items that have been
identified by management as “non-underlying” in the current year, but
none of these are considered to be “exceptional”.

Parent Company financial statements

£2.8 million (2017: £5.4 million).

1% of total assets restricted so
as not to exceed 95% of Group
materiality.

We believe that total assets is
the primary measure used by the
shareholders in assessing the
performance and position of the
entity and reflects the Company’s
principal activity as a holding
company.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Corporate governance
Independent auditors’ report to the members of Circassia Pharmaceuticals plc continued

For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality.
The range of materiality allocated across components was between £2.3 and £2.8 million. Certain components were audited
to a local statutory audit materiality that was also less than our overall Group materiality.

We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £149,500
(Group audit) (2017: £300,000) and £142,000 (Parent Company audit) (2017: £270,000) as well as misstatements below
those amounts that, in our view, warranted reporting for qualitative reasons.

Conclusions relating to going concern
ISAs (UK) require us to report to you when:

— 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 and 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.

We have nothing to report in respect of the above matters.

However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group's
and Parent Company's ability to continue as a going concern. For example, the terms on which the United Kingdom may
withdraw from the European Union are not clear, and it is difficult to evaluate all of the potential implications on the Group's
trade, customers, suppliers and the wider economy.

Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our
auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements
does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise
explicitly stated in this report, any form of assurance 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 an apparent material inconsistency or material
misstatement, we are required to perform procedures to conclude whether there is a material misstatement of 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
based on these responsibilities.

With respect to the Strategic report and Directors’ report, we also considered whether the disclosures required by
the UK Companies Act 2006 have been included.

Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006
(CA06) and ISAs (UK) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless
otherwise stated).

Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and
Directors’ report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared
in accordance with applicable legal requirements. (CA06)

In light of the knowledge and understanding of the Group and Parent Company and their environment obtained in the course
of the audit, we did not identify any material misstatements in the Strategic report and Directors’ report. (CA06)

Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance
with the Companies Act 2006. (CA06)

Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of directors' responsibilities set out on page 67, the directors are responsible
for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that
they give a true and fair view. The directors are also responsible for such internal control as they 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.

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018Auditors’ 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 auditors’ 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 FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.

Use of this report
This report, including the opinions, has been prepared for and only for the Parent Company's members as a body in
accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these
opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed by our prior consent in writing.

Other required reporting

Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:

— we have not received all the information and explanations we require for our audit; or

— 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

— certain disclosures of directors’ remuneration specified by law are not made; or

— the Parent Company financial statements are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment
Following the recommendation of the audit committee, we were appointed by the members on 30 September 2007
to audit the financial statements for the year ended 31 December 2007 and subsequent financial periods. The period
of total uninterrupted engagement is 12 years, covering the years ended 31 December 2007 to 31 December 2018.

Simon Ormiston (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Cambridge

1 May 2019

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018
Consolidated statement of comprehensive income
for the year ended 31 December 2018

2018

Underlying
operations
£m

Non-
underlying
items
£m

Underlying
operations
Restated1
£m

Total
£m

Notes

Non-
underlying
items
Restated1
£m

6
7
7

Continuing operations

Revenue from contracts with customers
Cost of sales

Gross profit

Research and development costs
Sales and marketing
Administrative expenses

Operating loss

Other gains and (losses)
Finance costs
Finance income

Loss before tax

Taxation

Loss for the financial year
from continuing operations
Discontinued operations
Loss for the year from discontinued operations
attributable to owners of Circassia Pharmaceuticals plc

Loss for the financial year

Other comprehensive (expense)/income
items that may be subsequently reclassified
to profit or loss
Currency translation differences

Total other comprehensive (expense)/income
for the year

Total comprehensive expense for the year

2017

Total
£m

46.3
(10.0)

36.3

(58.4)
(49.5)
(10.6)

(82.2)

10.4
(2.8)
0.4

48.3
(8.9)

39.4

(10.8)
(54.4)
(11.4)

(37.2)

1.9
(0.1)
0.3

(35.1)

9.2

–
–

–

–
(2.9)
(0.3)

(3.2)

(5.6)
(11.9)
–

(20.7)

–

48.3
(8.9)

39.4

(10.8)
(57.3)
(11.7)

(40.4)

(3.7)
(12.0)
0.3

(55.8)

9.2

46.3
(10.0)

36.3

(13.3)
(49.5)
(10.7)

(37.2)

(1.1)
(0.1)
0.4

–
–

–

(45.1)
–
0.1

(45.0)

11.5
(2.7)
–

(38.0)

(36.2)

(74.2)

3.5

10.2

13.7

(25.9)

(20.7)

(46.6)

(34.5)

(26.0)

(60.5)

–

(25.9)

(70.5)

(91.2)

(70.5)

(117.1)

–

(34.5)

(38.6)

(64.6)

(38.6)

(99.1)

(4.8)

(30.7)

–

(4.8)

2.2

–

2.2

(91.2)

(121.9)

(32.3)

(64.6)

(96.9)

Loss per share attributable to owners of the parent during the year (expressed in £ per share)

Basic and diluted loss per share

Loss per share from continuing operations
Total loss per share

13
13

2018

(0.14)
(0.34)

2017
Restated1
£

(0.19)
(0.31)

1 Restated to show the results of the respiratory business in discontinued operations, see note 10 for further details.

The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent
Company profit and loss account.

The notes on pages 80 to 123 are an integral part of these financial statements.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Consolidated statement of financial position
as at 31 December 2018

Assets
Non–current assets
Property, plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Investment in joint venture
Prepayment for business combination
Non–current tax assets

Current assets
Inventories
Trade and other receivables
Current tax assets
Short-term bank deposits
Cash and cash equivalents

Total assets

Equity and liabilities
Ordinary shares
Share premium
Other reserves
Accumulated losses

Total equity

Liabilities
Non-current liabilities
Deferred tax liabilities
Non-contingent consideration
Contingent consideration
Non-current trade payables

Current liabilities
Non-contingent consideration
Contingent consideration
Trade and other payables

Total liabilities

Total equity and liabilities

Notes

14
15
16
24
18
35
12

19
20
12
21
21

25
27
29
28

24
35
35
22

35
35
22

2018
£m

0.5
9.3
221.4
19.1
0.1
–
3.0

253.4

4.2
8.1
1.0
–
40.7

54.0

307.4

0.3
622.5
15.1
(512.0)

125.9

10.9
–
46.2
–

57.1

80.3
15.4
28.7

124.4

181.5

307.4

2017
£m

1.4
10.0
199.7
15.7
0.5
77.9
7.3

312.5

5.0
18.9
6.5
15.0
44.5

89.9

402.4

0.3
602.2
17.2
(394.9)

224.8

24.1
68.7
33.6
20.4

146.8

–
–
30.8

30.8

177.6

402.4

The notes on pages 80 to 123 are an integral part of these financial statements.

The financial statements on pages 74 to 123 were authorised for issue by the Board of Directors on 1 May 2019 and
were signed on its behalf by

Steven Harris
Chief Executive Officer
Circassia Pharmaceuticals plc

Julien Cotta
Chief Financial Officer
Circassia Pharmaceuticals plc

Registered number: 05822706

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Parent Company statement of financial position
as at 31 December 2018

Assets
Non-current assets
Investments in subsidiaries

Current assets
Trade and other receivables
Short-term bank deposits
Cash and cash equivalents

Total assets

Equity and liabilities
Equity attributable to the owners of the Company
Ordinary shares
Share premium
Other reserves
(Accumulated losses) / retained earnings

Total equity

Liabilities
Current liabilities
Trade and other payables

Total equity and liabilities

Notes

20
21
21

25
27
29
28

2018
£m

67.6

282.6
–
0.1

282.7

350.3

0.3
622.5
11.3
(289.9)

344.2

6.1

350.3

2017
£m

273.5

328.2
15.0
0.3

343.5

617.0

0.3
602.2
8.6
1.9

613.0

4.0

617.0

The loss for the Parent Company for the year was £291.8 million (2017: £1.5 million profit).

The notes on pages 80 to 123 are an integral part of these financial statements.

The financial statements on pages 74 to 123 were authorised for issue by the Board of Directors on 1 May 2019
and were signed on its behalf by

Steven Harris
Chief Executive Officer
Circassia Pharmaceuticals plc

Julien Cotta
Chief Financial Officer
Circassia Pharmaceuticals plc

Registered number: 05822706

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Consolidated and Parent Company statements of cash flows
for the year ended 31 December 2018

Cash flows from operating activities
Cash (used in) / generated from operations
Interest paid
Tax credit received

Net cash (used in) / generated from operating activities

Cash flows from investing activities
Recapitalisation of subsidiary
Purchases of property, plant and equipment
Purchases of intangible assets
Proceeds from sale of property, plant and equipment
Interest received
Joint venture distributions to owners
Loans granted to subsidiary undertakings
Decrease in short-term bank deposits

Net cash generated from / (used in) investing activities

Cash flows from financing activities
Proceeds from issuance of ordinary shares
Share issue costs offset against share premium
Acquisition of interest in a subsidiary

Net cash generated from / (used in) financing activities

Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January
Exchange gains on cash and cash equivalents

Cash and cash equivalents at 31 December

2018
£m

(51.3)
(0.2)
10.9

(40.6)

–
(0.1)
(0.3)
0.5
0.2
0.3
–
15.0

15.6

20.4
(0.1)
–

20.3

(4.7)
44.5
0.9

40.7

Group

2017
£m

(66.4)
(0.1)
8.9

(57.6)

–
(0.8)
–
–
0.8
0.2
–
5.0

5.2

–
(1.6)
–

(1.6)

(54.0)
97.4
1.1

44.5

2018
£m

11.7
–
–

11.7

–
–
–
–
–
–
(45.5)
15.0

(30.5)

20.4
(0.1)
(1.7)

18.6

(0.2)
0.3
–

0.1

Company

2017
£m

0.4
–
–

0.4

(9.0)
–
–
–
0.7
–
(68.2)
5.0

(71.5)

–
(1.6)
–

(1.6)

(72.7)
73.0
–

0.3

Notes

30
7
12

17
14
16
14
7
18
20

25
27
17

The notes on pages 80 to 123 are an integral part of these financial statements.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Consolidated statement of changes in equity
for the year ended 31 December 2018

Ordinary
shares
£m

Share
premium
£m

Other 1
reserves
£m

Accumulated
losses
£m

Notes

At 1 January 2017
Loss for the financial year
Currency translation differences

Total comprehensive income/(expense)
Transactions with owners:
Issue of ordinary shares
Employee share option scheme

At 31 December 2017

At 1 January 2018
Loss for the financial year
Currency translation differences

Total comprehensive expense
Transactions with owners:
Issue of ordinary shares
Employee share option scheme

At 31 December 2018

28
29

25
29

28
29

25
29

0.2
–
–

–

0.1
–

0.3

0.3
–
–

–

–
–

563.8
–
–

–

38.4
–

602.2

602.2
–
–

–

20.3
–

12.5
–
2.2

2.2

–
2.5

17.2

17.2
–
(4.8)

(4.8)

–
2.7

Total
equity
£m

280.7
(99.1)
2.2

(295.8)
(99.1)
–

(99.1)

(96.9)

–
–

(394.9)

(394.9)
(117.1)
–

(117.1)

38.5
2.5

224.8

224.8
(117.1)
(4.8)

(121.9)

–
–

20.3
2.7

0.3

622.5

15.1

(512.0)

125.9

1 Other reserves include share option reserve, translation reserve, treasury shares reserve, and transactions with NCI reserve.

The notes on pages 80 to 123 are an integral part of these financial statements.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Parent Company statement of changes in equity
for the year ended 31 December 2018

At 1 January 2017

Profit and total comprehensive income
Transactions with owners:
Issue of ordinary shares
Employee share option scheme

At 31 December 2017

At 1 January 2018
Loss and total comprehensive expense

Transactions with owners:
Issue of ordinary shares
Employee share option scheme

At 31 December 2018

Notes

25, 27
29

Ordinary
shares
£m

Share
premium
£m

Share
option
reserve
£m

(Accumulated
losses) /
Retained
earnings
£m

0.2

–

0.1
–

0.3

0.3
–

–
–

563.8

–

38.4
–

602.2

602.2
–

20.3
–

6.1

–

–
2.5

8.6

8.6
–

–
2.7

Total
equity
£m

576.9

1.5

38.5
2.5

613.0

0.4

1.5

–
–

1.9

1.9
(291.8)

613.0
(291.8)

–
–

20.3
2.7

0.3

622.5

11.3

(289.9)

344.2

The notes on pages 80 to 123 are an integral part of these financial statements.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements

1. Summary of significant accounting policies

General information
The Group is a specialty pharmaceutical group focused on the development and commercialisation of respiratory products.

Circassia Pharmaceuticals plc is a public company limited by shares which is listed on the Alternative Investment Market
(AIM) and incorporated and domiciled in the United Kingdom. The Company is resident in England and the registered office
is The Magdalen Centre, Robert Robinson Avenue, Oxford Science Park, Oxford, Oxfordshire, England, OX4 4GA.

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.

Basis of preparation
The financial information has been prepared in accordance with International Financial Reporting Standards as adopted
by the European Union (‘IFRS’), IFRS Interpretations Committee (‘IFRS IC’) interpretations endorsed by the European Union
and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements
have been prepared using the historical cost convention modified by the revaluation of certain items, as stated in the
accounting policies, and on a going concern basis.

The results shown for the years ended 31 December 2018 and 2017 are audited. Statutory accounts of the Company
in respect of the financial year ended 31 December 2018 were approved by the Board of Directors on 1 May 2019 and
will be delivered to the Registrar of Companies in due course. The report of the auditors on those accounts was unqualified
and did not contain an emphasis of matter paragraph nor any statement under Section 498 of the Companies Act 2006.

The exemption from audit has been claimed for the individual financial statements of Circassia Pharma Limited (registered
number 6410308) and Prosonix Limited (registered number 05679156) for the year ended 31 December 2018 under section
479A of Companies Act 2006. Circassia Pharmaceuticals plc has given the required guarantee under section 479C in
respect of the reporting year. Circassia Pharma Limited and Prosonix Limited results are included in these consolidated
financial statements.

Going concern
Though the Group continues to make losses, the directors have reviewed the current and projected financial position
of the Group, taking into account existing cash balances. On the basis of this review, the directors have not identified
any material uncertainties to the Group’s ability to continue to adopt the going concern basis of accounting for a period
of at least 12 months from the date of approval of the financial statements.

The directors note that as at 31 December 2018, the Group is in a net current liability position. This is mainly due
to the $125 million consideration payable to AstraZeneca. Payment of this amount will be addressed by a loan
provided by AstraZeneca.

New and amended standards adopted by the Group
The Group has applied the following standards and amendments for the first time for their annual reporting period
commencing 1 January 2018:

— IFRS 9 – Financial Instruments

— IFRS 15 – Revenue from Contracts with Customers

The new standards listed above did not have any impact on the amounts recognised in prior periods or the current
period and are not expected to significantly affect future periods.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

New standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018
reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new
standards and interpretations is set out below.

IFRS 16 – Leases
This new standard was issued in January 2016. It will result in almost all leases being recognised on the balance sheet by
lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use
the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases.

The Group has reviewed all leasing arrangements considering the new lease accounting rules in IFRS 16. The standard will
affect primarily the accounting for the Group’s operating leases.

As at the reporting date, the Group has non-cancellable operating lease commitments of £3.7 million, see note 32. Of these
commitments, approximately £0.1 million relates to low value leases which will be recognised on a straight-line basis as
expense in profit or loss.

For the remaining lease commitments, the Group expects to recognise right-of-use assets of approximately £2.3 million on
1 January 2019, lease liabilities of £2.5 million (after adjustments for prepayments and accrued lease payments recognised
as at 31 December 2018). The related deferred tax asset is immaterial. Overall net assets will be approximately £0.1 million
lower, and net current assets will be £0.6 million lower due to the presentation of a portion of the liability as a current liability.

The Group expects that loss after tax will increase by approximately £0.1 million for 2019 as a result of adopting the new rules.

Operating cash flows will increase, and financing cash flows decrease by approximately £1.6 million as repayment of the
principal portion of the lease liabilities will be classified as cash flows from financing activities.

The Group’s activities as a lessor are not material and hence the Group does not expect any significant impact on the
financial statements. However, some additional disclosures will be required from next year.

The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the
simplified transition approach and will not restate comparative amounts for the year prior to first adoption.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity
in the current or future reporting periods and on foreseeable future transactions.

Use of estimates and assumptions
The preparation of financial information in conformity with IFRS requires the use of certain critical accounting estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial information and the reported
amounts of revenues and expenses during the reporting period. Estimates and judgements are continually made and are
based on historical experience and other factors, including expectations of future events that are believed to be reasonable
in the circumstances.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

Significant accounting estimates and judgements
The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal
the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. This note
provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more
likely to be materially adjusted due to estimates and assumptions being revised.

The areas involving significant estimates are listed below:

Recognition of deferred tax asset for carried-forward tax losses
The deferred tax assets include an amount of £8.2 million which relates to carried-forward tax losses of Circassia AB
(previously known as Aerocrine AB). These losses were generated before the company was acquired by Circassia
Pharmaceuticals plc. The Group has concluded that the deferred assets will be recoverable using the estimated future
taxable income based on the approved business plans and budgets for the subsidiary. The subsidiary has generated
taxable income in both years ended 2017 and 2018 is expected to continue generating taxable income from 2019 onwards.
The losses can be carried forward indefinitely and have no expiry date. The judgement is how much of the asset can
be recognised based on probable future profits. Changes in the expected future profits of Circassia AB might result
in a significantly higher or lower deferred tax asset. A 10% higher or lower taxable profit generated by Circassia AB
would result in a £0.8 million higher or lower deferred tax asset recognised.

Accounting for collaboration with AstraZeneca
Following the collaboration and profit share arrangement with AstraZeneca in the previous year, a Purchase Price Allocation
exercise was performed in relation to the Duaklir® acquisition. It was considered that the Group assumed control over the
Duaklir® business only on this date, as the acquisition of Tudorza® was contingent on net sales achievement. The following
key accounting areas were of focus:

Valuation of Duaklir® IPR&D
The Excess Earnings Method approach was determined to be the most appropriate methodology to use for the valuation
of the In-Process Research & Development (IPR&D). This methodology made use of the same cash flows used in
the Duaklir® business valuation with certain key assumptions including a specific rate of return of net working capital,
no additional workforce requirement and minimal tangible fixed asset requirements.

As at 31 December 2018, the carrying amount of the Duaklir® IPR&D was £33.3 million (2017: £33.3 million). The Group
estimates the useful life of this IPR&D to be 17 years, based on the expected future cash flows that the asset is expected
to generate. However, the actual useful life might be shorter or longer than 17 years, depending on product innovations
and competitor actions. As at 31 December 2018, the asset is not yet ready for use as the Duaklir® product has not been
launched, and therefore this estimate has no impact on the carrying amount in the current year.

Valuation of Duaklir® royalties
As part of the collaboration, Circassia will pay royalties to AstraZeneca on future sales of Duaklir® in the United States.
There is some uncertainty over the final amount of future sales and thus royalties due and therefore actual outcomes could
differ significantly from the estimates made. Under IFRS 3, these royalties have been classified as additional consideration
and initially recognised as an IPR&D asset with a corresponding contingent liability. The value of the IPR&D asset and
corresponding liability was calculated by management using a tax-effected NPV of the future royalty cash outflows
at the date of the transaction.

As at 31 December 2018, the royalty liability has been remeasured using sales projections based on financial budgets
approved by management covering a ten-year period. Expected sales beyond the ten-year period are extrapolated using
estimated growth rates. See note 35 for further details.

Accounting for the Tudorza® option exercise
Following the Tudorza® option becoming substantive in October, a Purchase Price Allocation exercise was performed
focusing on the following key accounting area:

Initial valuation of Tudorza® CMP
The Excess Earnings Method approach was determined to be the most appropriate methodology to use for the valuation
of the Currently Marketed Product (CMP). This methodology made use of the cash flows associated with the Tudorza®
business with certain key assumptions including a specific rate of return of net working capital, workforce requirements
and minimal tangible fixed asset requirements. In addition, the Cost Approach was used to value the Assembled Workforce.
As per IAS 38, the fair value of the Assembled Workforce has not been recognised as a separate intangible asset.
The valuation of the Assembled Workforce was solely used for allowing a return on the Assembled Workforce
in the valuation analyses of the CMP.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Investments
Circassia Pharmaceuticals plc holds a number of investment balances in subsidiary companies. Investment impairment
reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment.
Judgements and estimates are made in respect of the carrying value of the cash generating units (CGUs) containing the
investment. If there is a significant impairment of a particular CGU or if the Group’s market capitalisation remains below
the carrying value of Circassia Pharmaceuticals plc’s aggregate investment in subsidiaries, this could result in an impairment
of the investment. Please see note 17 for sensitivity analysis and further information.

The areas involving judgement are listed below:

Date of acquisition regarding Tudorza® option exercise
The business combination relating to the exercise of the Tudorza® option has been accounted for on 23 October 2018.
This is determined to be the point at which there were no barriers to prevent Circassia from exercising the option, rather
than 11 December 2018, being the date at which formal notice of exercise was served to AstraZeneca.

Non-underlying items
The Group presents certain items of income and expense as non-underlying in the Consolidated Statement of
Comprehensive Income. Management primarily manage the business and measure performance based on the results
of "underlying operations". Significant irregular and exceptional items are classified as "non-underlying" items and
are excluded from the underlying measures. This is a judgemental area and is performed by management.

Consolidation
Subsidiaries
Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity
when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability
to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control
is transferred to the Group. They are de-consolidated from the date that control ceases. Inter-company transactions,
balances and unrealised gains and losses on transactions between Group companies are eliminated. Accounting policies
of subsidiaries are consistent with the policies adopted by the Group. Acquisition-related costs are expensed as incurred.

Joint arrangements
The Group applies IFRS 11 to all joint arrangements. Under IFRS 11 investments in joint arrangements are classified
as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. Circassia
Pharmaceuticals plc has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint
ventures are accounted for using the equity method.

Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter
to recognise the Group’s share of the post-acquisition profits or losses and movements in other comprehensive income.
When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes
any long-term interests that, in substance, form part of the Group’s net investment in the joint ventures), the Group
does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures.

Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s
interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment
of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency
with the policies adopted by the Group.

Segmental reporting
The Group had four business segments during 2018, allergy, respiratory, NIOX® and US AZ collaboration. This is
consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker,
who is responsible for allocating resources and assessing performance, has been identified as the Executive Directors,
who make strategic decisions.

The allergy and respiratory operating segments have been classified as discontinued operations. Information about these
discontinued segments is provided in note 10.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

Discontinued operations
A discontinued operation is a component of the Group’s business that represents a separate major line of business
or geographical area of operations that will not be progressed in the future. Discontinued operations are presented on the
income statement as a separate line and are shown net of tax. Cash flows relating to discontinued operations are disclosed
in the notes.

The decision to treat the allergy business as discontinued was made on 25 April 2017 when the Group announced a decision
to cease all further activities on the allergy programmes. As such, the allergy programme costs and the associated research
and development tax credit for the year ended 31 December 2017 and 31 December 2018 are classified as discontinued
operations in the Consolidated Statement of Comprehensive Income in accordance with IFRS 5 requirements.

The respiratory programme costs and the associated research and development tax credit for the year ended
31 December 2017 have been reclassified as discontinued operations in the Consolidated Statement of Comprehensive
Income in accordance with IFRS 5 requirements. The decision to treat the in-house respiratory pipeline as discontinued
was made in April 2018 when the Group announced a decision to cease investment in the respiratory pipeline and
to seek an out-license partner.

Financial instruments
The Group’s financial instruments comprise cash and cash equivalents, short-term bank deposits, receivables and payables
arising directly from operations.

Cash and cash equivalents comprise cash in hand and short-term deposits which have an original maturity of three months
or less and are readily convertible into known amounts of cash. Such assets are classified as current, where management
intend to dispose of the asset within 12 months of the end of the reporting period. Bank deposits with maturity of more than
12 months after the end of the reporting period are classified as non-current assets.

Where derivatives exist in the financial year, they are initially recognised at fair value on the date a derivative contract
is entered into and are subsequently re-measured at their fair value at each reporting date, with any resulting gain or loss
recognised through profit or loss.

The Group does not have any committed borrowing facilities. Payment of the $125 million consideration payable and the
$18.3 million R&D payment will be addressed by a loan provided by AstraZeneca. Cash balances are mainly held on short
and medium term deposits with quality financial institutions, in line with the Group’s policy to minimise the risk of loss.
The main risks associated with the Group’s financial instruments relate to interest rate risk and foreign currency risk (note 2).

Trade and other receivables
Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business.
They are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are
recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less credit
loss allowance. In respect of 2018 and subsequent years, the Group applies the IFRS 9 simplified approach to measuring
expected credit losses which uses a lifetime expected loss allowance for all trade receivables and contract assets. In respect
of 2017, the Group applied an incurred loss methodology, in accordance with IAS39.

Trade receivables are written off when there is no reasonable expectation of recovery.

Other receivables are recognised initially at fair value and subsequently measured at amortised cost, using the effective
interest method, less provision for impairment.

Trade and other payables
Trade and other payables are obligations to pay for goods or services that have been acquired in the ordinary course
of business from suppliers. They are initially recognised at fair value and subsequently held at amortised cost. Accounts
payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current
liabilities.

Leases
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified
as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged
to the income statement on a straight line basis over the period of the lease.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Goodwill and Intangible assets
Intangible fixed assets, relating to goodwill, customer relationships, technology, intellectual property rights and currently
marketed products acquired through licensing or assigning patents and know-how are carried at historical cost, less
accumulated amortisation, where the useful economic life of the asset is finite, and the asset will probably generate
economic benefits exceeding costs.

Amortisation is calculated using the straight line method to allocate the cost of intangible assets over their estimated useful
lives, as follows:

Intangible asset

IPR&D
CMP
Customer Relationships
Technology
Software

Estimated useful lives

5 – 17 years
13 years
18 years
15 – 20 years
5 years

Goodwill arising on the acquisition of subsidiaries represents the excess of the consideration transferred, the amount of any
non-controlling interests in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over
the fair value of the identifiable net assets acquired.

For the purpose of impairment testing, goodwill acquired in a business combination is allocated to each of the CGUs,
or groups of CGUs, that are expected to benefit from the synergies of the combination. Each unit or group of units to
which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal
management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate
a potential impairment. The carrying value of the CGU containing the goodwill is compared to the recoverable amount,
which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately
as an expense and is not subsequently reversed.

Where an acquired intangible asset is not yet available for use in the manner intended by management, the asset is tested
annually for impairment by allocating the assets to the CGUs to which they relate. Amortisation would commence when
product candidates underpinned by the intellectual property rights become available for commercial use. Amortisation would
be calculated on a straight line basis over the shorter of the remaining useful life of the intellectual property or the estimated
sales life of the product candidates.

Expenditure on product development is capitalised as an intangible asset and amortised over the expected useful economic
life of the product candidate concerned. Capitalisation commences from the point at which technical feasibility and
commercial viability of the product candidate can be demonstrated and the Group is satisfied that it is probable that future
economic benefits will result from the product candidate once completed. Capitalisation ceases when the product candidate
receives regulatory approval for launch. No such costs have been capitalised to date.

Expenditure on research and development activities that do not meet the above criteria, including ongoing costs associated
with acquired intellectual property rights and intellectual property rights generated internally by the Group, is charged to
the income statement as incurred. Intellectual property and in-process research and development from acquisitions are
recognised as intangible assets at fair value. Any residual excess of consideration over the fair value of net assets in an
acquisition is recognised as goodwill in the financial statements.

Computer Software
Expenditure on software costs is capitalised as an intangible asset and amortised over the expected useful economic
life of the software. Until such an asset is fully developed, the costs are capitalised and classified within intangibles assets
as ‘Software in development’. These costs are not amortised until the software has been fully developed and operational,
at which point the total cost of the software development is amortised over its estimated useful life.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

Investments
Investments in subsidiary companies are recognised and carried at cost less any identified impairment losses at the end
of each reporting period. Investments are impaired where there is objective evidence that the estimated future cash flows
of the investment have been affected.

Inventories
Inventories are valued at the lower of the acquisition cost and the net realisable value. The FIFO (first in, first out) principle
is used to calculate the value of inventories. Inventories mainly comprise products for sale and stocks of components for
the service activities in Sweden and the US. The acquisition value comprises all expenses for purchases. The net realisable
value is the expected sale price less expected costs for preparation and selling. Write-downs of inventory occur in the
general course of business and are recognised in cost of sales.

Impairment of non-financial assets
Assets that have an indefinite useful life, for example goodwill or intangible assets not ready for use, are not subject to
amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed 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 asset’s carrying amount exceeds its recoverable amount. The recoverable amount
is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets
are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial
assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting
date. Charges or credits for impairment are passed through the income statement.

Property, plant and equipment
Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that
is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or
recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with
the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of replaced parts
is derecognised. All other repairs and maintenance are charged to the income statement during the financial period
in which they are incurred.

Depreciation is calculated using the straight-line method to allocate the cost of assets over their estimated useful lives,
as follows:

Property, plant and equipment

Leasehold improvements
Fixtures and fittings
Plant and equipment

Depreciation rate

Over the life of the unbreakable portion of the lease
20%
10% - 33%

Individually significant tangible assets that are intended to be held by the Group for use in the production or supply of goods
and services or for administrative purposes and that are expected to provide economic benefit for more than one year are
capitalised. All other assets of insignificant value are charged to the income statement in the year of acquisition.

Costs incurred relating to an asset that is not yet complete are capitalised and held as ‘Assets under construction’ until they
are brought into use. The asset is then transferred to the appropriate asset class and depreciated in line with the policy above.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event,
it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made
of the amount of the obligation. If the amounts involved are significant, provisions are determined by discounting the
expected future cash flows at a pre-tax rate which reflects the current market assessment of the time value of money
and, when appropriate, the risks specific to the liability.

Where a leasehold property substantially ceases to be used for the Group’s business, or a commitment is entered into
which would cause this to occur, provision is made to the extent that the recoverable amount of the interest in the property
is expected to be insufficient to cover the future obligations relating to the lease.

A charge for restructuring costs is taken to the income statement when the Group has approved a detailed and formal
restructuring plan, and the restructuring has either commenced or the Group has a constructive obligation, for example
having made an announcement publicly to the employee or the Group as a whole.

Deferred non-contingent consideration
Deferred non-contingent consideration is measured by discounting the liability, where the effect of the time value
of money is material, using a pre-tax discount rate that reflects current market assessments of the time value of money
and, when appropriate, the risks specific to the liability. Where discounting is used, the increase in the liability due
to the passage of time is recognised as an interest expense in the income statement.

Deferred contingent consideration
Deferred contingent consideration is recognised as a liability and measured at fair value on the acquisition date. It is
measured by discounting the liability, where the effect of the time value of money is material, using a pre-tax discount rate
that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability.
The liability is subsequently measured at fair value at each reporting date, with changes in fair value recognised as other
gains or losses in the income statement. Where discounting is used, the increase in the liability due to the passage of time
is recognised as an interest expense in the income statement.

Contingent royalty consideration
In a business combination, future royalty payments owed to the seller are treated as contingent consideration.
The contingent consideration is recognised as a liability, an asset or equity depending on its terms. A contingent
consideration arrangement is initially measured at fair value on the acquisition date based on a tax-effected net present
value basis of the future cash outflows. Contingent consideration that is classified as a liability is remeasured to fair value
at each reporting date, with changes included in the income statement in the post-combination period until the uncertainty
is resolved.

Cash and cash equivalents
In the consolidated statement of cash flows, cash and cash equivalents include cash in hand, deposits held on call
with banks, and other short-term highly liquid investments with original maturities of three months or less from the date
of original investment.

Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction, net of tax, from the proceeds.

Employee benefit costs
The Group makes contributions to defined contribution personal pension schemes for its directors and employees.
The pension cost charge recognised in the year represents amounts payable by the Group to the funds. The Group has
no further payment obligations once the contributions have been paid. The contributions are recognised as employee
benefit expense when they are due.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

Share based payments
The Group operates a number of equity-settled, share based compensation plans, under which the entity receives services
from employees as consideration for equity instruments (options) of the Group. The fair value of the employee services
received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is
determined by reference to the fair value of the options granted:

— including the effect of any market performance conditions (for example, an entity’s share price);

— excluding the impact of any service and non-market performance vesting conditions (for example, profitability, sales

growth targets and remaining an employee of the entity over a specified time period); and

— including the impact of any non-vesting conditions (for example, the requirement for employees to save).

Non-market performance and service conditions are included in assumptions about the number of options that are expected
to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting
conditions are to be satisfied.

The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group
is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair
value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding
credit to equity in the parent entity financial statements.

The Group’s employees participate in various share option schemes as disclosed in note 26. Equity settled share based
payments are measured at fair value at the date of grant and expensed on a straight line basis over the vesting period of
the award. At the end of each reporting period the Group revises its estimate of the number of options with non-market
performance conditions that are expected to become exercisable. The financial consequences of revisions to the original
estimates, if any, are recognised in the income statement, with a corresponding adjustment to equity.

The fair value of share options is measured using either the Black Scholes option pricing model or the Monte Carlo
Simulation. This is dependent on the conditions attached to each of the issued options. Where conditions are non-market
based the Black Scholes option pricing model is used. Where market based conditions are attached to options, the fair value
is determined using the Monte Carlo Simulation.

Other employee benefits
The expected cost of compensated short-term absence (e.g. holidays) is recognised when employees render services that
increase their entitlement. An accrual is made for holidays earned but not taken, and prepayments recognised for holidays
taken in excess of days earned.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Revenue
Revenue is accounted for under IFRS 15. Revenue comprises the fair value of consideration received or receivable
for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value added
tax and trade discounts and after elimination of intra-Group sales. Income is reported as follows:

Sale of goods
The Group sells medical technology equipment that enables inflammation of the airways to be measured as well as
consumable items and spare parts. Revenue is recognised when a contractual promise to a customer (performance obligation)
has been fulfilled by transferring control of the product to the customer, substantially all of which is on confirmation of delivery
to the customer.

Rendering of services
Under the AstraZeneca collaboration agreement, the Group promotes the chronic obstructive pulmonary disease (COPD)
treatment Tudorza® in the United States. Revenues recognised are the amounts invoiced to AstraZeneca pursuant to the
right to collaborate with AstraZeneca on the commercialisation and development of Tudorza® in the United States. Revenue
is recognised in the accounting periods in which the services are rendered.

Foreign currency translation
Monetary assets and liabilities in foreign currencies are translated into sterling at the rates of exchange ruling at the end
of the financial year. Transactions in foreign currencies are translated into sterling at the rates of exchange ruling at the date
of the transaction. Foreign exchange differences are taken to the income statement in the year in which they arise
and presented within ‘Other gains and losses’.

Foreign exchange differences on translation of foreign operations into the Group presentational currency, are recognised
as a separate element of other comprehensive income. Cumulative exchange differences are presented in a separate
component of equity entitled ‘Translation reserve’.

Taxation including deferred tax
The charge for current tax is based on the results for the year, adjusted for items which are non-assessable or disallowed.
It is calculated using tax rates that have been enacted or substantively enacted at the end of each reporting period.

The Group is entitled to claim tax credits in the United Kingdom for certain research and development expenditure.
The amount included in the financial statements at the year end represents the credit receivable by the Group for the
year and adjustments to prior years.

Deferred tax is accounted for using the liability method in respect of temporary differences arising from differences
between the carrying amount of assets and liabilities in the financial information and the corresponding tax bases used
in the computation of taxable profit. In principle, deferred tax liabilities are recognised for all taxable temporary differences
and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which
deductible temporary differences can be utilised.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint
ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised only to the extent that it is probable that future taxable profit will be available against
which the temporary differences can be utilised.

Deferred tax is calculated at the average tax rates that are expected to apply to the period when the asset is realised
or the liability is settled. Deferred tax is charged or credited in the statement of comprehensive income, except when
it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

2. Financial and capital risk management

Capital risk management
The Group’s objectives when managing capital are to safeguard the ability to continue as a going concern and ensure that
sufficient capital is in place to fund the Group’s activities. The Group’s principal method of adjusting the capital available has
been through issuing new shares. During 2018, the Company issued 23,725,800 ordinary shares with a value of £20.4 million
to AstraZeneca (AZ). The Group’s capital is comprised of share capital and share premium, which are disclosed in notes 25
and 27 respectively. The Group monitors the availability of capital through forecasting future expenditure on an ongoing basis.

Transaction and translation risk
Foreign exchange fluctuations may adversely affect the Group’s results and financial condition. The Group prepares its
financial statements in British pound sterling, but a significant proportion of its expenditure and subsidiary results are in
various currencies including United States dollar, Swedish krona, euro and Chinese yuan. The Group does not currently
hedge against translation risk.

Financial risk factors
The Group’s simple structure and the lack of external debt financing reduces the range of financial risks to which it is exposed.
Monitoring of financial risk is part of the Board’s ongoing risk management, the effectiveness of which is reviewed annually.
The Group’s agreed policies are implemented by the Chief Executive Officer, who submits periodic reports to the Board.

Foreign exchange risk
The majority of operating costs are denominated in British pound sterling, United States dollar, Swedish krona or euro.
Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities.

In relation to foreign currency risk, the Group’s policy is to hold the majority of its funds in sterling, monitor foreign currency
rates and purchase foreign currency at spot rates. The change in foreign exchange rates that is assessed to be reasonably
likely for each currency in 2018 is 10% (2017: 10%).

At 31 December 2018, if the euro had weakened/strengthened by 10% against sterling with all other variables held constant,
the post tax loss for the year would have been £0.5 million (2017: £0.4 million) lower/higher, as a result of net foreign
exchange gains/losses on translation of euro denominated payables, receivables and foreign exchange losses/gains
on translation of euro denominated bank balances.

The impact on post tax loss at 31 December 2018 of a 10% weakening/strengthening of the US dollar against British
pound sterling with all other variables held constant would have been a decrease/increase of £0.7 million (2017: £2.7 million),
as a result of net foreign exchange gains/losses on translation of dollar denominated payables, receivables and foreign
exchange losses/gains on translation of dollar denominated bank balances.

Interest rate risk
The Group’s policy in relation to interest rate risk is to monitor short and medium term interest rates and to place cash
on deposit for periods that optimise the amount of interest earned while maintaining access to sufficient funds to meet
day to day cash requirements.

The Group does not have any committed external borrowing facilities, as its cash and cash equivalents and short-term
deposit balances are sufficient to finance its current operations. Consequently, there is no material exposure to interest
rate risk in respect of interest payable.

If interest rates had been 10 basis points higher/lower the impact on net loss in 2018 would have been an increase/decrease
of £0.0 million (2017: £0.1 million) due to changes in the amount of interest receivable.

Credit risk
Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures
to customers, including outstanding receivables.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

i) Risk management
The Group’s policy is to place funds with financial institutions which have a minimum credit rating with Fitch IBCA
of A- long-term/F1 short-term. During 2018, the Group opened a bank account with China Merchant Bank which has
a Fitch IBCA rating of BBB. This is a short-term arrangement until a permanent solution is implemented.

During 2018 the Group placed funds on deposit with 8 banks (2017: 6 banks). The Group does not allocate a quota
to individual institutions but seeks to diversify its investments, where this is consistent with achieving competitive rates
of return. It is the Group’s policy to place not more than £35 million (or the equivalent in other currencies) with any
one counterparty.

The value of financial instruments held represents the maximum exposure that the Group has to them. There is no collateral
held for this type of credit risk.

No credit limits were exceeded during any of the periods reported, and management does not expect any material losses
from non-performance by these counterparties.

ii) Impairment of financial assets
The Group only has one type of financial asset that is subject to the expected credit loss model being trade receivables.
The Company only has one type of financial asset that is subject to the expected credit loss model being receivables
from subsidiary undertakings. While cash and cash equivalents are also subject to the impairment requirements of IFRS 9,
the identified impairment loss was immaterial.

The Group and Company applies the IFRS 9 simplified approach to measuring expected credit losses which uses an
expected loss allowance for all trade receivables and receivables from subsidiary undertakings. To measure the expected
credit losses, trade receivables and receivables from subsidiary undertakings have been grouped based on the days past due.

The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2018
and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect
current and forward looking information on macroeconomic factors affecting the ability of the customers to settle
the receivables.

On that basis, the loss allowance as at 31 December 2018 was determined as follows:

Group

31 December 2018

Expected loss rate

Gross trade receivables
carrying amount

Loss allowance

Company

31 December 2018

Expected loss rate

Gross receivables from subsidiary
undertakings carrying amount

Loss allowance

Current
£m

3.4

(0.1)

Current
£m

24%

373.1

(91.4)

More than 30 days
past due
£m

More than 60 days
past due
£m

More than 90 days
past due
£m

12%

0.1

–

10%

0.1

–

0.2

–

More than 30 days
past due
£m

More than 60 days
past due
£m

More than 90 days
past due
£m

–

Total
£m

3.8

(0.1)

Total
£m

373.1

(91.4)

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

The closing loss allowance for trade receivables as at 31 December 2018 reconciles to the opening loss allowances
as follows:

Opening loss allowance as at 1 January
Increase in loss allowances recognised in profit or loss during the year
Receivables written off during the year as uncollectible
Unused amount reversed

At 31 December

2018
£m

–
(0.1)
–
–

(0.1)

Group

2017
£m

(0.2)
–
0.1
0.1

–

2018
£m

–
(91.4)
–
–

(91.4)

Company

2017
£m

–
–
–
–

–

Trade receivables are written off where there is no reasonable expectation of recovery. Indicators that there is no reasonable
expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group, and
a failure to make contractual payments for a period of greater than 120 days past due.

Impairment losses on trade receivables and receivables from subsidiary undertakings are presented within operating profit.
Subsequent recoveries of amounts previously written off are credited against the same line item.

Cash flow and liquidity risk
Funds are generally placed on deposit with the maturity profile of investments being structured to ensure that sufficient liquid
funds are available to meet operating requirements. The directors do not consider that there is presently a material cash flow
or liquidity risk.

The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period
at the balance sheet date to the contractual maturity date. The only financial liability outstanding for periods greater than
one year in 2018 is a proportion of the contingent royalty consideration relating to sales of Duaklir® and Tudorza® made
in 2020 and onwards. Financial liabilities outstanding for periods greater than one year in 2017 included non-contingent
consideration, contingent royalty consideration and R&D contribution payable to AstraZeneca. The amounts disclosed
in the table are the contracted cash flows discounted to present value where such impact is material:

At 31 December

Non-contingent consideration
Contingent consideration
Trade and other payables

Total

Less than
1 year
2018
£m

80.3
15.4
28.7

124.4

Over
1 year
2018
£m

–
46.2
–

46.2

Less than
1 year
2017
£m

–
–
30.8

30.8

Over
1 year
2017
£m

68.7
33.6
20.4

122.7

As at 31 December 2018, the Group is in a net current liability position. This is mainly due to the $125 million consideration
payable to AstraZeneca. Payment of this amount will be addressed by a loan provided by AstraZeneca.

Derivative financial instruments and hedging

There were no derivatives at 31 December 2018 or 31 December 2017.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

3. Operating segments

The chief operating decision-maker (the Chief Executive Officer) is responsible for making key operating decisions in the
Group. Assessment of performance and decisions regarding the allocation of resources are made by operating segment.
The 2018 operating segments are identified within the Group by product portfolios:

— NIOX® relates to the portfolio of products used to improve asthma diagnosis and management by measuring fractional

exhaled nitric oxide (FeNO); and

— US AZ collaboration relates to the US collaboration agreement with AstraZeneca regarding the commercialisation

of Tudorza® and Duaklir®.

The allergy and respiratory operating segments have been classified as discontinued operations. Information about these
discontinued segments is provided in note 10.

There were no sales between the segments in either reporting year.

The table below presents information regarding the Group’s operating segments for the years ended 31 December 2018
and 2017. Costs shared between the segments are not allocated to individual segments for decision making purposes.
These are disclosed under the column headed ‘Unallocated’.

Segment operating loss

Year ended 31 December 2018

Revenue (from external customers by country,
based on the destination of the customer)
US
EU
Asia Pacific
Rest of world

Total segment revenue

Research and development
Sales and marketing
Administrative expenses

Operating loss from continuing operations

Depreciation, amortisation & impairment included in
the expenditure above

Year ended 31 December 2017
Restated1

Revenue (from external customers by country,
based on the destination of the customer)
US
EU
Asia Pacific
Rest of world

Total segment revenue

Research and development
Sales and marketing
Administrative expenses
Other

Operating loss from continuing operations

Depreciation, amortisation & impairment included in
the expenditure above

NIOX®
£m

US AZ collaboration
£m

Unallocated
£m

9.4
8.4
9.5
0.1

27.4

(3.2)
(32.3)
–

(17.0)

(3.8)

20.9
–
–
–

20.9

(1.0)
(22.1)
–

(2.2)

–

–
–
–
–

–

(6.6)
–
(11.4)

(18.0)

(0.6)

NIOX®
£m

US AZ collaboration
£m

Unallocated
£m

9.5
8.4
9.3
0.1

27.3

(4.4)
(32.6)
–
(10.0)

(19.7)

(4.2)

19.0
–
–
–

19.0

(45.1)
(16.8)
–
–

(42.9)

–

–
–
–
–

–

(8.9)
(0.1)
(10.6)
–

(19.6)

(0.7)

Total
£m

30.3
8.4
9.5
0.1

48.3

(10.8)
(54.4)
(11.4)

(37.2)

(4.4)

Total
£m

28.5
8.4
9.3
0.1

46.3

(58.4)
(49.5)
(10.6)
(10.0)

(82.2)

(4.9)

1 Restated to show the results of the respiratory business in discontinued operations, see note 10 for further details.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

Assets by segment

As at 31 December 2018

Cash, cash equivalents and short-term deposits
Property, plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Investment in joint venture
Non-current tax assets
Inventories
Trade and other receivables
Current tax assets

Total assets

As at 31 December 2017
Restated1

Cash, cash equivalents and short-term deposits
Property, plant and equipment
Goodwill
Intangible assets
Deferred tax assets
Investment in joint venture
Prepayment for business combination
Non-current tax assets
Inventories
Trade and other receivables
Current tax assets

Total assets

NIOX®
£m

US AZ collaboration
£m

Unallocated
£m

7.1
–
5.2
50.7
8.2
–
–
4.2
6.1
–

81.5

4.9
0.5
4.1
170.7
10.9
0.1
3.0
–
2.0
1.0

197.2

28.7
–
–
–
–
–
–
–
–
–

28.7

NIOX®
£m

US AZ collaboration
£m

Unallocated
£m

3.7
–
5.4
74.9
–
–
–
–
–
–
–

84.0

55.8
1.4
0.2
124.8
15.7
0.5
77.9
7.3
5.0
18.9
6.5

314.0

–
–
4.4
–
–
–
–
–
–
–
–

4.4

Total
£m

40.7
0.5
9.3
221.4
19.1
0.1
3.0
4.2
8.1
1.0

307.4

Total
£m

59.5
1.4
10.0
199.7
15.7
0.5
77.9
7.3
5.0
18.9
6.5

402.4

1 Restated to show the results of the respiratory business in discontinued operations, see note 10 for further details.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

4. Revenue from contracts with customers

The Group derives the following types of revenue:

Sale of goods
Rendering of services
Licence and milestone revenue

Total revenue from contracts with customers

All revenue is recognised at a point in time, rather than over time.

2018
£m

27.0
21.3
–

48.3

2017
£m

27.2
19.0
0.1

46.3

5. Employees and directors

The average monthly number of persons (including Executive Directors) employed during the year was:

By activity

Office and management
Sales and marketing
Research and development

Total average headcount

2018
Number

43
285
39

367

Group

2017
Number

42
256
68

366

2018
Number

8
–
–

Company

2017
Number

7
–
–

The average number of administration staff employed by the Group during the year, including Executive and Non-Executive
Directors, was 2 (2017: 2).

Employee benefit costs

Wages and salaries
Social security costs
Other pension costs
Share options expense

Total employee benefit costs

2018
£m

39.1
5.7
1.5
2.7

49.0

Group

2017
£m

39.6
3.2
1.5
2.5

46.8

2018
£m

1.5
0.2
–
–

1.7

Company

2017
£m

1.4
0.2
0.1
–

1.7

The Group contributes to defined contribution pension schemes for its Executive Directors and employees. Contributions
of £0.1 million (included in other payables) were payable to the funds at the year end (2017: £0.1 million).

The details of directors of the Group who received emoluments from the Group during the year are shown in the
Remuneration Committee report.

Key management personnel
The average number of key management personnel employed by the Group during the year including directors
(Executive and Non-Executive) was 13 (2017: 13).

Key management personnel during the year included directors (Executive and Non-Executive), Senior VP of Commercial US,
Senior VP of General Counsel and Chief Compliance Officer, Senior VP of Human Resources and Senior VP of Commercial
EU & RoW. The compensation paid or payable to key management is set out below.

Short-term employee benefits (including bonus)
Post-employment benefits
Share based payment

Total

2018
£m

3.7
0.1
1.0

4.8

2017
£m

3.0
0.2
0.8

4.0

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

6. Other gains and losses

Net foreign exchange gain/(loss)
Change in fair value of contingent Duaklir® royalty consideration
Change in fair value of deferred consideration
Foreign exchange (loss)/gain on non-contingent consideration
Foreign exchange (loss)/gain on contingent royalty consideration
Foreign exchange loss on exercise of Tudorza® option
Foreign exchange loss on contingent consideration

Total other gains and losses

2018
£m

1.9
(1.1)
5.4
(4.4)
(2.5)
(2.7)
(0.3)

(3.7)

2017
£m

(1.1)
3.2
–
5.4
2.9
–
–

10.4

A £5.4 million gain on change in fair value of the deferred non-contingent consideration between date of the initial business
combination and Tudorza® option exercise has been recognised. This gain has arisen due to the unwinding of the discount
on the consideration payable between initial recognition on 12 April 2017 and 23 October 2018, being the date that Circassia
Limited had the substantive rights to exercise the Tudorza® option. See note 35.

7. Finance income and costs

Finance costs:
Bank charges and interest payable
Non-contingent consideration: unwinding of discount
Contingent royalty consideration: unwinding of discount
Non-current trade payables: unwinding of discount

Total finance costs

Finance income:
Bank interest receivable

Total finance income

8. Operating expenses by nature

Operating loss is stated after charging the following:

Employee benefit costs (note 5)
Externally contracted research and development 1
Marketing costs
Legal and professional fees including patent costs
Depreciation 2
Amortisation 2
Impairment of goodwill and other intangible assets
Operating lease payments

2018
£m

(0.1)
(7.2)
(3.5)
(1.2)

(12.0)

0.3

2018
£m

49.0
1.6
10.7
7.5
0.6
3.8
75.0
0.8

2017
£m

(0.1)
(2.7)
–
–

(2.8)

0.4

2017
£m

46.8
52.7
10.0
3.6
0.8
4.1
37.0
0.8

1 2017 includes AZ R&D contribution of £45.1 million, see note 11.
2 Depreciation and amortisation is included on the face of the statement of comprehensive income within ‘Research and development costs’,

‘Sales and marketing’ and ‘Administrative expenses’.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

9. Auditors’ remuneration

Services provided by the Group’s auditors and its associates
During the year the Group obtained the following services from the Group’s auditors and its associates:

Fees payable to the Group’s auditors and its associates for the audit of the Parent Company
and consolidated financial statements
Fees payable to the Group’s auditors and its associates for other services:
– The audit of the Company’s subsidiaries
– Other assurance services 1

Total

2018
£m

0.2

0.1
–

0.3

2017
£m

0.2

0.1
0.2

0.5

1 Other assurance services in 2017 mainly relate to reporting accountant services performed on prospective acquisitions. 2017 costs were offset against the share

premium reserve.

10. Discontinued operations

During 2017 it was announced that the Group would no longer continue development of the allergy programmes.
Subsequently during 2018, it was announced that the Group would cease investment in the in-house respiratory pipeline.
As such, the allergy and respiratory programme costs and the associated research and development tax credit are classified
as discontinued operations in the consolidated statement of comprehensive income to comply with IFRS 5 requirements.

Loss for the year

Expenditure
Goodwill and intangible assets impairment
Share of loss of joint venture

Loss before tax
Taxation

Loss from discontinued operations

Cash flow

Net cash outflow from operating activities

Net decrease in cash from discontinued operations

Notes

2018

£m

(3.7)
(75.0)
(0.1)

(78.8)
8.3

(70.5)

2018

£m

(0.3)

2017
Restated1
£m

(8.7)
(37.0)
(0.2)

(45.9)
7.3

(38.6)

2017
Restated1
£m

(4.7)

1 Restated to show the results of the respiratory business as discontinued. See note 10 for details.

The disposal groups constituting discontinued operations are all held at fair value less cost to sell.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

11. Non-underlying items

Management primarily manage the business and measure performance based on the results of “underlying operations”.
Significant irregularly occurring and exceptional items are excluded from the underlying measures. The following
non-underlying items have been recognised in the income statement for the period:

Charged to research and development costs
AZ R&D contribution

Charged to sales and marketing costs
Restructuring costs

(Charged)/credited to administrative expenses
AIM transfer costs
Restructuring costs

(Charged)/credited to other gains and losses
Foreign exchange movement on non-contingent consideration
Change in fair value of deferred consideration
Foreign exchange movement on contingent consideration
Change in fair value of contingent Duaklir® royalty consideration
Foreign exchange movement on exercise of Tudorza® option exercise
Foreign exchange movement on contingent royalty consideration

Charged to finance costs
Contingent royalty consideration: unwinding of discount
Contingent consideration: unwinding of discount
Non-contingent consideration: unwinding of discount
Non-current trade payables: unwinding of discount

Loss before tax
Credited to taxation

Loss from continuing operations
Loss from discontinued operations

Total loss

1 Restated to show the results of the respiratory business as discontinued. See note 10 for details.

Notes

35
35
35
35
35
35

35
35
35
35

2018

£m

–

(2.9)

(0.3)
–

(0.3)

(4.4)
5.4
(0.3)
(1.1)
(2.7)
(2.5)

(5.6)

(7.1)
(0.1)
(3.5)
(1.2)

(11.9)

(20.7)
–

(20.7)
(70.5)

(91.2)

2017
Restated1
£m

(45.1)

–

–
0.1

0.1

5.4
–
–
3.2
–
2.9

11.5

–
–
(2.7)
–

(2.7)

(36.2)
10.2

(26.0)
(38.6)

(64.6)

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

AstraZeneca R&D contribution
2017 includes a R&D contribution of £45.1 million for Tudorza® and Duaklir® product development.

Restructuring costs
Restructuring costs comprise cost optimisation initiatives including severance payments, compensation for loss of office,
property and other contract termination costs. Restructuring in 2018 relates to the resizing of the US field force, and as such
is allocated to sales and marketing. Restructuring in 2017 related to property costs in relation to the closure of the Solna
office in Sweden, and therefore allocated to administrative expenses.

AIM transfer costs
AIM transfer costs comprise professional fees in relation to the transfer of Circassia Pharmaceuticals plc shares
from the Main Market to AIM.

Non-contingent consideration
The £4.4 million (2017: £5.4 million) foreign exchange movement on non-contingent consideration relates to the impact
of the strengthening dollar on translation of the $100 million and $5 million deferred non-contingent consideration payable
to AstraZeneca. The consideration was measured by discounting the liability with £3.5 million (2017: £2.7 million) increase
in the liability due to the passage of time (unwinding of discount) recognised as a finance cost in the year.

Contingent consideration
Contingent consideration relates to the $20 million payable to AstraZeneca on approval of Duaklir®. The consideration
was measured by discounting the liability with £0.1 million (2017: £nil) increase in the liability due to the passage of time
(unwinding of discount) recognised as a finance cost in the year. The £0.3 million (2017: £nil) foreign exchange movement
on non-contingent consideration relates to the impact of the strengthening dollar.

Contingent royalty consideration
Contingent royalty consideration relates to the amount of royalties payable to AstraZeneca on the future Tudorza® and
Duaklir® sales. The liability was remeasured to fair value at the year end with the resulting £1.1 million (2017: £3.2 million
credit) charge recorded in other gains and losses in the income statement. The £2.5 million (2017: £2.9 million) foreign
exchange movement relates to the impact of the strengthening dollar on translation of the contingent royalty consideration.

Taxation
The R&D tax credit of £10.2 million for the year ended 31 December 2017 relates to the above R&D contribution
to AstraZeneca.

Loss from discontinued operations
The costs relating to the discontinued allergy and respiratory operations are deemed to be an exceptional item
to be excluded from the underlying operations, see note 10 for further details.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Notes to the financial statements continued

12. Taxation

The Group is entitled to claim tax credits in the United Kingdom for certain research and development expenditure.
The amount included in the financial statements for the years ended 31 December 2018 and 2017 represents the credit
receivable by the Group for the year and adjustments to prior years. The 2018 amounts have not yet been agreed with
the relevant tax authorities.

Current tax
United Kingdom corporation tax research and development credit
Adjustments in respect of prior year

Total current tax

Deferred tax
Decrease/(increase) in deferred tax assets
(Decrease)/increase in deferred tax liabilities
Adjustments in respect of prior year

Total deferred tax

Total tax

Tax is attributable to:
Loss on continuing operations
Loss on discontinued operations

2018

£m

(1.0)
–

(1.0)

(3.5)
(13.9)
0.9

(16.5)

(17.5)

(9.2)
(8.3)

(17.5)

The tax credit for the year is lower (2017: lower) than the standard rate of corporation tax in the UK of 19.00%
(2017: 19.25%). The differences are explained below:

Loss from continuing operations before tax
Loss from discontinued operation before tax

Loss before tax

Loss on ordinary activities before tax multiplied by the standard rate
of corporation tax in the UK of 19.00% (2017: 19.25%)
Expenses not deductible for tax purposes (permanent differences)
Employee share options
Research & development relief uplift
Adjustments in respect of prior year
Tax losses for which no deferred income tax asset was recognised

Tax credit for the year

2018

£m

(55.8)
(78.8)

(134.6)

(25.6)
–
0.3
(0.4)
0.9
7.3

(17.5)

2017
Restated1
£m

(13.8)
(0.2)

(14.0)

0.6
(7.0)
(0.6)

(7.0)

(21.0)

(13.7)
(7.3)

(21.0)

2017
Restated1
£m

(74.2)
(45.9)

(120.1)

(23.1)
0.5
–
(5.8)
(0.8)
8.2

(21.0)

1 Restated to show the results of the respiratory business as discontinued. See note 10 for details.

At 31 December 2018, the Group has tax losses to be carried forward of approximately £341.3 million (2017: 354.7 million).
These can be utilised against future taxable profits. At 31 December 2018, Circassia Limited had tax losses to be carried
forward of approximately £148.1 million (2017: £131.2 million). The utilisation of these losses will be restricted to 50%
of profits generated in the United Kingdom.

At 31 December 2018, the Group has tax assets arising from tax credits in the United Kingdom for certain research and
development expenditure of £4.0 million (2017: £13.8 million). Of this £3.0 million (2017: £7.3 million) tax is receivable after
more than one year and is classified as a non-current tax asset.

A reduction in the rate of UK corporation tax to 17% from 1 April 2020 has been substantively enacted. UK deferred tax
assets and liabilities are recognised at a rate of 17% (2017: 17%).

100

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

13. Loss per share

Basic loss per share is calculated by dividing the loss attributable to ordinary equity holders of the Company by the weighted
average number of ordinary shares in issue during the year. As net losses were recorded in both 2018 and 2017, the dilutive
potential shares are anti-dilutive and therefore excluded from the earnings per share calculation.

For the year ended 31 December 2018

Loss attributable to ordinary equity owners
of the Parent Company (£m)
Weighted average number of ordinary shares
in issue (Number)

Continuing operations

Underlying
operations

Non-underlying
operations

Total

Discontinued
operations

Total

(25.9)

(20.7)

(46.6)

(70.5)

(117.1)

344,347,267

Loss per share

(0.08)

(0.06)

(0.14)

(0.20)

(0.34)

For the year ended 31 December 2017
Restated1

Underlying
operations

Non-underlying
operations

Total

Discontinued
operations

Total

Loss attributable to ordinary equity owners
of the Parent Company (£m)
Weighted average number of ordinary shares
in issue (Number)

(34.5)

(26.0)

(60.5)

(38.6)

(99.1)

319,541,498

Loss per share

(0.11)

(0.08)

(0.19)

(0.12)

(0.31)

Continuing operations

1 Restated to show the results of the respiratory business as discontinued. See note 10 for details.

14. Property, plant and equipment

Group

At 1 January 2017
Cost
Accumulated depreciation

Net book amount

Year ended 31 December 2017
Opening net book amount
Additions
Depreciation
Exchange differences

Closing net book amount

At 31 December 2017
Cost
Accumulated depreciation

Net book amount

Year ended 31 December 2018
Opening net book amount
Additions
Depreciation
Disposals

Closing net book amount

At 31 December 2018
Cost
Accumulated depreciation

Net book amount

Leasehold
improvements
£m

Fixtures
and fittings
£m

Plant and
equipment
£m

Total property,
plant and
equipment
£m

0.6
(0.4)

0.2

0.2
0.2
(0.1)
–

0.3

0.8
(0.5)

0.3

0.3
–
(0.1)
–

0.2

0.8
(0.6)

0.2

0.3
(0.1)

0.2

0.2
0.2
(0.1)
–

0.3

0.5
(0.2)

0.3

0.3
0.1
(0.1)
–

0.3

0.6
(0.3)

0.3

1.7
(0.7)

1.0

1.0
0.4
(0.6)
–

0.8

2.1
(1.3)

0.8

0.8
–
(0.4)
(0.4)

–

1.7
(1.7)

–

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

2.6
(1.2)

1.4

1.4
0.8
(0.8)
–

1.4

3.4
(2.0)

1.4

1.4
0.1
(0.6)
(0.4)

0.5

3.1
(2.6)

0.5

101

Notes to the financial statements continued

15. Goodwill

At 1 January
Cost
Accumulated impairment

Net book amount

Year ended 31 December

Opening net book amount
Acquisition of business (note 35)
Impairment
Exchange differences

Closing net book amount

At 31 December

Cost
Accumulated impairment

Net book amount

2018
£m

84.5
(74.5)

10.0

10.0
3.9
(4.4)
(0.1)

9.3

88.2
(78.9)

9.3

2017
£m

84.2
(74.5)

9.7

9.7
0.2
-
0.1

10.0

84.5
(74.5)

10.0

During 2018, Circassia Limited exercised its option to acquire the full US commercial rights over Tudorza® resulting
in goodwill of £3.9 million being recognised.

In 2018, following the decision to cease investment in the in-house respiratory portfolio, the respiratory portfolio value
was written off in full resulting in an impairment charge for the respiratory CGU of £75.0 million, of which £4.4 million related
to goodwill.

The carrying value of goodwill is allocated to the following CGUs:

Cash generating unit

NIOX®
Respiratory
AstraZeneca collaboration

2018
£m

5.2
–
4.1

9.3

2017
£m

5.4
4.4
0.2

10.0

The recoverable amount of the CGUs is assessed using a value in use model. Value in use is calculated as the net present
value of the projected risk-adjusted pre-tax cash flows plus a terminal value of the CGU to which the goodwill is allocated.

The value in use for the NIOX® CGU was calculated over a ten year period using a discount factor of 12.5% (being a
weighted average cost of capital rate for the CGU). The calculations use pre-tax cash flow projections. Cash flows over
ten years have been considered appropriate based on the product lifecycle. Cash flows beyond the ten year period were
extrapolated using the estimated terminal growth rate stated below. The growth rate does not exceed the long-term
average growth rate for the business. The discount rate used is pre-tax and reflects specific risks relating to the Group
and uncertainties surrounding the cash flow projections.

The value in use for the AstraZeneca collaboration CGU was calculated over a ten year period using a discount factor of
17.0% (being a weighted average cost of capital rate for the CGU). The calculations use risked pre-tax cash flow projections.
Cash flows over ten years have been considered appropriate based on the product lifecycle. Cash flows beyond the ten year
period were extrapolated using the estimated terminal growth rate stated below. The growth rate does not exceed the long-
term average growth rate for the business. The discount rate used is pre-tax and reflects specific risks relating to the Group
and uncertainties surrounding the cash flow projections.

102

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

The key assumptions used for the valuations of the CGUs are as follows:

NIOX® CGU

Valuation basis

Research and development costs

Sales value, volume and growth rates

Advertising and promotion investment

Profit margins

Period of specified projected cash flows

Terminal growth rate

Discount rate

AstraZeneca collaboration CGU

Valuation basis

Anticipated launch dates

Research and development costs

Sales value, volume and growth rates

Advertising and promotion investment

Profit margins

Period of specified projected cash flows

Terminal growth rate

Discount rate

Value in use
Based on management forecasts of testing and development costs for its product
candidates, as well as related expenses associated with the regulatory approval process and
commercialisation
Estimates of sales value, volume and growth rates are internal forecasts based on both
internal and external market information

Based on management forecasts of advertising and promotion required in the key territories
Margins reflect management’s forecasts of sales values and costs of manufacture adjusted
for its expectations of market developments

10 years
Terminal growth rates based on management’s estimate of future long-term average
growth rate
2018 – 1%
2017 – 1%
Discount rates based on weighted average cost of capital for the CGU, adjusted where
appropriate.
2018 – 12.5%
2017 – 10.0%

Value in use

2019
Based on management forecasts of testing and development costs for its product
candidates, as well as related expenses associated with the regulatory approval process
and commercialisation
Estimates of sales value, volume and growth rates are internal forecasts based on both
internal and external market information

Based on management forecasts of advertising and promotion required in the United States
Margins reflect management’s forecasts of sales values and costs of manufacture adjusted for
its expectations of market developments

10 years
Terminal growth rates based on management’s estimate of future long-term average
growth rate
2018 – (5%)
2017 – 1%
Discount rates based on weighted average cost of capital for the CGU, adjusted where
appropriate.
2018 – 17.0%
2017 – 11.5%

Period of projected cash flows of 10 years is in line with management’s forecasts. This is deemed to be the most appropriate
period to assess cash flows due to the time taken to reach peak sales.

In each case the valuations of NIOX® and AstraZeneca collaboration indicate sufficient headroom such that a change
to key assumptions that are reasonably possible is unlikely to result in an impairment of the related goodwill.

Impact of possible changes in key assumptions
Reduction in revenue growth in the NIOX® and AstraZeneca collaboration CGUs
Management have, in their sensitivity analysis, assessed the impact of the possibility that sales growth in the NIOX®
and AstraZeneca collaboration CGUs is less than that of internal forecasts.

No change in the key assumptions mentioned above would have resulted in a goodwill or intangible assets
impairment charge.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

103

Notes to the financial statements continued

16. Intangible assets

Group

At 1 January 2017
Cost
Accumulated amortisation and impairment

Net book amount

Year ended 31 December 2017:
Opening net book amount
Acquisition of business (note 35)
Amortisation charge
Impairment charge
Exchange differences

Closing net book amount

At 31 December 2017
Cost
Accumulated amortisation and impairment

Net book amount

Year ended 31 December 2018:
Opening net book amount
Additions
Amortisation charge
Impairment charge
Exchange differences

Closing net book amount

At 31 December 2018
Cost
Accumulated amortisation and impairment

Net book amount

IPR&D
£m

88.9
(0.1)

88.8

88.8
73.0
(0.1)
(37.0)
0.1

124.8

161.9
(37.1)

124.8

124.8
–
–
(51.7)
–

73.1

161.9
(88.8)

73.1

CMP
£m

Customer
relationships
£m

Technology
£m

Total intangible
assets
£m

Other
£m

–
–

–

–
–
–
–
–

–

–
–

–

–
97.4
–
–
–

97.4

97.4
–

97.4

34.3
(2.9)

31.4

31.4
–
(1.9)
–
0.3

29.8

34.6
(4.8)

29.8

29.8
–
(1.8)
–
(0.8)

27.2

34.6
(7.4)

27.2

50.0
(3.1)

46.9

46.9
–
(2.1)
–
0.3

45.1

50.3
(5.2)

45.1

45.1
–
(2.0)
(18.9)
(0.8)

23.4

50.3
(26.9)

23.4

1.6
(1.6)

–

–
–
–
–
–

–

1.6
(1.6)

–

–
0.3
–
–
–

0.3

1.9
(1.6)

0.3

174.8
(7.7)

167.1

167.1
73.0
(4.1)
(37.0)
0.7

199.7

248.4
(48.7)

199.7

199.7
97.7
(3.8)
(70.6)
(1.6)

221.4

346.1
(124.7)

221.4

The Group tests annually whether goodwill and intangible assets have suffered any impairment and tests more frequently
when events or circumstances indicate that the current carrying value may not be recoverable. An impairment test is based
on the value in use of the intangible assets. Key assumptions and sensitivities used in the impairment review at a CGU level
are disclosed in note 15.

An impairment charge of £70.6 million has been recognised in research and development in the income statement in relation
to product candidates in the respiratory portfolio following the inability to find an out-licensing partner.

104

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

In-Process Research & Development (IPR&D)
IPR&D comprise a portfolio of asthma and chronic obstructive pulmonary disease product candidates.

The IPR&D has been initially valued using the Excess Earnings Method. This valuation method is based on discounting
the cash flows that are attributable to the intangible asset, after taking into account the contribution of other assets.
IPR&D assets are tested for impairment on the same basis.

Currently Marketed Product (CMP)
CMP comprises the Tudorza® product, which is currently marketed in the United States. This has a useful economic
life of 13 years, based on the cumulative present value of the positive excess earnings.

The CMP has been initially valued using the Excess Earnings Method. This valuation method is based on discounting
the cash flows that are attributable to the intangible asset, after taking into account the contribution of other assets.
CMP assets are tested for impairment on the same basis.

Customer relationships
Customer relationships represent the existing customers, as at the date of acquisition that are expected to continue
to support the business. A remaining useful life of 18 years was determined at acquisition. Amortisation has been calculated
on a straight line basis over this period from the date of acquisition.

Technology
Aerocrine developed its technology to measure fractional exhaled nitric oxide (“FeNO”) since the mid-1990s.
The Company was the first to develop an instrument for the measurement of FeNO as a valuable tool in the management
of airway inflammation. The valuation of the Technology was based on pre-determined hypothetical royalty rate attributable
to the use of the Technology. The estimated remaining useful life of the Technology is 15 years. Amortisation has been
calculated on a straight line basis over this period from the date of acquisition.

Other
Other intangible assets relate to licences and software. Current year additions relate to the development costs of the new
ERP software. Amortisation will be charged once the software has been fully developed and is operational.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

105

Notes to the financial statements continued

17. Investments in subsidiaries

Company

Investments in subsidiaries at 1 January
Additional investment in Prosonix Limited
Equity settled instruments granted to employees of subsidiaries
Investment in Circassia Beijing
Provision against investments

Investments in subsidiaries at 31 December

2018
£m

273.5
–
2.7
1.7
(210.3)

67.6

2017
£m

262.0
9.0
2.5
–
–

273.5

Investments in subsidiaries are recorded at cost, which is the fair value of the consideration paid.

The Group tests annually whether investments in subsidiaries have suffered any impairment and tests more frequently
when events or circumstances indicate that the current carrying value may not be recoverable. An impairment test is based
on the value in use of the subsidiaries. Key assumptions and sensitivities used in the impairment review are disclosed
in note 15.

A credit loss provision of £210.3 million has been recognised due to the cessation of investment in the respiratory portfolio.

Changes in the value in use of the subsidiaries might result in a significantly higher or lower fair value of investments.
10% higher or lower value in use would result in £35.4 million lower or higher fair value of investments.

The capital contribution relating to share based payment is for 5,103,400 (2017: 4,141,200) 0.08p share options granted
by the Company to employees of subsidiary undertakings in the Group. Further details on the Group’s share option schemes
can be found in note 26.

Transfer of trade and certain assets from Prosonix Limited to Circassia Limited
On 2 March 2017, Prosonix Limited allotted one new ordinary share to Circassia Pharmaceuticals plc for £9.0 million.
This consisted of share capital of £0.001 and share premium of £8,999,999.999. Immediately following the share issue,
Prosonix Limited reduced its issued share capital from £35,394,779.66 to £1,189.72 by cancelling and extinguishing
2,284,294 ordinary shares of £0.001 each, 1,891,840 A shares of £0.001 each and 9,941,261 B shares of £0.001 each,
and by cancelling and extinguishing the entire share premium account, leaving behind 1,189,724 C shares of £0.001
each. The reduction in share capital was credited to a Capital reduction reserve account.

On 3 March 2017, Prosonix Limited fully repaid the intercompany loan due to Circassia Pharmaceuticals plc of
£10,906,586.98. In addition, Prosonix Limited sold its business and certain assets for the price of £1,284,321.55 to Circassia
Limited, representing the net book value of its business and certain assets, as part of a bona fide solvent reorganisation of
the Circassia Group, subject to and on the terms and conditions of an asset purchase agreement between Prosonix Limited
and Circassia Limited. Consequently, the majority of the Company’s investment in Prosonix Limited was reclassified to
investment in Circassia Limited.

106

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

The Group had the following subsidiaries at 31 December 2018:

Name

Circassia Limited

Circassia Pharma Limited

Circassia Pharmaceuticals Inc

Circassia AB

Circassia AG

Prosonix Limited

Circassia (Beijing)
Medical Device Co. Limited

Registered address

Nature of business

Proportion of ordinary shares held

The Magdalen Centre,
Robert Robinson Avenue,
Science Park, Oxford,
OX4 4GA, UK

Pharmaceutical research and sale
of devices for management of
asthma

Dormant

5151 McCrimmon Parkway,
Suite 260, Morrisville,
North Carolina 27560, USA

Pharmaceutical research and
sale of asthma and respiratory
products

Fyrislundsgatan 80,
754 50, Uppsala, Sweden

Development and sale of devices
for management of asthma

Louisenstraße 21,
61348, Bad Homburg, Germany

Sale of devices for management
of asthma

The Magdalen Centre,
1 Robert Robinson Avenue,
Oxford Science Park, Oxford,
OX4 4GA, UK

Room 1109 Jing Guang Center
Office Building, No 1 Chao Yang
Men Wai Avenue, Hu Jia Lou,
Chao Yang District, Beijing,
100020, P.R. China

Dormant

Sale of devices for management
of asthma

100%

All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary
undertakings held directly by the Parent Company does not differ from the proportion of ordinary shares held. The Parent
Company does not have any shareholdings in the preference shares of subsidiary undertakings included in the Group.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

107

Notes to the financial statements continued

18. Investment in joint venture

At 1 January
Share of loss
Distributions to owners

At 31 December

2018
£m

0.5
(0.1)
(0.3)

0.1

2017
£m

0.9
(0.2)
(0.2)

0.5

The joint venture listed below has share capital consisting solely of ordinary shares, which is held directly by the Group.

Nature of investment in joint venture 2018 and 2017:

Name of entity

Registered address

Adiga Life Sciences

McMaster Innovation Park, Suite 305,
175 Longwood Road South Hamilton,
Ontario, Canada

% of
ownership interest

Nature of
the relationship

Note 1

Measurement
method

Equity

Note 1.
Adiga Life Sciences (“Adiga”) is a joint venture with McMaster University in Canada for early epitope and mechanistic
clinical studies. Adiga is a private company and there is no quoted market price available for its shares.

Adiga Life Sciences is a private company and there is no quoted market price available for its shares.

There are no contingent liabilities or commitments relating to the Group’s interest in the joint venture.

Summarised financial information for joint venture
Set out overleaf is the summarised financial information for Adiga which is accounted for using the equity method.

108

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Summarised statement of financial position at 31 December

Current assets
Trade and other receivables
Cash

Net assets

Summarised statement of comprehensive income for the year ended 31 December

Revenue
Research and development costs
Administrative expense

Loss from operation
Income tax

Post tax loss from operation

2018
£m

0.1
0.1

0.2

2018
£m

–
–
(0.2)

(0.2)
–

(0.2)

The information above reflects the amounts presented in the financial statements of the joint venture adjusted
for differences in accounting policies between the Group and the joint venture (and not Circassia Pharmaceuticals plc’s
share of those amounts).

The Adiga Life Sciences joint venture managed clinical research organisations (CROs) in Canada in respect of allergy
programmes on behalf of Circassia Pharmaceuticals plc. As the allergy programmes are no longer being continued,
the results of the joint venture for the year ended 31 December 2018 and 2017 have been included within discontinued
operations in the consolidated statement of comprehensive income, see note 10.

Reconciliation of summarised financial information
Reconciliation of the summarised financial information presented to the carrying amount of the Company’s interest
in the joint venture.

Summarised financial information

Opening net assets 1 January
Loss for the year
Dividends paid

Closing net assets

Interest in joint venture @ 50%
Carrying value

2018
£m

1.0
(0.2)
(0.6)

0.2

0.1
0.1

2017
£m

0.8
0.2

1.0

2017
£m

0.1
(1.0)
(0.1)

(1.0)
0.6

(0.4)

2017
£m

1.8
(0.4)
(0.4)

1.0

0.5
0.5

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

109

Notes to the financial statements continued

19. Inventories

Finished goods

2018
£m

4.2

2017
£m

5.0

Inventories recognised as an expense during the year ended 31 December 2018 amounted to £7.5 million (2017: £8.5 million).
These were included in ‘Cost of sales’.

Write-down of inventories to net realisable value amounted to £0.5 million (2017: £0.9 million). These were recognised
as an expense during the year and included in ‘Cost of sales’. There has been no reversal of any write down in the year
ended 31 December 2018.

20. Trade and other receivables

Trade receivables
Prepayments and accrued income
Other receivables
Receivables from subsidiary undertakings

Total trade and other receivables

2018
£m

3.7
3.9
0.5
–

8.1

Group

2017
£m

3.7
6.0
9.2
–

18.9

2018
£m

–
–
0.9
281.7

282.6

Company

2017
£m

–
–
0.7
327.5

328.2

Included within trade receivables is £0.4 million (2017: £0.7 million) of invoices that were more than 30 days past due
at the end of the reporting year but have not been impaired.

Receivables from subsidiary undertakings are amounts provided by the Company to its subsidiaries in order to undertake
commercial operations and research studies. The receivables are unsecured, interest free and have no fixed date of
repayment. Recoverability of the amounts are dependent on the success of those operations and studies and future
profitability of subsidiary undertakings. As at 31 December 2018, an expected credit loss of £91.4 million (2017: £nil)
was recognised against receivables from subsidiary undertakings.

The carrying amounts of the Group and Company receivables, excluding prepayments and recoverable taxes, are
denominated in the following currencies:

British pound sterling
United States dollar
Swedish krona
Euro

2018
£m

0.7
3.7
0.1
1.8

6.3

Group

2017
£m

0.2
7.0
0.1
1.6

8.9

2018
£m

181.7
100.9
–
–

282.6

Company

2017
£m

263.4
64.8
–
–

328.2

110

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

21. Cash and cash equivalents and short-term bank deposits

Short-term bank deposit, with original maturity:
More than 3 months

Total short-term bank deposits

Cash and cash equivalents:
Cash at bank and in hand

Total cash and cash equivalents

2018
£m

–

40.7

Group

2017
£m

15.0

44.5

2018
£m

–

0.1

Company

2017
£m

15.0

0.3

The Group and Company cash and cash equivalents and short-term deposits are held with institutions with the following
Fitch IBCA long-term rating:

AA
AA-
A+
A
BBB

2018
£m

0.6
31.4
–
7.1
1.6

40.7

Group

2017
£m

0.3
19.3
20.1
19.8
–

59.5

2018
£m

–
0.1
–
–
–

0.1

The Group and Company cash and cash equivalents and short-term deposits are held in the following currencies at
31 December:

British pound sterling
United States dollar
Canadian dollar
Euro
Swedish krona

22. Trade and other payables

Payable within one year
Trade payables
Social security and other taxes
Accruals
Other payables
Payables to subsidiary undertakings

Total trade and other payables

Payable after one year
Trade payables

Total non-current trade payables

2018
£m

23.2
13.0
–
4.0
0.5

40.7

2018
£m

19.1
0.3
7.6
1.7
–

28.7

–

Group

2017
£m

39.6
16.6
0.2
2.6
0.5

59.5

Group

2017
£m

22.7
0.3
6.7
1.1
–

30.8

20.4

2018
£m

0.1
–
–
–
–

0.1

2018
£m

0.1
–
0.5
–
5.5

6.1

–

Company

2017
£m

–
0.3
–
15.0
–

15.3

Company

2017
£m

15.3
–
–
–
–

15.3

Company

2017
£m

0.1
–
0.2
–
3.7

4.0

–

Non-current trade payables in 2017 related to an R&D contribution payable to AZ on 31 December 2019. As at 31 December
2018 the amount is due within 1 year therefore the balance has been reclassified as current trade payables.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

111

Notes to the financial statements continued

23. Financial instruments

The Group’s financial instruments comprise cash and cash equivalents, short-term bank deposits, trade and other
receivables, trade and other payables and contingent consideration. Additional disclosures are set out in the accounting
policies relating to financial and capital risk management (note 2).

The Group had the following financial instruments at 31 December each year:

Assets

Cash and cash equivalents
Short-term bank deposits
Trade and other receivables

Financial assets held at amortised cost (2017: Loans and receivables)

Liabilities

Trade and other payables – current
Trade payables – non-current
Non-contingent consideration – current
Non-contingent consideration – non-current
Contingent consideration – current
Contingent consideration – non-current

Financial liabilities held at amortised cost

The Company had the following financial instruments at 31 December each year:

Assets

Cash and cash equivalents
Short-term bank deposits
Other receivables
Receivable from subsidiary undertaking

Financial assets held at amortised cost (2017: Loans and receivables)

Liabilities

Trade and other payables – current
Payables to subsidiary undertakings

Financial liabilities held at amortised cost

2018
£m

40.7
–
8.1

48.8

2018
£m

28.7
–
80.3
–
15.4
46.2

2017
£m

44.5
15.0
8.9

68.4

2017
£m

29.9
20.4
–
68.7
–
33.6

170.6

152.6

2018
£m

0.1
–
0.9
281.7

282.7

2018
£m

0.6
5.5

6.1

2017
£m

0.3
15.0
0.7
327.5

343.5

2017
£m

0.3
3.7

4.0

Cash balances comprise floating rate instant access deposits earning interest at prevailing bank rates.

Short-term deposits earn interest at fixed rates.

In accordance with IFRS 9 the Group has reviewed all contracts for embedded derivatives that are required to be separately
accounted for if they do not meet certain requirements set out in the standard. There were no such derivatives identified at
31 December 2018 or 31 December 2017.

Fair value
The directors consider that the fair values of the Group’s financial instruments do not differ significantly from their book
values except as described below.

Contingent consideration is remeasured to fair value calculated using a discounted cash flow approach. The valuation
methodology uses significant inputs which are not based on observable market data (unobservable inputs), therefore this
valuation technique is classified as level 3 in the fair value hierarchy. See note 35 for further detail.

112

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

24. Deferred taxation

As at 1 January 2017
(Credit)/charge to the income statement

As at 31 December 2017

As at 1 January 2018
Credit to the income statement

As at 31 December 2018

Intangibles
£m

Tax losses
£m

Net deferred tax
liability
£m

31.9
(7.8)

24.1

24.1
(13.2)

10.9

(16.6)
0.9

(15.7)

(15.7)
(3.4)

(19.1)

15.3
(6.9)

8.4

8.4
(16.6)

(8.2)

The £3.4 million credit to the income statement in relation to tax losses consists of a £8.2 million credit relating
to the recognition of a deferred tax asset for expected future profits generated by Circassia AB, and a £4.8 million charge
relating to the derecognition of a deferred tax asset held by Prosonix Limited due to no future taxable profits expected
to be generated.

Deferred tax liabilities
Deferred tax assets

Total deferred tax position

The Group has the following unrecognised potential deferred tax assets as at 31 December:

Losses

Total unrecognised deferred tax asset

25. Ordinary shares

Authorised, called up and fully paid

357,286,434 (2017: 333,466,262) ordinary shares of 0.08p each

2018
£m

10.9
(19.1)

(8.2)

2018
£m

58.0

2018
£m

0.3

2017
£m

24.1
(15.7)

8.4

2017
£m

60.3

2017
£m

0.3

On 18 July 2018, Circassia Pharmaceuticals plc issued 23,725,800 ordinary shares with a value of £20.4 million
to AstraZeneca such that AstraZeneca’s holding increased from 14.2% to 19.9%. Costs of £0.1 million related
to the deal which are offset against the share premium reserve.

Movements in ordinary shares

As at 1 January 2018
Share issue to AZ
Employee share scheme issues

As at 31 December 2018

Number of shares

333,466,262
23,725,800
94,372

357,286,434

Par value
£m

0.3
–
–

0.3

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

113

Notes to the financial statements continued

26. Share based payments

Share options
Options have been awarded under the Circassia PSP Share Option Scheme (“the PSP Scheme”) and the Circassia
Unapproved Share Option Scheme (“the Unapproved Scheme”).

The share options outstanding can be summarised as follows:

PSP Scheme 1
Unapproved Scheme 2

2018
Number of ordinary
shares
(‘000)

2017
Number of ordinary
shares
(‘000)

10,671
187

10,858

8,855
187

9,042

The contractual life of all options is 10 years and the options cannot normally be exercised before the third anniversary
of the date of grant.

1 Options granted under the PSP Scheme have a fixed exercise price and are subject to additional vesting performance
conditions. The exercise price of options granted under the 2014 PSP scheme is £nil and all subsequent PSP scheme
awards have an exercise price of £0.0008. The performance conditions state that a proportion of an award shall vest
subject to the Company Total Shareholder Return (TSR) ranking against the Comparator Index TSR and the remaining
shall vest subject to the meeting of certain strategic Company objectives.

2 Options granted under the Unapproved Scheme also have a fixed exercise price based on the market price at the date

of grant.

The movement in share options outstanding is summarised in the following table:

Outstanding at 1 January

Granted
Expired
Forfeited / lapsed
Exercised

Outstanding at 31 December

Vested and exercisable at 31 December

2018
Weighted
average
exercise price
(£)

2017
Number (‘000)

2017
Weighted
average
exercise price
(£)

2018
Number (‘000)

9,042

5,103
–
(3,129)
(158)

10,858

762

0.05

0.0008
n/a
0.0007
0.0005

0.04

0.59

7,661

4,141
–
(1,879)
(881)

9,042

535

0.06

0.0008
n/a
0.0003
0.0008

0.05

0.84

Share options outstanding at the end of the year have the following expiry and exercise prices:

Scheme

PSP 2014
PSP 2015
PSP 2016
PSP 2017
PSP 2018
Unapproved

Total

Grant year

Expiry year

2014
2015
2016
2017
2018
2013 – 2014

2024
2025
2026
2027
2028
2023 – 2024

Exercise price
(£)

2018
Number (‘000)

2017
Number (‘000)

0
0.0008
0.0008
0.0008
0.0008
2.416

284
291
2,510
3,029
4,557
187

10,858

348
1,925
2,760
3,822
–
187

9,042

The weighted average remaining contractual life of share options outstanding at the end of the year was 8.4 years
(2017: 8.4 years).

Options exercised in 2018 resulted in 158,044 (2017: 880,532) shares being issued at a weighted average price of £0.0005
(2017: £0.0008) each. The related weighted average share price at the time of exercise was £0.74 (2017: £0.88) per share.

114

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Valuation models
The fair value of PSP share options granted during the year was determined using the Monte Carlo Simulation model
and Black Scholes model dependent on the performance vesting conditions.

There have been no Unapproved Scheme options granted during the year (2017: nil), all options granted in previous years
were valued using the Black Scholes model.

Black Scholes
There were no options granted during the year (2017: nil) that were valued solely using the Black Scholes model.

Monte Carlo Simulation
The following weighted average assumptions were used in the Monte Carlo Simulation model in calculating the fair values
of the options granted during the year:

Exercise price
Share price
Expected volatility
Expected life
Expected dividends
Risk free interest rate

2018
£m

£0.0008
£0.90
35%
3 years
0%
0.89%

2017
£m

£0.0008
£0.96
30%
3 years
0%
0.1%

The Monte Carlo Simulation model has been used to value the portion of the awards which have a market performance
vesting condition (Total Shareholder Return (TSR)). The model incorporates a discount factor reflecting this performance
condition into the fair value of this portion of the award.

The weighted average fair value of options granted during the year determined using the Monte Carlo Simulation model
at the grant date was £0.90 per option (2017: £0.75).

For the options valued using the Monte Carlo Simulation, expected volatility is measured by calculating the standard
deviation of the natural logarithm of share price movements of comparable companies. This is a standard approach
to calculating volatility. The risk free rate of return is the rate of interest obtainable from government securities
as at the date of grant (i.e. Gilts in the UK) over the expected term (i.e. three years).

Restricted shares
The Company previously made awards of ordinary shares to employees and Non-Executive Directors by entering into a form
of restricted share agreement with each participant, under which the participant subscribed for or purchased ordinary shares
in the Company at 10p per ordinary share (converted into 0.08p shares post capital reorganisation). These shares are subject
to certain restrictions on transfer and forfeiture, as set out in the restricted share agreement. The restrictions lift on the earlier
of a sale of the Company and the expiry of a vesting period of between two and three years (depending on the date of award
of the restricted shares).

There were no restricted shares in issue at 31 December 2018 and 31 December 2017.

Deferred shares
During the year the Group awarded nil (2017: nil) deferred shares to Executive Directors as part of a deferred bonus for 2018.
The shares are held by the Group’s Employee Benefit Trust until the third anniversary of the grant date when they will transfer
to the Executive Directors so long as they are still an officer or employee of the Group.

Income statement
See note 5 for the total expense recognised in the income statement in respect of the above equity settled instruments
granted to directors and employees.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

115

Notes to the financial statements continued

27. Share premium

Group and Company

At 1 January
Issue of new shares
Expenses relating to share issue

At 31 December

28. (Accumulated losses)/retained earnings

At 1 January
(Loss)/profit for the year

At 31 December

29. Other reserves

Group

At 1 January 2017
Employee share option scheme
Currency translation differences

At 31 December 2017
Employee share option scheme
Currency translation differences

At 31 December 2018

Company

At 1 January 2017
Employee share option scheme

At 31 December 2017
Employee share option scheme

At 31 December 2018

2018
£m

602.2
20.4
(0.1)

622.5

2018
£m

1.9
(291.8)

(289.9)

2017
£m

563.8
40.0
(1.6)

602.2

Company

2017
£m

0.4
1.5

1.9

2018
£m

(394.9)
(117.1)

(512.0)

Group

2017
£m

(295.8)
(99.1)

(394.9)

Share option
reserve
£m

Translation
reserve
£m

Treasury shares
reserve
£m

Transactions with
non-controlling
interests
£m

Total other
reserves
£m

6.4
2.5
–

8.9
2.7
–

11.6

12.9
–
2.2

15.1
–
(4.8)

10.3

(0.7)
–
–

(0.7)

(6.1)
–
–

(6.1)

12.5
2.5
2.2

17.2
2.7
(4.8)

15.1

Share option reserve
£m

Total other reserves
£m

6.1
2.5

8.6
2.7

11.3

6.1
2.5

8.6
2.7

11.3

116

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

30. Cash used in operations

Reconciliation of (loss)/profit before tax to net cash used in operations

(Loss)/profit from continuing operations before tax
Loss from discontinued operation before tax

Loss before tax
Adjustment for:

Interest income
Interest expense
Depreciation (note 8)
Amortisation (note 8)
Goodwill impairment charge (note 15)
Intangible assets impairment charge (note 16)
Profit on sale of fixed assets
Impairment of investments (note 17)
Share of joint venture loss (note 18)
Fair value gain on contingent royalty consideration
Change in fair value of deferred consideration
Share based payment charge (note 5)
Foreign exchange on non-operating cash flows

Changes in working capital:

Decrease/(increase) in trade and other receivables
Increase/(decrease) in credit loss provision
Increase in inventories
(Decrease)/increase in trade and other payables

Cash (used in)/generated from operations

Group

2017
Restated1
£m

(74.2)
(45.9)

(120.1)

(0.4)
2.8
0.8
4.1
–
37.0
–
–
0.2
(3.2)
–
2.5
(8.5)

(11.4)
(0.2)
–
30.0

(66.4)

2018
£m

(55.8)
(78.8)

(134.6)

(0.3)
12.0
0.6
3.8
4.4
70.6
(0.1)
–
0.1
1.1
(5.4)
2.7
6.7

10.9
0.1
(0.1)
(23.8)

(51.3)

1 Restated to show the results of the respiratory business as discontinued. See note 10 for details.

In the statement of cash flows, proceeds from sale of property, plant and equipment comprise:

Net book amount (note 14)
Profit on disposal of property, plant and equipment

Proceeds from disposal of property, plant and equipment

2018
£m

(291.8)
–

(291.8)

(0.2)
(4.6)
–
–
–
–
–
210.3
–
–
–
–
6.2

(0.1)
91.4
–
0.5

11.7

2018
£m

0.4
0.1

0.5

Company

2017
£m

1.5
–

1.5

(0.3)
1.5
–
–
–
–
–
–
–
–
–
–
(3.5)

1.2
–
–
–

0.4

2017
£m

–
–

–

117

Circassia Pharmaceuticals plcAnnual Report and Accounts 2018

Notes to the financial statements continued

31. Contingent liabilities

There were no contingent liabilities at 31 December 2018 or at 31 December 2017.

During 2017, the Group received a notification about an arbitration claim raised for up to $4.0 million for the non-
performance of certain obligations of the contract against one of the subsidiary companies. On 4 October 2018, a settlement
of $2.5 million was agreed. As at 31 December 2018, $1.5 million remains unpaid and is recognised within accruals.

32. Operating lease commitments

The total of future minimum lease payments payable under the Group’s non-cancellable operating lease for each
of the following periods is as follows:

Due within one year
Due between one and five years
Over five years

2018
£m

1.2
1.4
1.1

2017
£m

0.8
1.8
0.5

The Group leases various offices and warehouses under non-cancellable operating leases expiring within one
to over five years.

The total of future minimum sublease payments expected to be received for the Chicago property no longer utilised
by the Group is £1.3 million (2017: £1.5 million).

33. Commitments

As per the signed Tudorza® transition services agreement, on the date that the Tudorza® NDA and sNDA are transferred to
Circassia Limited, Circassia Limited has the commitment to purchase from AstraZeneca any remaining Tudorza® inventory
and replenishment stock, up to a maximum of one batch. The maximum payable is $1.4 million.

There were no capital commitments as at 31 December 2017.

118

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

34. Related party transactions

Group
There is no ultimate controlling party of the Group as ownership is split between the Company’s shareholders. The most
significant shareholders as at 31 December 2018 are as follows: Invesco Asset Management (24.1% of total voting
rights); Woodford Investment Management (23.8% of total voting rights); AstraZeneca PLC (19.9% of total voting rights);
OppenheimerFunds Inc (7.9% of total voting rights); Imperial Innovations Businesses LLP (7.4% of total voting rights);
Neptune Investment Management (6.1% of total voting rights).

Transactions with related parties during the year and balances with related parties at 31 December are as follows:

Related party

Adiga Life Sciences (Joint venture)
Touchstone Innovations1

2018
Purchases
£’000

–
–

2017
Purchases
£’000

330
46

2018
Payables
£’000

–
–

2017
Payables
£’000

–
–

1 ‘Purchases’ include compensation paid or payable in respect of services provided by Russell Cummings as Non-Executive Director of the Company.

Company
The following transactions with subsidiaries occurred in the year:

Related party

Rendering of services to Circassia Limited1
Settlement of liabilities on behalf of the subsidiaries
Net transfer of funds to subsidiaries
Deed of assignment transfer

2018
£m

1.2
(2.5)
89.2
–

87.9

1 Remuneration costs (excluding share options charges) relating to Steven Harris and Julien Cotta in respect of services rendered to Circassia Limited.

Balances due from subsidiary companies
Balances due to subsidiary companies

2018
£m

281.7
(5.5)

2017
£m

1.2
(2.8)
69.8
42.1

110.3

2017
£m

327.5
(3.7)

The amounts due are unsecured and have no fixed date of repayment. Interest is charged at a rate of LIBOR + 4%.

Employee benefit trust
In 2014 the Company set up an Employee benefit trust for the purposes of buying and selling shares on the employees’
behalf. No funding was paid into the Trust by the Company during the year ended 31 December 2018 (2017: £nil).

No shares were purchased by the Trust during the year ended 31 December 2018 (2017: 373,299). As at 31 December 2018
a cash balance of £4,733 (2017: £4,733) was held by the Trust.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

119

Notes to the financial statements continued

35. Business combinations

Duaklir®
On 12 April 2017, Circassia Pharmaceuticals plc’s collaboration and profit share arrangement with AstraZeneca became
unconditional. Under the agreement, Circassia Pharmaceuticals plc secured certain US commercial rights to Tudorza®
and Duaklir®. On that day Circassia Pharmaceuticals plc issued 47,355,417 ordinary shares with a value of $50 million
to AstraZeneca. In addition, Circassia Pharmaceuticals plc will pay AstraZeneca deferred non-contingent consideration
of $100 million on the earlier of: (i) 30 June 2019; and (ii) the approval of Duaklir® by the FDA; and royalties on sales
of Duaklir® in the United States.

Following positive results from the AMPLIFY Phase III study, the filing of a New Drug Application (NDA) for Duaklir® with the
United States Food and Drug Administration (FDA) took place in 2018, with approval granted on 29 March 2019. Circassia
Pharmaceuticals plc has exclusive commercialisation rights to Duaklir® in the United States and as such it is considered
that the Group assumed control over the Duaklir® business when the collaboration agreement became unconditional.

The future royalty payments to third-parties on Duaklir® are recognised as an additional intangible asset and contingent
consideration liability. A contingent consideration arrangement is initially measured at fair value on the acquisition date
based on discounted future cash outflows. Contingent consideration that is classified as a liability is remeasured to fair value
at each reporting date, with changes taken to the income statement. The amount of royalties payable as determined in the
collaboration agreement is based on the future Duaklir® sales. As the valuation methodology uses this significant input which
is not based on observable market data, this valuation technique is classified as level 3 in the fair value hierarchy. The fair
values are calculated using the discount rate of 17.0% (2017: 20.5%).

Transaction costs totalling £1.9 million were incurred on the collaboration arrangement with AstraZeneca, of which
£0.3 million is included within the operating loss (administrative expenses line) for the year ended 31 December 2017
and £1.6 million was offset against the share premium reserve.

The consideration for the Duaklir® business was determined to be £73.2 million. Intangible assets (IPR&D) of £73.0 million
have been recognised in the accounts. The difference between total value of the business and identifiable assets resulted
in a recognition of £0.2 million goodwill.

Tudorza® option
The net sales report was received from AstraZeneca on 23 October 2018 and the net sales for the 12 month period
to 30 September 2018 exceeded the minimum sales requirement. The threshold was met and therefore Circassia Limited
had the ability to exercise the option. On this date, Circassia Limited had substantive rights to exercise the option,
and therefore this is the date that Circassia Pharmaceuticals plc had control over the Tudorza® business.

Circassia Limited exercised the option on 11 December 2018. Based on the net sales achieved, further consideration
of $25 million is payable to AstraZeneca within 30 days of Duaklir® approval. Of the maximum $25 million payable,
$20 million is contingent on the approval of Duaklir®. Under the terms of the agreement, the completion date was
31 December 2018, at which point the licence will transfer to Circassia Limited.

The future royalty payments to third-parties on Tudorza® are recognised as an additional intangible asset and contingent
consideration liability. A contingent consideration arrangement is initially measured at fair value on the acquisition date based
on discounted future cash outflows. Contingent consideration that is classified as a liability is remeasured to fair value at
each reporting date, with changes taken to the income statement. The amount of royalties payable as determined in the
collaboration agreement is based on the future Tudorza® sales. As the valuation methodology uses this significant input
which is not based on observable market data, this valuation technique is classified as level 3 in the fair value hierarchy.
The fair values are calculated using the discount rate of 19.0%.

120

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Consideration

Ordinary share capital 47,355,417 shares at £0.0008
Share premium
Deferred non-contingent consideration
Contingent Duaklir® royalty consideration
Deferred contingent consideration
Contingent Tudorza® royalty consideration

Recognised amounts of identifiable assets acquired

Duaklir® IPR&D
Duaklir® royalty IPR&D
Tudorza® CMP
Tudorza® royalty CMP

Total identifiable net assets

AZ collaboration goodwill (Duaklir®)
AZ collaboration goodwill (Tudorza®)
Prepayment for Tudorza® business combination

2018
£m

–
40.0
77.9
39.7
14.2
2.7

174.5

2018
£m

33.3
39.7
94.7
2.7

170.4

0.2
3.9
–

174.5

The value of the contingent and non-contingent consideration payable on exercise of Tudorza® was calculated by
discounting the liability using a pre-tax discount rate of 5.4%.

Deferred non-contingent consideration

At 1 January
Additional non-contingent consideration payable on exercise of Tudorza®
Unwinding of discount
Foreign exchange movement

At 31 December

Deferred contingent consideration

At 1 January
Consideration payable on exercise of Tudorza®
Unwinding of discount
Foreign exchange movement

At 31 December

Contingent Duaklir® royalty consideration

At 1 January
Unwinding of discount
Change in fair value
Foreign exchange movement

At 31 December

Contingent Tudorza® royalty consideration

At 1 January
Consideration payable on exercise of Tudorza®
Unwinding of discount
Foreign exchange movement

At 31 December

2018
£m

68.7
3.7
3.5
4.4

80.3

2018
£m

–
14.2
0.1
0.3

14.6

2018
£m

33.6
7.0
1.1
2.4

44.1

2018
£m

–
2.7
0.1
0.1

2.9

Duaklir® and Tudorza® royalties payable within 1 year amount to £0.0 million and £0.8 million respectively
(2017: £nil and £nil).

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

2017
£m

–
40.0
71.4
39.7
–
–

151.1

2017
£m

33.3
39.7
–
–

73.0

0.2
–
77.9

151.1

2017
£m

71.4
–
2.7
(5.4)

68.7

2017
£m

–
–
–
–

–

2017
£m

39.7
–
(3.2)
(2.9)

33.6

2017
£m

–
–
–
–

–

121

Notes to the financial statements continued

Until the Tudorza® option completion date, the Group promoted the chronic obstructive pulmonary disease (COPD)
treatment Tudorza® in the US in accordance with the collaboration and profit share arrangement. The commission fees
receivable are based on Tudorza® product in-market sales and promotion activities performed by Circassia Pharmaceuticals
Inc. In 2018 revenue recognised for rendering this service was £20.9 million (2017: £19.0 million).

A £5.4 million gain on change in fair value of the deferred non-contingent consideration between date of the initial business
combination and Tudorza® option exercise is included in ‘Other (losses)/gains’ in the income statement. This gain has
arisen due to the unwinding of the discount on the consideration payable between initial recognition on 12 April 2017
and 23 October 2018, being the date that Circassia Limited had the substantive rights to exercise the option. This is offset
by a £2.7 million loss due to fluctuations in foreign exchange. See note 6.

Changes in fair value and foreign exchange movements relating to contingent Duaklir® and Tudorza® royalty consideration
are included in ‘Other (losses)/gains’ in the income statement. See note 6.

Changes in future Duaklir® and Tudorza® sales might result in a significantly higher or lower fair value of contingent royalty
consideration (see the table below for list of key inputs used in the fair value measurement). 10% higher or lower Duaklir®
sales would result in £4.4 million lower or higher fair value of the liability. 10% higher or lower Tudorza® sales would result
in £0.3 million lower or higher fair value of the liability.

Significant estimates relating to contingent royalty consideration valuation
The assessment of the fair value of the contingent Duaklir® and Tudorza® royalty consideration requires the selection of
an appropriate valuation model at the date of acquisition, consideration as to the inputs necessary for the valuation model
chosen and the estimation of the future cash flows of the product discounted at the risk adjusted rate. Key assessments
and judgements included in the calculation of deferred royalty consideration are as follows:

Duaklir®

Valuation model

Anticipated launch dates

Sales value, volume and growth rates

Period of specified projected cash flows

Discount rate

Tudorza®

Valuation model

Discounted cash flow

2019 – reviewed and amended to take into account development, regulatory and marketing risks
Estimates of sales value, volume and growth rates are internal forecasts based
on both internal and external market information and market research commissioned
by the Company

17 years
2018: 17.0%
2017: 20.5%

Discounted cash flow

Anticipated launch dates

Sales value, volume and growth rates

Product already launched with Circassia Pharmaceuticals plc full ownership from 1 January 2019
Estimates of sales value, volume and growth rates are internal forecasts based on previous
product performance and market research commissioned by the Company

Period of specified projected cash flows

7 years

Discount rate

2018: 19.0%

On 1 September 2017, a deed of assignment was signed between Circassia Pharmaceuticals plc and Circassia Limited
and Circassia Limited was assigned all rights, powers, interests and benefits of the agreement. Under the terms of the
agreement, Circassia Limited had the option to secure the remaining commercial rights and economic benefits of Tudorza®
based on the sales performance of Tudorza® in the preceding 12 month period.

122

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Annual Report and Accounts 2018

36. Events occurring after the reporting date

On 24 January 2019, Circassia Pharmaceuticals plc announced that Circassia Limited had entered into a definitive
agreement with AIT Therapeutics Inc. (“AIT”) to acquire the exclusive commercialisation rights from to its ventilator
compatible nitric oxide product, AirNOvent, in the United States and China.

Under the terms of the agreement, the consideration is structured as follows:

— Circassia Pharmaceuticals plc issued 12,300,971 ordinary shares with a value of $7.35 million to AIT;

— Circassia Pharmaceuticals plc issued 5,271,844 ordinary shares with a value of $3.15 million to AIT following

the successful completion of a pre-submission meeting with FDA;

— Circassia Limited will pay AIT $12.6 million upon the sooner of the product’s US launch in PPHN or 90 days

post FDA approval;

— Circassia Limited will pay AIT $8.4 million upon label expansion in a related indication in the US;

— Circassia Limited will pay AIT $1.05 million on launch in China.

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

123

Advisors and contact details

Financial calendar
— Annual General Meeting:

7 June 2019

— Interim results for the six months

ending 30 June 2019:
Q3 2019

Registrars
All administrative enquiries relating
to shareholdings and requests to
receive corporate documents by email
should, in the first instance, be directed
to Equiniti. Shareview is Equiniti’s
shareholder portal offering access to
services and information to help manage
your shareholdings and inform your
important investment decisions.

Shareview Portfolio
Shareview Portfolio is an online portfolio
management tool which enables you to
view and manage all the shareholdings
you have, where Equiniti is the Registrar,
in one place. It is free to use and
provides access to a wide range of
market information and investment
services. Please visit www.shareview.co.uk

This is not a recommendation
to buy or sell shares. The price of shares
can go down as well as up, and you are
not guaranteed to get back the amount
that you originally invested.

Addresses for correspondence
Head office
Circassia Pharmaceuticals plc
Northbrook House
Robert Robinson Avenue
The Oxford Science Park
Oxford OX4 4GA
United Kingdom

Tel: +44 (0)1865 405560
Fax: +44 (0)7092 987560

General enquiries: info@circassia.com
Investors: IR@circassia.com
Website: www.circassia.com

Registered office
The Magdalen Centre
Robert Robinson Avenue
Oxford Science Park
Oxfordshire
England
OX4 4GA

Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
United Kingdom

Shareholder support: 0371 384 2030
Calls to this number are charged at 8p
per minute plus network extras.
Lines are open 8:30am to 5:30pm
Monday to Friday.

Bankers
HSBC Bank plc
Apex Plaza
Reading
RG1 1AX

Independent auditors
PricewaterhouseCoopers LLP
Chartered Accountants
and Statutory Auditors
1 Embankment Place
London
WC2N 6RH

124

Circassia Pharmaceuticals plc
Annual Report and Accounts 2018

Forward-looking statements
This Annual Report and Accounts contains certain
projections and other forward-looking statements with
respect to the financial condition, results of operations,
businesses and prospects of Circassia. The use of terms
such as “may”, “will”, “should”, “expect”, “anticipate”,
“project”, “estimate”, “intend”, “continue”, “target”
or “believe” and similar expressions (or the negatives
thereof) are generally intended to identify forward-looking
statements. These statements are based on current
expectations and involve risk and uncertainty because
they relate to events and depend upon circumstances
that may or may not occur in the future. There are a
number of factors that could cause actual results or
developments to differ materially from those expressed
or implied by these forward-looking statements. Any of the
assumptions underlying these forward-looking statements
could prove inaccurate or incorrect and therefore any
results contemplated in the forward-looking statements
may not actually be achieved. Nothing contained in this
Annual Report and Accounts should be construed as
a profit forecast or profit estimate. Investors or other
recipients are cautioned not to place undue reliance
on any forward-looking statements contained herein.
Circassia undertakes no obligation to update or revise
(publicly or otherwise) any forward-looking statement,
whether as a result of new information, future events
or other circumstances.

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Circassia Pharmaceuticals plc
Northbrook House
Robert Robinson Avenue
The Oxford Science Park
Oxford OX4 4GA
United Kingdom

Tel: +44 (0)1865 405560

www.circassia.com

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