Annual Financial Report and Notice of AGM

RNS Number : 4586M

Circassia Pharmaceuticals Plc

27 April 2018

 

For immediate release

Circassia Pharmaceuticals plc

Annual report and accounts for the year ended 31 December 2017 and Notice of 2018 Annual General Meeting

27 April 2018

Circassia Pharmaceuticals plc announces that the following documents have today been posted or otherwise made available to shareholders:

·      The Company's Annual report and accounts for the year ended 31 December 2017

·      Notice of the Company's 2018 Annual General Meeting

·      Form of Proxy for the Annual General Meeting

In accordance with Listing Rule 9.6.1 copies of each of these documents have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm.

The Annual report and accounts for the year ended 31 December 2017 and Notice of 2018 Annual General Meeting are available on the Company's website: www.circassia.com.

The Annual General Meeting will be held at 9.30 am on Wednesday 30 May 2018 at the Company's offices: Northbrook House, Robert Robinson Avenue, Oxford, OX4 4GA.

In accordance with DTR 6.3.5 the appendices below contain as unedited text extracted from the 2017 Annual report and accounts: principal risks, the Directors' responsibility statement, the independent auditor's report to the members of the Company and details of related party transactions. Any references to page numbers in the extract refer to those in the Annual report and accounts. Circassia Pharmaceuticals plc's preliminary results announcement issued on 24 April 2018 contained a condensed set of financial statements, the Chairman's statement, an operating review and financial review.

For further information please contact:
Circassia Pharmaceuticals plc Julien Cotta, Company Secretary	[phone]

Appendix 1 - Risks and risk management

The principal risks relating to Circassia Pharmaceuticals plc and its Group are set out on pages 33 to 38 of the Annual report and accounts, and the following is extracted in full and unedited form.

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.

During H1 2017 the Group commenced its collaboration with AstraZeneca to sell the long-acting muscarinic antagonist (LAMA), Tudorza® in the United States. 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 increase its share of the LAMA 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 provision of Tudorza® samples to healthcare practitioners is currently managed by AstraZeneca. However, as and when the Group exercises its option to take full ownership of the product it will need to implement its own sample management programme.

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 because for example it proves difficult to build a strong enough economic case based on the burden of illness and population impact. Third party payers are increasingly attempting to curtail healthcare costs by challenging the prices that are charged for pharmaceutical products and denying or limiting coverage and the level of reimbursement. Moreover, even if the products can be sold profitably, they may not be accepted by patients and the medical community.

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. None of these competing products are currently available in the US.

Outside the US, UK and Germany the Group relies on distributors to sell its NIOX® devices and such relationships must be carefully managed in order to ensure the 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.

The successful commercialisation of the Group's fluticasone propionate product will, if launched, be largely dependent upon its partner Mylan which has the exclusive rights to sell the product in most major markets. Moreover, this product and certain other drug products being developed by the Group for treatment of asthma, such as its fluticasone/ salmeterol combination product, are generic products and so will compete with the innovator products as well as potentially generics from other third parties.

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 are implementing a jointly agreed Promotional Plan for Tudorza® and this is reviewed at regular meetings of the Joint Commercialisation Committee. Promotional efforts are focused on higher volume prescribers and the Group's sales representatives promote Tudorza® as the primary product in the majority of health care professional (HCP) calls. A dedicated team concentrates on selling the product to larger public and private institutions under fixed term contracts. To mitigate the risks of termination of the 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 increasing resources to sales of the device. By the end of 2017 there were approximately 200 sales representatives selling NIOX® in the United States, double the number at the end of 2016. Distributor markets are managed by an experienced Director of Distributor Management and the resources available to this team have also increased in the course of the year.

With respect to the Respiratory franchise, the Group's agreement with Mylan contains provisions which offer remedies in the event that insufficient diligence is applied to the development and marketing of its fluticasone propionate products. A joint steering committee oversees this project.

Compliance with healthcare regulations

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 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 US may result in criminal and civil proceedings against the Group.

Mitigating activities

The Group has an internal Compliance function which has been extended and restructured in the course of the year. Two regional heads of Compliance, one focused solely on the United States, and the other on territories outside the US now report to the General Counsel and Chief Compliance Officer. The General Counsel and Chief Compliance Officer has a direct reporting line to the Chair of the Audit and Risk Committee. A Compliance Committee oversees activities in this area and meets on a quarterly basis. The Compliance function works with a network of external advisers in the relevant territories to ensure local regulations are comprehended and that strategies are in place to support products in development as well as those already approved and sold. 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, and audits of distributors and suppliers.

Regulatory approvals

The Group may not obtain regulatory approval for those of its products which 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. Moreover, approval in one territory offers no guarantee that regulatory approval will be obtained in any other territory.

In order to obtain regulatory approval for the Group's products, it will be necessary to successfully complete supporting clinical studies. 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 UK 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.

The Group also has an exclusive licence to commercialise Duaklir® in the United States. This product is not yet approved, although clinical studies have been successfully completed and filing for a New Drug Application is currently anticipated in H1 2018.

During 2017, the Group also received the results of a Phase IV post- marketing study relating to Tudorza®. This met both its primary efficacy endpoint and its primary safety endpoint thereby eliminating a risk which had been highlighted in last year's report and accounts.

The Group is currently awaiting results from a clinical trial for one of its respiratory products. The respiratory programme seeks to develop a substitute for Seretide®. However, there can be no guarantee that this trial will meet its endpoint or that the product will ultimately be approved. Similarly, its nebulized LABA/LAMA formulation, which is being developed for use with smart nebulizer technology in-licensed from Philips and its generic tiotropium programme are still at an early stage. In order to extract value from its in-house respiratory programmes in the near term, the Group is seeking to out-license / partner these programmes to third parties. There is, however, a risk that the Group will not be able to negotiate such licence agreements.

The Group relies on third party sub-contractors and service providers for the execution of most aspects of its 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 clinical managers and regulatory affairs professionals who, where appropriate, will commission advice from external advisers and consult with the regulatory authorities on the design of the Group's pre-clinical and clinical programmes. These in-house experts 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 clinical studies which took place with Tudorza® and Duaklir® during 2017 have been managed by AstraZeneca which is a global leader in the development of respiratory drugs. AstraZeneca will also take the lead on the regulatory activities which flow from the successful outcome of those studies.

Unforeseen side effects

Unforeseen side effects may result from the use of the Group's products or product candidates.

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 development may be delayed, additional expenses may be incurred if further studies or product development work are required, and, in extreme circumstances, it may prove necessary to suspend or terminate development. This may occur even after regulatory approval has been obtained, in which case additional trials may be required or the approval may be suspended or withdrawn or additional safety warnings may have to be included on the label.

Adverse events or unforeseen side effects or device malfunction may also potentially lead to product liability claims being raised against the Group as the developer of the products and sponsor of the relevant clinical trials.

Mitigating activities

The Group conducts pre-clinical and clinical trials which test for and identify adverse side effects of the pharmaceutical products which it is developing. Its medical devices are subject to rigorous testing procedures. A robust pharmacovigilance 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®.

AstraZeneca administers the global safety database for Tudorza® 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 and services. 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 and services either prior to launch or thereafter. Some materials may only be available from one source, as is currently the case for the NIOX MINO® and NIOX VERO® devices and the sensors contained in those devices, and regulatory requirements may make substitution costly and time-consuming.

The supply chain for Tudorza® continues to be controlled by AstraZeneca. Even after exercise by the Group of the option to acquire full rights to the product, AstraZeneca will remain the sole source of supply for this product, and for Duaklir® if approved.

Mitigating activities

Audits of sub-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. AstraZeneca has an established global supply chain in place for Tudorza® and at the point when the Group is able to acquire the full rights to the product the existing arms'-length supply agreement negotiated by the parties will come into full effect.

Research and development risks

The Group may not be successful in its efforts to out-license / partner its pipeline of respiratory products. This could have a material impact on the long-term success of the business. Failure of programmes could result from lack of resources or capabilities, or from not obtaining the desired pre-clinical and clinical results.

In addition, the Group is dependent upon external collaborators for the development of its NIOX® devices. The Group relies upon its collaborations with Panasonic Healthcare Co., Ltd for the development of the devices themselves and upon IT Dr. Gambert GmbH for the development of the sensors contained in those devices.

Research and Development activities associated with Tudorza® and Duaklir® will continue to be led by AstraZeneca, although the Group will have input through the steering committees which have been formed to govern the collaboration.

Mitigating activities

The Group has recruited highly experienced R&D executives. Projects are closely monitored against goals and regularly reported to the Senior Management Team and the Board, and external resources are retained where this is deemed appropriate.

The development collaborations with Panasonic and AstraZeneca 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. 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 US, 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 licenses 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® 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.

Mitigating activities

Important products are covered by more than one patent family 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 of the Group and belonging 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, and committee structures exist with the Contract Research Organisations instructed by the Group, to monitor and manage the conduct of the Group's clinical trials.

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.

Free float

The UK Listing Authority requires listing issuers to maintain at least 25% free float in their listed shares. At 29 March 2018 the Company had a free float of approximately 11.9%. The proposed issue of new shares to AstraZeneca will reduce the free float to approximately 11.2%. If the level of free float cannot be increased to 25% then the UKLA can require the Company to cancel its listing on the premium segment of the Official List and move its listing to another market in London. This might adversely affect the ability of new and existing shareholders to buy Ordinary shares and of holders to sell them.

Mitigating activities

At the time of publication of its prospectus announcing its collaboration with and the issue of shares to AstraZeneca, on 17 March 2017, the Company obtained a derogation from the UKLA in respect of the Free Float requirement for a period of 12 months. During this period the Company has been in dialogue with the UKLA to discuss various ways in which the free float can be increased such as: (i) discussing with Shareholders who own more than 5% of the issue share capital of the Company whether any of their holdings can be disaggregated because decisions are being taken by independent investment managers within that Shareholder's organisation; and (ii) discussing with such Shareholders the prospect of reducing their holding below 5%. The Company's advisers are in continuing dialogue with the FCA regarding these matters.

Financial operations

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®.

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 expenditure is in US dollars, Swedish krona, or Euros.

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

The Group's Viability Statement which appears on page 39 sets out the considerations relevant to solvency and liquidity. 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 Investec on a daily basis. If tax credits are lost in the future then action would be taken to reduce discretionary expenditure in order to ensure there remained sufficient cash to support the business through to profitability.

Brexit

At the referendum which was held on 23 June 2016, the UK voted to leave the EU. The Group faces 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 UK has left the EU, to permit sales of the device to continue across Europe. The Group will also seek partners for its respiratory pipeline products in the future, and the optimal regulatory pathway for the approval of these products after Brexit cannot yet be determined.

Brexit may also result in restrictions on the movement of people which 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 announcement of Brexit also caused a significant depreciation in the value of sterling and may lead to 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 does already have established subsidiaries in Sweden (Circassia AB) and Germany (Circassia AG) and so will still have a corporate presence in the EU even after Brexit comes into effect. The risks relating to currency volatility are mitigated through the actions described above under the Financial Operations risk.

Appendix 2 - Directors' responsibility statement

The following statement is extracted from page 82 of the Annual report and accounts. This statement relates solely to the Annual report and accounts and is not connected to the extracted information set out in this announcement.

The Directors are responsible for preparing the Annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law and have elected to prepare the parent Company financial statements on the same basis.

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 their profit or loss for that period. In preparing each of the Group and the parent Company financial statements the Directors are required to:

·      properly select and consistently apply accounting policies;

·      make prudent and reasonable accounting estimates and judgements;

·      state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

·      make an assessment of the Company's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and Directors Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and for taking reasonable steps to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' responsibility statement

We confirm that to the best of our knowledge:

·      the financial statements, prepared in accordance with IFRS as adopted by the EU give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

·      the Strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties which they face; and

·      the Annual report and the financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Group's position, performance, business model and strategy.

The Directors' report, including those sections of the Annual report which are referred to in it, has been approved by the Board and is signed on its behalf by:

Julien Cotta

Director

24 April 2018

Appendix 3 - Independent Auditors' report to the members of Circassia Pharmaceuticals plc

The Independent Auditors' report to the members of Circassia Pharmaceuticals plc is set out on pages 83 to 89 of the Annual report and accounts, and the following is extracted in full and unedited form.

Report on 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 2017 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 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 and, as regards the group financial statements, Article 4 of the IAS Regulation.

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 2017; 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 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.

Our audit approach

Overview

·      Overall group materiality: £5.7 million (2016: £3.25 million), based on 5% of loss before tax.

·      Overall parent company materiality: £5.4 million (2016: £3.0 million), based on 1% of total assets (adjusted so as not to exceed 95% of Group materiality).

·      We identified 4 components which, in our view, required a full scope audit based on their size or risk.

·      We used component teams in 2 countries to perform 2 full scope audits, with the Group team performing the remaining 2 components.

·      Reporting entities where we performed audit procedures accounted for 99% of Group loss before tax; 98% of Group revenue; and 98% of Group total assets. Our audit scope provided sufficient appropriate audit evidence as a basis for our opinion on the Group financial statements as a whole.

·      Impairment of goodwill and intangibles (Group).

·      Accounting for the collaboration with AstraZeneca (Group).

·      Impairment of the parent company's Investment in and intercompany balances with subsidiaries (Parent).

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. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain.

We gained an understanding of the legal and regulatory framework applicable to the group and the industry in which it operates, and considered the risk of acts by the group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at group and significant component level to respond to the risk, recognising that 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. We focused on laws and regulations that could give rise to a material misstatement in the group and parent company financial statements, including, but not limited to, the Companies Act 2006, the Listing Rules and UK tax legislation. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with legal advisors, enquiries of management, including those outside of the finance function and review of significant components auditors' work. 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.

We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud.

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.

Key audit matter	How our audit addressed the key audit matter
Impairment of goodwill and intangibles IAS 36 requires at least annual impairment assessments in relation to goodwill and intangible assets that are not yet ready for use, with more regular assessment should an impairment trigger be identified.  No impairment triggers were considered to have occurred at the cash generating unit level. However, at an individual asset level triggers were identified and impairments were determined to be required for Seriveo (£31.0m), Flixotide pMDI substitute (EU rights) (£4.7m) and Particle-engineered version of salmeterol xinafoate (£1.3m). Goodwill of £10.0m and intangible assets of £199.7m 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. 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 page 51 (Audit Committee Report), page 97 (Critical accounting estimates and judgements), and pages 110 to 113 in the notes. Group	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 three 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 compared forecast revenues to the Group's business plan, obtained an understanding of the stage of product development and management's expected timelines for product launches, including updates on the achievement of expected milestones. We specifically considered the reasonableness of: (i) revenue growth rates in respect of NIOX (taking into account latest forecasts, historical growth rates and the size of the sales force available to promote this product line). We concluded that the terminal growth rates were reasonable based on our market experts' analysis of the asthma market as well as being consistent with the rate used in the prior year. We considered that revenue growth rates were reasonable, taking into account the increased sales force available to promote the product. Despite third party forecasts for the market peak being lower than those of management, sufficient headroom remains after sensitising sales to this level, such that no impairment is indicated; (ii) forecasts for sales of new products, including comparing projected peak sales of certain marketed and in-development pharmaceutical products with third party forecasts and, in the case of in-development products, the probabilities associated with such products reaching the market. Despite third party forecasts for one product being lower than those of management, sufficient headroom remains after reducing sales to be in line with third party expectations such that no impairment is indicated. 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 found management's assumptions in relation to individual asset impairments to be reasonable.
Accounting for collaboration with AstraZeneca The Group entered into a Development and Commercialisation Agreement ('DCA') with AstraZeneca to acquire the rights to commercialise Duaklir in the United States of America on 12 April 2017. In addition, the Group acquired the right to exercise an option to acquire the remaining contractual rights and economic benefits of Tudorza. The consideration comprised of 47,355,417 ordinary shares valued at $50.0m, plus further deferred non-consideration of $100.0m and contingent royalty consideration on further sales of Duaklir. Our main area of focus and the area of most complexity and judgement was the assessment of whether control of each product had transferred to the Group, 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 page 51 (Audit Committee Report), page 97, (Critical accounting estimates and judgements), and pages 126 and 127 in the notes. Group	We obtained and reviewed the underlying DCA between the Group and AstraZeneca and concurred with management that control of the Duaklir business had passed to the Group and that control of the Tudorza business would not pass to the Group until the option to acquire the remaining contractual rights and economic benefits becomes exercisable. We also concurred that the option is not "substantive" (as defined in IFRS 10) and therefore should not be recognised as a liability of the Group or parent company at the balance sheet date. 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 assessed the appropriateness of the relative fair value approach used to determine the split of consideration between Duaklir and Tudorza products and concurred that this was the most appropriate methodology in the circumstances. 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) for both products; 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. We suggested that cash flows should be modelled over the whole life cycle of the product (rather than only over the licence period) and noted that certain royalty rates used in the model had not been updated to reflect the final agreement. The model utilised by management was updated to take account of these items, and we considered that management's assumptions in the final model were reasonable. In relation to the re-measurement of contingent consideration in respect of future royalties payable to AstraZeneca, we obtained management's revised forecasts as at 31 December 2017, 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.
Impairment of the parent company's Investment in and intercompany balances with subsidiaries Investment in subsidiaries of £273.5m is a significant balance. In addition, the parent company has intercompany receivables totalling £327.5m from its subsidiary companies. The market capitalisation of the Group is £289m, 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 page 51 (Audit Committee Report), page 97 (Critical accounting estimates and judgements), and pages 113 and 114 in the notes. Parent	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 and balances with subsidiary companies, 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 found that there was significant headroom between the value of the cash generating units derived from the value-in-use models and the carrying value of the parent company's investments in and balances with subsidiary undertakings. We performed our own sensitivities (reflecting what we believed to be a range of individually reasonably possible alternative outcomes) over the forecast cash flows and discount rates, the results of which did not indicate an impairment.

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.

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 Company, the accounting processes and controls, and the industry in which they operate.

The Group's accounting process is structured around a local finance function 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 where a full scope audit was required included Circassia Inc (incorporated in the USA), determined as individually financially significant because it contributes more than 15% of the Group's underlying loss before tax and Circassia AB (incorporated in Sweden) due to its size or risk. We also undertook the statutory audit of two further reporting units incorporated in the UK, Circassia Pharmaceuticals plc and Circassia Limited. Senior members of the UK engagement team attended planning meetings with each engagement team and attended, either in person or by telephone, the audit closing meetings. A senior member of the Group audit engagement team visited Sweden, to review the work undertaken by component auditors and assess the audit findings of Circassia AB. The Group audit team reviewed the working papers of the US component team remotely.

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, bank and other borrowings and related finance costs, current and deferred tax, central adjustments recorded as part of the consolidation process and assessment of impacts of new accounting standards (IFRS 9 and 15).

In aggregate our audit procedures accounted for 99% of Group loss before tax.

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.

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	Parent company financial statements
Overall materiality	£5.7 million (2016: £3.25 million).	£5.4 million (2016: £3.0 million).
How we determined it	5% of loss before tax.	1% of total assets (adjusted so as not to exceed 95% of Group materiality)
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 or 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 new AZ collaboration, as well as the discontinuation of the Allergy programmes, we considered loss before tax to be the measure of most relevance to users of the accounts. In the prior year we used loss before tax and the exceptional items related to the allergy programme (primarily impairment of intangible assets), as the exceptional items were material one off items not expected to be repeated. While some items have been identified as "non-underlying" in the current year, none are considered "exceptional".	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.

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 £1.6 million and £5.4 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 £0.3 million (Group audit) (2016: £0.2 million) and £0.3 million (Parent company audit) (2016: £0.2 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.

Going concern

In accordance with ISAs (UK) we report as follows:

Reporting obligation	Outcome
We are required to report if we have anything material to add or draw attention to in respect of the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors' identification of any material uncertainties to the group's and the parent company's ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.	We have nothing material to add or to draw attention to. 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.
We are required to report if the directors' statement relating to Going Concern in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.	We have nothing to report.

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), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) 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 2017 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)

The directors' assessment of the prospects of the group and of the principal risks that would threaten the solvency or liquidity of the group We have nothing material to add or draw attention to regarding: ·      The directors' confirmation on page 52 of the Annual Report that they have carried out a robust assessment of the principal risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity. ·      The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. ·      The directors' explanation on page 39 of the Annual Report as to how they have assessed the prospects of the group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they 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 of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing to report having performed a review of the directors' statement that they have carried out a robust assessment of the principal risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the "Code"); and considering whether the statements are consistent with the knowledge and understanding of the group and parent company and their environment obtained in the course of the audit. (Listing Rules)

Other Code Provisions We have nothing to report in respect of our responsibility to report when: ·      The statement given by the directors, on page 47, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the group's and parent company's position and performance, business model and strategy is materially inconsistent with our knowledge of the group and parent company obtained in the course of performing our audit. ·      The section of the Annual Report on page 51 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. ·      The directors' statement relating to the parent company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.

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 82, 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.

Auditors' 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 and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Appointment

We were appointed by the directors of the Company (which was unlisted at the time) in 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 11 years, covering the years ended 31 December 2007 to 31 December 2017. In December 2016, the Company held a competitive tender process for the audit of the year ending 31 December 2017, which resulted in our re-appointment.

Simon Ormiston (Senior Statutory Auditor)

for and on behalf of PricewaterhouseCoopers LLP

Chartered Accountants and Statutory Auditors

Cambridge

24 April 2018

Appendix 4 - Related party transactions

The Group related party transactions are set out on page 124 of the Annual report and accounts, and the following is extracted in full and unedited form.

Transactions with related parties during the year and balances with related parties at 31 December are as follows:

Related party	2017 Purchases £'000	2016 Purchases £'000	2017 Payables £'000	2016 Payables £'000
Adiga Life Sciences (Joint venture)	330	1,929	-	-
Touchstone Innovations1	46	42	-	-

¹ 'Purchases' include compensation paid or payable in respect of services provided by Russ Cummings as Non-Executive Director of the Company.

 

END

 

 

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