Preliminary Results for Year Ended 31 Dec 2016

RNS Number : 1864D

Circassia Pharmaceuticals Plc

25 April 2017

CIRCASSIA PHARMACEUTICALS PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2016

Transformational transaction with AstraZeneca for US commercial rights to two COPD products

Leverages commercial infrastructure established as key growth platform

Robust NIOX® sales growth

Broad respiratory pipeline progressing

Allergy investment halted following additional disappointing study results

Oxford, UK - 25 April 2017: Circassia Pharmaceuticals plc ("Circassia" or "the Company") (LSE: CIR), a specialty pharmaceutical company focused on respiratory disease, today announces its preliminary results for the year ended 31 December 2016 and a post-period update.

Transformational transaction with AstraZeneca (AZ) announced post-period

· Collaboration to commercialise COPD product Tudorza® in US (AZ 2016 revenues $80 million)

· Secures US commercial rights to phase III product Duaklir®¹ with filing planned H1 2018

· Collaboration to fund immediate doubling of Circassia's US sales force plus R&D contributions

· $50 million of shares issued to AZ

· Third-party debt to fund further consideration of up to $180 million

Commercial platform expanded as strategic asset

· US sales force expanded to approximately 100 in 2016; further expansion to 200 under AZ collaboration

· US key accounts and managed markets teams established

· UK direct sales force launched

· German and Chinese commercial teams strengthened

· Appointing new specialist distributors in France and Italy

NIOX® performing strongly

· Sales increased 23% (10% at CER²) to £23.1 million (2015 CER²: £21.0 million of which £9.5 million under previous ownership)

· Direct clinical sales (ie non-research³) increased 35% (21% CER²) compared with 2015

· Rapid US clinical revenue growth following sales force expansion; 57% increase in Q1 2017 vs Q1 2016

· Reimbursement established with a number of additional health systems in US

· US label extension to include four, five and six year olds filed

· Successful primary ciliary dyskinesia diagnosis study; EU certification update initiated

Respiratory portfolio progressing

· Fliveo® (Flixotide® pMDI substitute) EU rights discussions initiated H2 2016

· Seriveo® (Seretide® pMDI substitute) filing targeted H1 2019

· Spiriva® DPI substitute pharmacokinetic study planned H1 2018

· Two COPD formulations in development; LABA / LAMA on track to enter clinic 2018

Allergy investment curtailed

· House dust mite allergy phase IIb study did not meet primary endpoint

· Investment in allergy portfolio halted

Cost containment ongoing

· Facilities consolidated in US, Sweden and UK; Chicago and Solna closed with Oxford reduced

· Positions reduced in R&D and G&A

Financial highlights

· Revenues increased to £23.1 million (2015: £10.8 million)

· R&D investment £46.2 million (2015: £46.8 million) including allergy expenditure of £21.5 million

· Underlying loss for year £57.4 million (2015: £50.0 million); total loss £137.4 million (2015: £50.0 million)

· Allergy portfolio provisions, restructuring costs and impairments £80.0 million⁴ (2015: £nil)

· Strong balance sheet with £117.4 million cash⁵ at 31 December 2016 (31 December 2015: £203.8 million with £33.2 million relating to 2015 acquisitions paid during 2016)

Steve Harris, Circassia's Chief Executive, said: "Following the receipt of disappointing phase III allergy results in June last year, we worked hard to strengthen our commercial platform and respiratory portfolio. We have substantially increased sales of our market-leading NIOX® asthma management products and recently completed a transformational transaction with AstraZeneca to commercialise the COPD products Tudorza® and Duaklir® in the United States. We also broadened our respiratory pipeline, adding three earlier-stage COPD products. In addition, we maintained a resolute focus on costs, while continuing to invest in our commercial infrastructure as a strategic growth platform. Following disappointing results from our house dust mite allergy field study, we have taken the difficult decision to curtail investment in our allergy programmes."

"With these significant developments now behind us, we look forward to the coming year with optimism. We have built a strategic asset in our direct specialty sales infrastructure, which we plan to strengthen further as we accelerate our commercial collaboration with AstraZeneca. We also intend to advance our other respiratory products, as well as pursuing additional in-licensing and acquisition opportunities to expand our commercial portfolio. As a result, we are increasingly well positioned to achieve our ambition of becoming a world-class, self-sustaining specialty pharmaceutical business."

Analyst meeting and webcast

An analyst meeting will take place today at 9.30am at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD. A webcast of the event will be available in the Media section of the Company's website at www.circassia.com.

Enquiries

Circassia
Steve Harris, Chief Executive Officer	Tel: +44 (0) 1865 405 560
Julien Cotta, Chief Financial Officer
Rob Budge, Corporate Communications

JP Morgan Cazenove
James Mitford / Chris Cargill	Tel: +44 (0) 20 7742 4000

Numis Securities
Clare Terlouw / Freddie Barnfield	Tel: +44 (0) 20 7260 1000

FTI Consulting
Ben Atwell / Simon Conway / Mo Noonan	Tel: +44 (0) 20 3727 1000

About Circassia

Circassia is a world-class specialty respiratory pharmaceutical business with a strong commercial infrastructure, marketed products and portfolio of treatments targeting major market opportunities. The Company sells its novel, market-leading NIOX® asthma management products directly to specialists in the United States, United Kingdom and Germany, and in a wide range of other countries through its network of partners. Circassia recently established a collaboration with AstraZeneca in the United States in which it promotes the chronic obstructive pulmonary disease (COPD) treatment Tudorza®, and has the US commercial rights to late-stage COPD product Duaklir®.

Circassia's broad-based development pipeline includes a range of respiratory medicines. The Company's lead asthma treatment, Fliveo®, targets substitution of GSK's Flixotide® pMDI and is approved in the UK. Circassia is also developing a direct substitute for Seretide® pMDI, Seriveo®. In addition, the Company's pipeline includes a number of inhaled medicines for COPD, including single and combination dose products. For more information on Circassia please visit www.circassia.com.

¹Duaklir® is a registered trademark in certain European countries; the US trademark is to be confirmed

²Constant exchange rates (CER) for 2015 represent reported 2015 numbers re‐stated using 2016 average exchange rates; management believes constant currency numbers better represent the underlying performance of the Group due to subsidiary functional currency fluctuations against Sterling

³Direct clinical sales to clinicians, hospitals and distributors; research sales to pharmaceutical companies for use in clinical studies

⁴Impairment of goodwill (£74.5 million), intangible assets impairment (£0.3 million), restructuring costs (£2.8 million) and cost for termination of certain contracts (£2.4 million)

⁵Cash, cash equivalents and short-term deposits

Forward-looking statements

This press release 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 press release 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.

CHAIRMAN'S STATEMENT

The past year, and in particular the last ten months, has been a period of great change with Circassia experiencing significant challenges as well as major opportunities. While disappointing phase III allergy results tested the Company's resilience, I am pleased to report that swift action helped conserve shareholders' funds, broaden the development portfolio and establish a transformational commercial collaboration with AstraZeneca. With results from the Company's house dust mite allergy study mirroring the earlier cat allergy phase III data, the Board has taken the difficult decision to cease further investment in the field and to focus Circassia's resources on its respiratory portfolio. With much progress made in a short period of time, the Company is now building positive momentum across its wider business.

Robust strategy

Since its establishment, Circassia's strategy has focused on building a world-class specialty pharmaceutical business, directly commercialising its products in key markets and developing a broad and balanced portfolio. During 2015, the Company accelerated this strategy, acquiring a direct specialty sales capability in the US and Germany and broadening its pipeline to include a number of respiratory products. Following the allergy results in 2016, the Board revisited this strategy to ensure the Company continues to focus on building shareholder value.

This strategic review considered multiple approaches, and ultimately concluded that Circassia's strategy continued to offer the best opportunity to exploit the Company's commercial infrastructure and pipeline assets. The Board considered options to accelerate self-sustainability and determined that expansion of the Company's commercial capabilities would offer both revenue growth opportunities and a strategic platform with which to attract third-party products. In parallel, out-licensing out-of-focus pipeline assets, focusing R&D efforts and driving efficiencies would reduce costs and help conserve resources.

Rapid action

Following the review, management acted quickly to implement this strategy, expanding the Company's commercial presence, driving efficiencies across the organisation, curtailing allergy investment and halting the development of out-of-focus products. The Company also added three novel formulations to its respiratory pipeline, initiated negotiations for the return of EU rights to its lead asthma treatment and established a transformational commercial collaboration with AstraZeneca.

As a result of this rapid action, Circassia's significantly enhanced commercial capability was an important factor in attracting AstraZeneca as a valued partner. During 2016, the Company doubled its sales force in its largest market, the United States, and as part of its new commercial collaboration will double this team again by the end of July 2017. In 2016, Circassia also launched a direct sales team in the UK and strengthened its commercial teams in Germany and China. In parallel, the Company's market-leading NIOX® asthma management products enjoyed robust sales growth and its pipeline now features additional chronic obstructive pulmonary disease (COPD) treatments. These advances were complemented by significant efficiency savings, with the Company's facilities costs set to decrease by approximately 40% next year and headcount reduced outside the commercial team.

Leveraging infrastructure

With its commercial infrastructure now firmly established, Circassia is well positioned to commercialise its in-house portfolio as well as third-party specialty products. The Company's respiratory pipeline targets a large and growing market, and is well positioned to leverage Circassia's commercial platform with specialist treatments exploiting its direct sales capabilities and substitute therapies that do not require significant promotion using its distribution, supply chain and market access expertise.

This commercial strategy was recently validated by the Company's collaboration with AstraZeneca, in which Circassia will undertake the US promotion of COPD treatments Tudorza® and Duaklir®, once approved. With this transaction transforming Circassia into a world-class specialty respiratory business, the Company is well positioned to attract further products that can benefit from its highly focused commercial capabilities.

Board changes

As well as the changes to the Company, Circassia's Board has also evolved. During 2016, Paul Edick and Cathrin Petty retired as Non-Executive Directors, and as announced alongside the preliminary results Tim Corn and Charles Swingland have informed the Company that after serving for over 10 years they will retire at the forthcoming Annual General Meeting. Each of these Directors has provided invaluable counsel and strategic advice based on long-standing industry experience, and we thank them all for their contribution to the progress made by Circassia. Following the addition of two new independent Directors during 2015, the Board remains strong, with five Non-Executive and three Executive members. The Board will continue to review its mix of skills and experience to ensure an optimal composition, both overall and of its Committees.

Positive outlook

Following the disappointment of the phase III allergy results in June 2016, Circassia has worked to refocus and broaden its business. After a period of consolidation and rebuilding, the Company is positioned for strong growth as it builds momentum in both its commercial and development portfolios. During the coming year, Circassia anticipates further progress with the Company capitalising on its asthma management products' market-leading position, focused promotion of its partnered COPD treatment Tudorza® and pursuit of opportunities to commercialise additional products through its specialty infrastructure. In addition, the Company plans to conclude discussions on the EU rights to its lead asthma treatment, expand its NIOX® registrations in the US and Europe and prepare two new novel COPD formulations to enter the clinic.

Following the setbacks of 2016, Circassia is looking forward with optimism as it builds its revenues and advances its pipeline of promising respiratory treatments. As a result, I believe the Company is increasingly well positioned to achieve its ambition of becoming a world-class, self-sustaining specialty pharmaceutical company.

Dr Francesco Granata

Chairman

OPERATING REVIEW

The past year has been a period of significant change and refocusing for Circassia. Our NIOX® asthma management products and commercial expansion plans made good progress and we recently established a ground-breaking commercial collaboration with AstraZeneca. However, we also received disappointing clinical data in our allergy portfolio. We acted quickly to curtail allergy-related expenditure, and also broadened our pipeline of respiratory products and realigned our R&D efforts to drive these programmes towards the market as quickly as possible.

In addition, we conducted a formal review of the Company's business. This reconfirmed the significant potential of our specialty business model, the value of a strong direct commercial presence and the importance of using our resources as efficiently as possible. Consequently, we substantially expanded our commercialisation capabilities to act as a strategic growth driver, and identified significant efficiency savings across our global operations.

With this period of consolidation and refocusing complete we have emerged in a strong position. Circassia now features a growing portfolio of marketed products, a broad pipeline of respiratory medicines and a robust balance sheet. With our ambition undimmed, we remain committed to building a world-class company for shareholders, customers and employees alike.

NIOX® asthma management products

Our NIOX® products play an important role helping physicians diagnose and manage asthma by providing an accurate measure of underlying airway inflammation through the monitoring of patients' fractional exhaled nitric oxide (FeNO). NIOX® is used both in clinical practise and pharmaceutical companies' studies, and is the market-leading point-of-care FeNO measurement system available across major markets. The current generation VERO® device is launched in a wide range of countries, including the US, Europe, Japan and China, and during the first quarter of 2017 was approved in Canada.

Strong sales performance

During 2016, NIOX® sales increased significantly, growing 23% to £23.1 million (10% CER) versus 2015 (2015: £18.7 million - £10.3 million under Circassia ownership and £8.4 million under previous ownership).

Of these revenues, sales for clinical use increased 35% compared with the year before (21% CER) reflecting significant commercial efforts by Circassia and its partners. NIOX® sales to pharmaceutical companies are influenced by the timing of clinical studies and are therefore more unpredictable, and these revenues decreased during the year by 6% (16% CER).

During the first quarter of 2017 this strong sales growth has continued, notably in the key US market following the significant expansion of the sales force in H2 2016. As a result, US clinical sales grew 57% in Q1 2017 versus the same period in 2016.

Experience programme performing well

Our NIOX VERO® experience programme continues to make good progress. During 2016, our US team continued to roll out the initiative placing approximately 900 devices in specialist clinics, over three times the 2015 level, providing physicians the opportunity to experience NIOX® in practise. Of the programme participants, the majority subsequently acquired a new NIOX® system, with the period to purchase reducing by approximately 25% compared with 2015. In 2017 we are maintaining momentum, with our teams in Germany and the UK adopting customer evaluation initiatives and our US programme evolving to focus on rapidly converting customers.

Reimbursement and key accounts increasing

During the second half of 2016, we also established a team of experienced managed markets professionals to increase the proportion of the US population covered by reimbursement for NIOX®. This initiative is now delivering results with a number of important health plans reimbursing NIOX® usage, and during the first quarter of 2017 the team made further progress, extending coverage to more than 2.8 million additional Americans through several new plans.

Circassia also established a key accounts team during 2016, which is performing well. By identifying and targeting major health providers in the asthma field, the team has signed 17 significant contracts since the beginning of 2017, with negotiations underway with a similar number of potential customers.

New US pricing model

Circassia's US commercial team recently completed an economic analysis of potential NIOX® pricing models, and in 2017 rolled out a new approach designed to encourage greater use. To measure patients' FeNO, clinicians require both a NIOX® device and pre-programmed replaceable test sensor, which are available for a fixed number of tests. The new pricing model aims to increase the number of tests used over the five-year life of the NIOX VERO® by separating the cost of the device and the sensors, compared with a bundled price previously. As a result, the new pricing aims to increase the commercial returns for customers while boosting margins for the Company.

Distributor improvement plan

In addition to our direct sales capabilities, we sell our NIOX® products through a network of distributors in approximately 35 further countries around the world. During the second half of 2016, we recruited an experienced Distributor Management Director to manage and improve these partnerships, and conducted a detailed performance review of our distribution network. We are currently further strengthening our distribution management team, and are working with distributors in the EU and other key territories to ensure transparency on local sales and marketing activities and to provide regular performance updates.

During 2016 we terminated our distribution agreements in France and Italy due to poor performance. We have now assessed a range of opportunities to boost our presence in these potentially significant markets, including via direct sales forces. This review concluded that partnering with high performing distributors offers the optimal approach, and we are appointing local specialists in both countries to promote our NIOX® products.

Positive registration extension studies

Recently, we completed two successful clinical studies designed to extend our NIOX VERO® usage. The first demonstrated the equivalence and utility of the six- and 10-second test functions in children aged four to six years old. As a result, we have now filed for an extension to the US label to match our European certification, which already includes this age group and both test functions.

Our second study, which included 160 subjects, identified a diagnostic level of FeNO in people with the orphan condition primary ciliary dyskinesia (PCD). PCD affects approximately 50,000 people in the EU and can be complex to diagnose. However, it is known that sufferers have unusually low levels of nasal nitric oxide, and our recently completed study demonstrated that the NIOX VERO® system can accurately measure this exhaled gas. As a result, we plan to add PCD diagnosis to our European certification in the coming months.

NIOX® development programme

During the past year, we began initial concept development for a new NIOX® generation to ensure we retain our leading position in the FeNO market. With rapid advancements in wireless and web technologies we have the opportunity to build on our ongoing collaboration with Microsoft for cloud-based applications, while also exploring additional functionality to enhance the utility of the NIOX® system.

Commercial collaboration with AstraZeneca

Circassia's recently completed transaction with AstraZeneca is an ideal fit with our strategy and transforms the Company into a world-class respiratory business. It represents a major commercial opportunity, doubling our number of marketed products, with the potential to triple the current number within two years. Under the initial collaboration, we plan to immediately double our US sales team to promote the COPD product Tudorza®, as well as our existing NIOX® franchise. Additionally, the transaction structure is highly attractive, allowing us to fund the consideration without further investment from shareholders, while at the same time welcoming AstraZeneca as a major shareholder.

Tudorza® collaboration

We have established an initial collaboration and profit share for the commercialisation of Tudorza® in the US, and in the next approximately two and half years we will have the option to acquire the full US commercial rights to the product. During the collaboration, Circassia will be responsible for the promotion of Tudorza® while AstraZeneca will manufacture and supply the product and provide regulatory and pharmacovigilance support.

Tudorza® (aclidinium bromide 400 μg twice daily) is a long-acting muscarinic antagonist (LAMA) indicated for the long-term maintenance treatment of bronchospasm associated with COPD, including chronic bronchitis and emphysema. It was initially approved in the United States in 2012 and is authorised in approximately 60 countries around the world under a range of brand names. AstraZeneca revenues related to the product's worldwide sales were $170 million in 2016, of which $80 million was in the United States.

Tudorza® is supported by a broad clinical database, including three pivotal phase III studies and three one-year long-term safety studies. These data demonstrate that Tudorza® provides statistically and clinically significant improvements in lung function (FEV₁), improves symptom severity, and due to its rapid onset of action provides bronchodilation from the first dose, which is sustained over long-term treatment. In a head-to-head comparison with the market-leading LAMA, Spiriva® (tiotropium bromide 18 μg once a day), Tudorza® demonstrated significantly greater improvements in lung function (FEV₁) during the night time on day one, which followed the evening dose of aclidinium that provided additional and sustained bronchodilation. Additionally, Tudorza® provided improvements in early morning and night-time symptom severity compared with Spiriva®. Studies also show that Tudorza® is well tolerated, with a low incidence of adverse events that are commonly associated with LAMA-containing products.

Duaklir® follow-on product

As part of the transaction we also secured the US commercial rights to the COPD product Duaklir®. The product is an orally inhaled fixed dose long-acting muscarinic antagonist / long-acting beta agonist (LAMA / LABA) combination (400 µg aclidinium bromide / 12 µg formoterol fumarate twice daily), which is in late-stage development by AstraZeneca in the United States. The product is currently undergoing a phase III trial, which is anticipated to complete in H2 2017, with a subsequent filing planned for H1 2018. Duaklir® was initially approved in the European Union in 2014 and is authorised in approximately 50 countries around the world under a range of brand names. AstraZeneca revenues related to Duaklir® sales outside the United States were $63 million in 2016.

The clinical development programme on which the product was approved in the EU and elsewhere included approximately 4,000 COPD patients, with a number of phase III studies complemented by long-term safety studies. These studies show that Duaklir® provided significant and clinically meaningful improvements in lung function (FEV₁) and symptom reduction compared with placebo and with the product's individual LAMA and LABA components. It also improved daytime, night-time and early morning COPD symptoms and the rate of moderate or severe exacerbations was significantly reduced compared to placebo. In addition, a comparison study versus leading inhaled corticosteroid / long-acting beta agonist (ICS / LABA) combination Seretide® showed that Duaklir® provided significantly improved FEV₁, with fewer pneumonia and treatment-related adverse events. Studies also show that Duaklir® demonstrated favourable safety and tolerability, which is comparable to its mono-components, with adverse event rates similar to placebo.

Unique Pressair® inhaler

Both Tudorza® and Duaklir® are delivered by the novel dry powder inhaler Pressair®. A number of studies show a clear patient preference for Pressair® versus many competing devices, including Handihaler® which is used by market leading LAMA Spiriva®. Pressair® also has fewer steps than many other inhalers, with a simple two-step delivery process. In addition, it prevents the release of a second dose before the first is successfully inhaled to prevent accidental overdosing. It has a unique combination of feedback mechanisms to indicate when the device is ready to use, whether the patient's inhalation is successful and the number of remaining doses. The device also locks after the final dose to prevent further use and it does not require cleaning.

Robust commercialisation plan

The US COPD market represents a major opportunity, with 2016 sales estimated at more than $5 billion. The disease's prevalence is expected to grow, and approximately 15.7 million Americans currently have diagnosed COPD, with several million more undiagnosed. As a result, COPD is responsible for over 120,000 deaths per year, making it the third leading cause of death in the United States.

The Global Initiative for Chronic Obstructive Lung Disease (GOLD), which comprises a number of leading agencies, including the US National Heart, Lung and Blood Institute and National Institutes of Health, has recently released its 2017 treatment guidelines. These support a move away from ICS / LABA products for many COPD patients and LAMA-containing products are now recommended as preferred initial treatments for every patient group. Consequently, these influential guidelines support a market move towards products such as Tudorza® and Duaklir®.

With the transaction with AstraZeneca now complete, Circassia is responsible for Tudorza®'s promotion in the US and we will make the product our lead promotional priority. Through highly focused commercialisation efforts we believe we can maintain the product's recent commercial performance and potentially increase sales in the medium- to longer-term. Third-party estimates suggest the product has peak sales potential of over $90 million.

As part of our commercial plan, we intend to increase our US field force to approximately 200 by the end of July 2017. We will focus our initial promotional efforts on the highest Tudorza® prescribing physicians, targeting those who account for 80% of its prescriptions. In addition, we will target physicians who account for 40% of non-Tudorza® COPD prescriptions to increase the product's customer base. We believe that by providing highly targeted, focused resources we will significantly increase the level and intensity of one-to-one sales calls where the product benefits can be presented in detail. This will also serve to establish the customer base for future sales of Duaklir® once approved. Additionally, we will use existing AstraZeneca marketing materials, training and data to ensure branding continuity and drive promotional efficiency. As well as having a strong focus on Tudorza® we will continue to advance our NIOX® business. Our expanded sales team will focus 30% of its calls on allergists to promote NIOX®, and will also promote the products to Tudorza® target physicians.

We believe the combination of recent changes to the GOLD guidelines, Tudorza® and Duaklir®'s compelling product benefits and our focused commercialisation plans provide a strong foundation to capture a portion of a large and growing market.

Attractive transaction structure

In addition to the commercial opportunity offered by the products, the structure of the transaction is highly attractive. It provides Circassia with the benefits of a broader portfolio and significantly expanded commercial infrastructure without requiring funding from shareholders. It also allows the majority of the consideration to be deferred, with the amount payable dependent on the successful approval of Duaklir® and commercialisation of Tudorza®. As a result, the transaction comprises a number of stages with different amounts payable over a period of approximately two and a half years, up to a maximum of $230 million plus royalties on future Duaklir® US sales.

With AstraZeneca taking a $50 million upfront stake in Circassia, we welcome the blue chip pharmaceutical company as a major shareholder. We also anticipate that our commercial collaboration will fund the major expansion of Circassia's US commercial team as well as the Company's R&D contributions to ongoing clinical studies. With third-party funding anticipated to cover the remaining deferred payments, we expect the transaction to be earnings enhancing after one year, broadly cashflow neutral for three years and then cash generative.

Commercial growth platform

Prior to establishing our AstraZeneca collaboration we greatly strengthened our commercial capabilities to boost NIOX® revenues and build an attractive platform for third-party products. In the third quarter of 2016, we doubled the size of our US sales force to approximately 100, targeting over 7,000 key specialist and primary care physicians. We also built a US managed markets team to focus on major healthcare systems and extend NIOX® reimbursement coverage. Recent successes have increased coverage to an additional 2.8 million Americans in the first quarter of 2017 and we anticipate further advances in the coming months. Additionally, our US key accounts team is targeting over 160 large customers with a particular focus on healthcare systems, integrated delivery networks, multi-site practises and federal organisations where penetration is currently low. This investment is now beginning to deliver, and in Q1 2017 US clinical sales grew over 50% compared with the same period in 2016, with March representing the team's best monthly performance.

Alongside this growth in the US, we established a direct presence in the UK, launching our new sales force at the end of 2016. The team is actively targeting both healthcare commissioners and specialist physicians, and in the first quarter of 2017 sales increased by approximately 15% compared with our revenues in the same period the prior year. In China, we also strengthened our commercial team during 2016 with the addition of medical and market access expertise to support the promotional activities of our distribution partners, and during the year revenues grew by approximately 70% in this important NIOX® market.

In addition to our sales team expansion, we are strengthening our commercial operations to support field-based activities. We have recently recruited an experienced head of global marketing and are expanding our marketing team in the US and adding marketing support in the UK.

As a result of this major commercial expansion, and future sales force growth under our collaboration with AstraZeneca, we are targeting a significantly broader customer base. With an established market-leading position in FeNO measurement, we anticipate continued NIOX® revenue growth in the coming year. We are also well positioned to attract additional products to broaden the Company's portfolio through acquisition, in-licensing or partnering, and we intend to pursue further opportunities in the coming year that fit our specialty strategy.

Respiratory portfolio

Fliveo® EU rights negotiations

Our lead asthma product, Fliveo®, is a particle-engineered fluticasone propionate formulation targeting substitution of GlaxoSmithKline's Flixotide® pMDI. Fliveo® is currently approved in the UK and the product was out-licensed under previous ownership in a number of major territories, including the EU and US. The United States remains the product's largest potential market, and during the second half of 2016 we initiated discussions with our partner for the potential return of the commercialisation rights in the more modest marketplace in Europe, and we hope to finalise our approach in the coming months.

Seriveo® progressing

Seriveo®, Circassia's fluticasone / salmeterol asthma therapy, targets direct substitution of GSK's Seretide® pMDI. The product has a major market opportunity, with global sales of the GSK originator in pMDI and DPI formats totalling approximately $4.7 billion last year.

During 2016, we initiated a clinical pharmacokinetic study comparing two Seriveo® formulations with Seretide® to inform further development work. The Company recently received the results, which indicate the fluticasone component of one the formulations matched the originator product. Additionally, the formulation's salmeterol absorbed dose and peak plasma concentration were in the same range as Seretide®. However, the salmeterol components differed at the 90% confidence interval required for approval. Based on these results and previous development data Circassia plans to adjust the formulation and delivery device and reiterate the trial before moving to a registration pharmacokinetic study. As a result, the Company anticipates filing a Marketing Authorisation Application in H1 2019.

Spiriva® DPI substitute advancing

During 2016, we further broadened our respiratory portfolio adding a particle-engineered formulation of tiotropium bromide to the pipeline. The product is designed as a direct substitute for Boehringer Ingelheim's COPD treatment Spiriva Handihaler®. Global revenues for Spiriva® totalled $3.3 billion in 2016. The product has made good initial progress and we are initiating formulation scale-up prior to progressing into an exploratory pharmacokinetic clinical study in H1 2018.

Novel formulations for COPD

In the second half of 2016, Circassia initiated development of two products targeting an underserved segment of the COPD market, in particular patients with more severe COPD. Circassia has completed initial market research for the products, confirming that both have significant commercial opportunities. Formulation development is progressing well, and the most advanced, a fixed dose LABA / LAMA combination based on existing approved products, is on track to begin an initial clinical study in 2018.

Non-strategic products

Circassia is focused on building a world-class specialty pharmaceutical company and we intend to divest products that do not fit this strategic focus. Two such out-of-focus COPD products are a 'triple' fixed dose combination and a novel glycopyrronium bromide formulation that is currently partnered in China, Taiwan, Hong Kong and Macau. Both have completed first-in-human clinical studies, which provide a clinical foundation to inform potential partners' development plans. In these studies, the glycopyrronium formulation demonstrated significantly improved lung function versus placebo, while the fixed dose triple combination showed bioavailability for each of the components following inhalation.

Allergy portfolio

Allergy investment curtailed

During 2016, Circassia received unexpected and highly disappointing phase III results from its lead allergy product. Subsequent analysis and expert review concluded that the study's design and conduct were robust and there were no major confounding factors. As a result, the Company minimised expenditure on its broader allergy portfolio, halting development activities for its grass and ragweed allergy products. As ongoing house dust mite and birch allergy studies were well advanced, and required only limited further investment, these continued. During the summer, the Company received results from the birch allergy study, which were encouraging, although this was an early-stage, small-scale (n=64) trial with limited efficacy endpoints.

Subsequently, the Company received disappointing results from its large-scale house dust mite allergy study, which did not meet its primary efficacy endpoint. Following receipt of these data, Circassia has halted investment in its allergy portfolio and will no longer progress its allergy product development programmes.

Focus on costs

During 2016, Circassia took a number of measures to drive efficiencies across its broader business, reduce expenditure in the allergy portfolio and contain costs.

· The Company completed a review of its facilities and consolidated operations onto single sites in the United States and Sweden where previously we operated out of two locations. We have now closed our Chicago and Solna sites and transferred operations to our facilities in Morrisville, North Carolina and Uppsala respectively. In addition, we have downsized our activities in Oxford, vacating one of our previous premises. As a result, we anticipate cutting future facilities costs by approximately 40%.

· As part of this efficiency drive we decreased the size of our back office support functions, and our G&A headcount is now 15% lower than at the end of H1 2016 despite the substantial increase in our commercial presence. We also reduced the size of our R&D organisation and refocused the team on our respiratory programmes. Although we have established a dedicated in-house device team to drive the development of our inhaled products and next generation NIOX® device, our R&D headcount remains 20% lower than at the end of H1 2016, and following the decision to halt investment in our allergy portfolio we intend to conduct a further review of future requirements.

Summary and outlook

The past year has been a period of challenges and major opportunities for Circassia. Our market-leading asthma management products continue to grow strongly and our respiratory portfolio is advancing. We also established a transformational commercial collaboration with AstraZeneca that leverages and expands our US infrastructure and brings new products to the Company. However, this progress was tempered by disappointing allergy data. Following these results we moved quickly to conserve resources, expand our commercial footprint and broaden our respiratory pipeline with the addition of several new products.

During the coming months we intend to build on this progress. We plan to rapidly expand our US sales force to promote Tudorza® and increase sales of our NIOX® products. With a growing specialty commercial presence in key markets, we are becoming increasingly well placed to attract further products, and we hope to exploit this opportunity in the coming year.

We also anticipate extending our NIOX VERO® usage in the US and Europe based on our successful clinical studies and recent filing in the United States. In parallel, we intend to progress our respiratory development programmes with our Spiriva® substitute and novel COPD treatment formulations moving towards the clinic and our Seretide® pMDI substitute advancing towards the final phase of pharmacokinetic testing.

With a clear strategy, strong commercial products, compelling pipeline and robust balance sheet we have the foundations of a highly successful business. Despite the setbacks of 2016 we remain determined to build a leading specialty pharmaceutical Company and are making good progress towards our goal.

FINANCIAL REVIEW

The financial results for the year reflect two main factors that differentiate this year from 2015. The first is impairment of goodwill that was allocated to the allergy franchise to reflect the future potential benefit of the acquired Aerocrine commercial infrastructure in the commercialisation of the Company's allergy portfolio. Following the disappointing results from the cat allergy phase III study, this goodwill has been fully impaired. The second factor is the full year's contribution from the NIOX® and Prosonix respiratory businesses compared with a little over half a year's contribution in 2015 following their acquisition on 18 June 2015 and 15 June 2015 respectively.

The financial results for the year to 31 December 2016 are set out in the table below.

	Underlying operations	Non-underlying items²	Total Group 2016	Total Group 2015
	£m	£m	£m	£m
Revenue	23.1	-	23.1	10.8
Cost of goods sold	(8.0)	-	(8.0)	(4.3)
Gross profit	15.1	-	15.1	6.5
Sales and marketing	(28.9)	(75.8)	(104.7)	(13.5)
Research & development	(42.3)	(3.9)	(46.2)	(46.8)
Administrative expenditure	(15.4)	(0.3)	(15.7)	(13.7)
Other gains	-	-	-	1.1
Operating loss	(71.5)	(80.0)	(151.5)	(66.4)
Finance income net	6.0	-	6.0	3.5
Share of profit of joint venture	0.6	-	0.6	0.1
Loss before tax	(64.9)	(80.0)	(144.9)	(62.8)
Taxation	7.5	-	7.5	12.8
Loss for the financial year	(57.4)	(80.0)	(137.4)	(50.0)
Cash¹	117.4	-	117.4	203.8

¹ Includes cash and cash equivalents and short-term deposits

² Includes impairment of goodwill (£74.5 million), intangible assets impairment (£0.3 million), restructuring costs (£2.8 million) and cost for termination of certain contracts (£2.4 million)

Revenue

Revenue of £23.1 million (2015: £10.8 million) reflects the full year contribution from the NIOX® business that accounts for nearly all the Group's turnover for the year. These revenues include sales of NIOX VERO® and NIOX MINO® for clinical use in the US, Europe and rest of world of £18.0 million (2015: £7.3 million), and for research use in pharmaceutical companies' clinical studies of £4.5 million (2015: £2.6 million), as well as other revenues including licence income and freight of £0.6 million (2015: £0.4 million).

In 2015, out of £10.8 million revenue, £10.3 million was NIOX® sales from 19 June to 31 December 2015 and £0.5 million was licence fees and milestone payments related to the respiratory business acquired on 15 June 2015.

Gross profit

Gross profit on NIOX® sales was £15.1 million (2015: £6.1 million), with a gross margin of 65% (2015: 59%). This increase reflects the continuous growth of NIOX® test sales.

Sales and marketing

During the year, the underlying sales and marketing expenditure was £28.9 million (2015: £13.5 million). This reflects a significant strengthening of the Group's commercial presence in the US. In particular, the US sales force increased substantially and the teams supporting the commercial infrastructure expanded in support of the Group's sales effort.

Goodwill arising on the acquisition of Aerocrine last year was allocated to reflect the potential benefit provided by the acquired commercial infrastructure in the future commercialisation of the allergy franchise. This goodwill has now been fully impaired following the disappointing outcome of the cat allergy phase III study resulting in a charge of £74.5 million to sales and marketing expenses. Goodwill impairment comprises the majority of the non-underlying items included in sales and marketing costs. For the full breakdown of non-underlying items see note 10 of the consolidated financial statements.

Research and development

Underlying investment in research and development activities was £42.3 million (2015: £46.8 million). Of this, £19.1 million (2015: £30.5 million) relates to Circassia's portfolio of allergy candidates, £6.9 million (2015: £6.1 million) to the development of the respiratory portfolio and £5.3 million (2015: £2.0 million) to the NIOX® franchise, of which £2.0 million relates to an amortisation charge for acquired R&D technology. Costs not specific to R&D projects, including personnel costs, were £11.0 million (2015: £8.2 million).

Following the results from the cat allergy phase III study in June 2016, expenditure on the allergy portfolio was halted except for the following activities:

- Limited costs that had already been committed.

- Completion of the ongoing house dust mite allergy field study (TH005).

- Completion of the two year cat allergy follow up study (CP007A).

- Expenditure required to maintain drug product and drug stability programmes.

Of the £19.1 million expenditure on the allergy programme, £13.8 million was incurred in H1 2016 and £5.3 million in H2 2016. Of the total costs of £7.7 million (2015: £14.2 million) in respect of the house dust mite allergy programme, £2.2 million was incurred in H2 2016 on TH005. The total spend on the cat allergy programme was £5.5 million (2015: £9.8 million), of which £2.0 million was incurred in H2 mainly in respect of drug product and stability programmes, committed costs of the cat phase III study (CP007) and the two year follow-up study (CP007A). In H1 2016, the grass allergy programme moved into the final phase of clinical testing with the start of the registration field study (TG005), contributing £4.8 million of expenditure in the year, however the majority of activities were stopped after the cat allergy results.

Investment in the respiratory portfolio mainly relates to the Seretide® / Advair® pMDI substitute development programme and the tiotropium bromide product targeting direct substitution of Spiriva® DPI.

In addition, a charge of £3.9 million has been recorded as non-underlying research and development expenditure. Of this, £2.4 million relates to a contract provision for the manufacture of trial batches for allergy programmes, £1.2 million in redundancy costs and closure of the site in Solna and an impairment of £0.3 million for allergy licences and patents following the cat allergy results.

Administrative expenditure

Underlying administrative expenses includes overheads specific to corporate functions, centrally managed support functions and corporate costs. These increased to £15.4 million (2015: £13.7 million) reflecting a full year of costs of the two businesses acquired in June 2015.

Financial income

Net finance income increased to £6.0 million (2015: £3.5 million). Included in this is bank interest income of £0.9 million (2015: £1.7 million) and a net gain on foreign exchange of £5.2 million (2015: £1.8 million). The foreign exchange gain arose as a result of sterling weakening during the year against the US dollar and Swedish krona.

R&D tax credits on qualifying expenditure

Taxation for the year was £7.5 million credit (2015: £12.8 million credit). Included within this is a tax credit of £8.6 million (2015: £10.3 million) recoverable under current legislation relating to R&D expenditure. The decrease over the previous year reflects the decrease in R&D expenditure qualifying for R&D tax credit, which is due in particular to the decrease in expenditure on the allergy portfolio.

Loss after tax and loss per share

Total loss for the financial year was £137.4 million (2015: £50.0 million), of which £137.3 million (2015: £49.9 million) was attributable to the owners of Circassia Pharmaceuticals plc. Basic loss per share attributable to the owners of Circassia Pharmaceuticals plc was 48p (2015: 20p). This includes impairment charges and other non-underlying items of £80.0 million. Excluding these costs, the loss per share for the underlying operations was 20p (2015: 20p).

Statement of financial position

The Group's net assets were £280.7 million at 31 December 2016 (2015: £409.7 million). The decrease includes impairment charges of £74.5 million and £0.3 million to goodwill and intangible assets respectively as well as reduction in cash. Further detail on the impairment charges can be found in notes 14 and 15. Other factors are commented on below.

The weakening of pound sterling against the US dollar and Swedish krona resulted in a credit of £9.8 million to Other Comprehensive Income and Expense due to retranslation of the Group's overseas operations.

Current liabilities were £21.5 million (2015: £48.3 million). The decrease is mainly due to the payment in January 2016 of contingent consideration of £30.0 million for the purchase of Prosonix. This reduction was partly offset by £2.3 million restructuring costs accrued at the year-end (2015: £nil) relating to cost reduction initiatives.

Current tax assets were £8.7 million at 31 December 2016 (2015: £11.8 million), representing the R&D tax credit due from H M Revenue and Customs. A payment of £11.8 million was received in H2 2016 from HMRC.

Restructuring provisions for Chicago (US) and Solna (Sweden) offices

Following a review of operations to drive efficiencies across the wider business, the Company decided to consolidate its US and Swedish operations and close its Chicago and Solna offices.

As a result, Chicago office closure costs of £1.3 million included in the financial statements relate to severance and compensation for loss of office, and property cost commitments that are deemed non-recoverable. These costs were recorded as non-underlying sales and marketing expenditure. It is expected that the consolidation in the US will ultimately yield annual cost savings of £4.6 million.

Similarly, Solna office closure costs of £1.0 million included in the financial statements relate to severance and compensation for loss of office, and non-recoverable property cost commitments. These costs were recorded as non-underlying expense in sales and marketing (£0.2 million), research and development (£0.5 million), and administrative expenditure (£0.3 million). It is expected that this consolidation will provide annual cost savings of £1.6 million.

Cash flow

The Group's cash position (including short-term deposits) decreased from £203.8 million at 31 December 2015 to £117.4 million at 31 December 2016. Main cash outflows were:

· £30.0 million deferred consideration paid to the former shareholders of Prosonix in January 2016 following receipt of UK marketing authorisation for its lead product in December 2015.

· £56.7 million cash used in operating activities (2015: £55.8 million) reflecting a full year of operations of the two businesses acquired in June 2015 as well as R&D expenditure and the expansion of the US sales and marketing infrastructure.

· £3.2 million payment to acquire the remaining 2.1% of issued shares of Aerocrine AB under the Swedish formal 'squeeze out' procedure. Please see note 28 for further details of the transaction.

The exchange gain on cash and cash equivalents for the period was £4.1 million (2015: £0.6 million).

Events occurring after the reporting date

On 17 March, Circassia announced a collaboration and profit share arrangement with AstraZeneca and securing of certain US commercial rights to Tudorza® and Duaklir® for a maximum total consideration of US $230 million. Circassia will also make R&D contributions of up to US$62.5 million payable to AstraZeneca as deferred payments and will pay royalties on future sales of Duaklir®. Further details are available in note 34 of the financial statements.

Summary and outlook

Following the significant setback of the cat allergy results in June 2016, Circassia reacted swiftly with a significant cost reduction programme to curtail expenditure on the allergy portfolio and consolidate operations with the closure of Chicago and Solna together with other redundancies across the Group. In addition, the Company invested significantly in its US commercial operations, increasing field force numbers from 40 to approximately 100 in July and August 2016. This decision was recently validated by the announcement in March 2017 of the collaboration with AstraZeneca to secure US commercial rights to Tudorza® and Duaklir® as well as the continued growth of the Company's NIOX® products.

As a result of these initiatives Circassia continues to have a robust balance sheet, with cash of £117.4 million as at 31 December 2016 and is well funded to deliver on its strategy. With a period of challenges now behind the Company, Circassia looks forward to further strengthening its business in 2017.

Julien Cotta

Chief Financial Officer

Consolidated statement of comprehensive income

for the year ended 31 December 2016

	Notes	2016			2015
		Underlying operations	Non-underlying items (note 10)	Total	Total
		£m	£m	£m	£m

Revenue	4	23.1	-	23.1	10.8
Cost of sales		(8.0)	-	(8.0)	(4.3)
Gross profit		15.1	-	15.1	6.5

Research and development costs		(42.3)	(3.9)	(46.2)	(46.8)
Sales and marketing		(28.9)	(75.8)	(104.7)	(13.5)
Administrative expenses		(15.4)	(0.3)	(15.7)	(13.7)
Other gains	9	-	-	-	1.1
Operating loss	7	(71.5)	(80.0)	(151.5)	(66.4)

Finance costs	6	(0.1)	-	(0.1)	-
Finance income	6	6.1	-	6.1	3.5
Share of profit of joint venture	17	0.6	-	0.6	0.1
Loss before tax		(64.9)	(80.0)	(144.9)	(62.8)

Taxation	11	7.5	-	7.5	12.8
Loss for the financial year		(57.4)	(80.0)	(137.4)	(50.0)

Loss attributable to:
Owners of Circassia Pharmaceuticals plc		(57.3)	(80.0)	(137.3)	(49.9)
Non-controlling interests		(0.1)	-	(0.1)	(0.1)
Loss for the financial year		(57.4)	(80.0)	(137.4)	(50.0)

Items that may be subsequently reclassified to profit or loss
Share of other comprehensive income of joint venture	17	0.1	-	0.1	-
Currency translation differences	28	9.8	(0.1)	9.7	3.1
Total other comprehensive income / (expense) for the year		9.9	(0.1)	9.8	3.1
Total comprehensive expense for the year		(47.5)	(80.1)	(127.6)	(46.9)

Total comprehensive expense attributable to:
Owners of Circassia Pharmaceuticals plc	(47.4)	(80.1)	(127.5)	(46.8)
Non-controlling interests	(0.1)	-	(0.1)	(0.1)
Total comprehensive expense for the year	(47.5)	(80.1)	(127.6)	(46.9)

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	12	(0.48)	(0.20)

The results for the financial years above are derived entirely from continuing operations.

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 profit for the parent company for the year was £2.4 million (2015: loss £3.2 million).

The notes on pages 21 to 50 are an integral part of these consolidated financial statements.

Consolidated statement of financial position

as at 31 December 2016

	Notes	2016	2015
		£m	£m
Assets
Non-current assets
Property, plant and equipment	13	1.4	1.3
Goodwill	14	9.7	81.2
Intangible assets	15	167.1	165.6
Deferred tax assets	23	16.6	17.2
Investment in joint venture	17	0.9	0.2
		195.7	265.5

Current assets
Inventories	18	4.6	3.0
Trade and other receivables	19	7.7	5.1
Current tax assets	11	8.7	11.8
Short-term bank deposits	20	20.0	37.8
Cash and cash equivalents	20	97.4	166.0
		138.4	223.7
Total assets		334.1	489.2
Equity and liabilities
Ordinary shares	24	0.2	0.2
Share premium	26	563.8	564.0
Other reserves	28	12.5	2.8
Accumulated losses	27	(295.8)	(158.5)
		280.7	408.5
Non-controlling interests		-	1.2
Total equity		280.7	409.7
Liabilities Non-current liabilities
Deferred tax liabilities	23	31.9	31.2
		31.9	31.2

Current liabilities
Trade and other payables	21	21.5	48.3
		21.5	48.3
Total liabilities		53.4	79.5
Total equity and liabilities		334.1	489.2

The notes on pages 21 to 50 are an integral part of these consolidated financial statements.

The financial statements on pages 15 to 50 were authorised for issue by the Board of Directors on
25 April 2017 and were signed on its behalf by

Steven Harris Julien Cotta

Chief Executive Officer Chief Financial Officer
Circassia Pharmaceuticals plc Circassia Pharmaceuticals plc

Registered number: 05822706

Parent Company statement of financial position

as at 31 December 2016

	Notes	2016	2015
		£m	£m
Assets
Non-current assets
Investments in subsidiaries	16	262.0	242.6
		262.0	242.6
Current assets
Trade and other receivables	19	220.9	185.0
Short-term bank deposits	20	20.0	37.8
Cash and cash equivalents	20	73.0	130.7
		313.9	353.5
Total assets		575.9	596.1
Equity and liabilities
Equity attributable to the owners of the Company
Ordinary shares	24	0.2	0.2
Share premium	26	563.8	564.0
Other reserves	28	6.1	3.7
Retained earnings/(accumulated losses)	27	0.4	(2.0)
Total equity		570.5	565.9

Liabilities
Current liabilities
Trade and other payables	21	5.4	30.2
		5.4	30.2
Total equity and liabilities		575.9	596.1

The notes on pages 21 to 50 are an integral part of these financial statements.

The financial statements on pages 15 to 50 were authorised for issue by the Board of Directors on

25 April 2017 and were signed on its behalf by

Steven Harris Julien Cotta

Chief Executive Officer Chief Financial Officer
Circassia Pharmaceuticals plc Circassia Pharmaceuticals plc

Registered number: 05822706

Consolidated and parent Company statement of cash flows

for the year ended 31 December 2016

		Group		Company
		2016	2015	2016	2015
	Notes	£m	£m	£m	£m
Cash flows from operating activities
Cash (used in) / generated from operations	29	(68.4)	(64.9)	1.9	(5.8)
Interest paid		(0.1)	-	(0.1)	-
Tax credit received		11.8	9.1	-	-
Net cash (used in) / generated from operating activities		(56.7)	(55.8)	1.8	(5.8)

Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired		(0.2)	(161.9)	(19.0)	(206.8)
Purchases of property, plant and equipment	13	(0.7)	(0.2)	-	-
Contingent consideration payment	21	(30.0)	-	(30.0)	-
Purchases of intangible assets	15	-	(0.1)	-	-
Interest received		0.7	3.0	0.7	2.9
Receipt on maturity of forward contract		-	1.1	-	-
Repayment of borrowings		-	(28.1)	-	-
Loans granted to subsidiary undertakings		-	-	(29.0)	(63.5)
Decrease in short-term bank deposits		17.8	119.1	17.8	119.1
Net cash used in investing activities		(12.4)	(67.1)	(59.5)	(148.3)

Cash flows from financing activities
Proceeds from issue of ordinary shares	24	-	266.1	-	266.1
Purchase of treasury shares	33	(0.4)	(0.3)	-	-
Transactions with non-controlling interests	28	(3.2)	(7.2)	-	-
Net cash (used in) / generated from financing activities		(3.6)	258.6	-	266.1

Net (decrease)/increase in cash and cash equivalents		(72.7)	135.7	(57.7)	112.0
Cash and cash equivalents at 1 January	20	166.0	29.7	130.7	18.8
Exchange gains/(losses) on cash and cash equivalents		4.1	0.6	-	(0.1)
Cash and cash equivalents at 31 December	20	97.4	166.0	73.0	130.7

The notes on pages 21 to 50 are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity

for the year ended 31 December 2016

	Notes	Share capital	Share premium	Other ⁽¹⁾ reserves	Accumulated losses	Total	Non-controlling interests	Total equity
		£m	£m	£m	£m	£m	£m	£m
At 1 January 2015	24, 26, 27, 28	0.2	297.9	1.3	(108.6)	190.8	-	190.8
Loss for the financial year		-	-	-	(49.9)	(49.9)	(0.1)	(50.0)
Other comprehensive income
Currency translation differences	28	-	-	3.1	-	3.1	-	3.1
Total comprehensive expense	27, 28	-	-	3.1	(49.9)	(46.8)	(0.1)	(46.9)
Transactions with owners:
Issue of ordinary shares	24	-	266.1	-	-	266.1	-	266.1
Purchase of own shares	28	-	-	(0.3)	-	(0.3)	-	(0.3)
Employee share option scheme	28	-	-	2.7	-	2.7	-	2.7
Non-controlling interests on acquisition of subsidiary	28	-	-	-	-	-	4.5	4.5
Transactions with non-controlling interests	28	-	-	(4.0)	-	(4.0)	(3.2)	(7.2)
At 31 December 2015	24, 26, 27, 28	0.2	564.0	2.8	(158.5)	408.5	1.2	409.7
At 1 January 2016	24, 26, 27, 28	0.2	564.0	2.8	(158.5)	408.5	1.2	409.7
Loss for the financial year		-	-	-	(137.3)	(137.3)	(0.1)	(137.4)
Other comprehensive income
Share of other comprehensive income of joint venture		-	-	0.1	-	0.1	-	0.1
Currency translation differences	28	-	-	9.7	-	9.7	-	9.7
Total comprehensive expense	27, 28	-	-	9.8	(137.3)	(127.5)	(0.1)	(127.6)
Transactions with owners:
Purchase of own shares	28	-	-	(0.4)	-	(0.4)	-	(0.4)
Employee share option scheme	28	-	-	2.4	-	2.4	-	2.4
Expenses offset against share premium	26	-	(0.2)	-	-	(0.2)	-	(0.2)
Transactions with non-controlling interests	28	-	-	(2.1)	-	(2.1)	(1.1)	(3.2)
At 31 December 2016	24, 26, 27, 28	0.2	563.8	12.5	(295.8)	280.7	-	280.7

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

The notes on pages 21 to 50 are an integral part of these consolidated financial statements.

Parent Company statement of changes in equity

for the year ended 31 December 2016

	Notes	Share capital	Share premium	Share option reserve	Retained earnings /(Accumulated losses)	Total equity
		£m	£m	£m	£m	£m
At 1 January 2015	24, 26, 27, 28	0.2	297.9	1.3	1.2	300.6
Loss and total comprehensive expense	27	-	-	-	(3.2)	(3.2)
Transactions with owners:
Issue of ordinary shares	24	-	266.1	-	-	266.1
Employee share option scheme	28	-	-	2.4	-	2.4
At 31 December 2015	24,26, 27, 28	0.2	564.0	3.7	(2.0)	565.9
At 1 January 2016	24, 26, 27, 28	0.2	564.0	3.7	(2.0)	565.9
Profit and total comprehensive income	27	-	-	-	2.4	2.4
Transactions with owners:
Expenses offset against share premium	26	-	(0.2)	-	-	(0.2)
Employee share option scheme	28	-	-	2.4	-	2.4
At 31 December 2016	24, 26, 27, 28	0.2	563.8	6.1	0.4	570.5

The notes on pages 21 to 50 are an integral part of these financial statements.

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 a range of asthma and respiratory products.

Circassia Pharmaceuticals plc is a public limited company which is listed on the London Stock Exchange and incorporated and domiciled in England and Wales. 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 2016 and 2015 are audited. The consolidated financial information contained in this announcement does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts of the Company in respect of the financial year ended 31 December 2016 were approved by the Board of directors on 25 April 2017 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.

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.

Changes in accounting policy and disclosures

a) The following new standards and amendments to standards were mandatory for the first time for the financial year beginning 1 January 2016 but had no significant impact on the Group:

- Annual improvements to IFRS 2012-2014 cycle;

- Accounting for acquisition of interests in joint operations - amendments to IFRS 11;

- Clarification of acceptable methods of depreciation and amortisation - amendments to IAS 16 and IAS 38;

- Equity method in separate financial statements - amendments to IAS 27;

- Disclosure initiative - amendments to IAS 1; and

- Investment entities: applying the consolidation exception - amendments to IFRS 10, IFRS 12 and IAS 28.

b) Standards, amendments and interpretations to existing standards that are not yet effective (and in some cases, had not yet been adopted by the EU) and have not been early adopted by the Group:

IFRS 9 'Financial instruments', on 'Classification and measurement' (effective 1 January 2018). This is the first part of a new standard on classification and measurement of financial assets that will replace IAS 39. IFRS 9 has two measurement categories: amortised cost and fair value. All equity instruments are measured at fair value.

A debt instrument is at amortised cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it is at fair value through profit or loss. Amortised cost accounting will also be applicable for most financial liabilities, with bifurcation of embedded derivatives. The main change is that in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity's own credit risk is recorded in other comprehensive income rather than the income statement, unless this creates an accounting mismatch. The Group is yet to assess the impact of IFRS 9 on its financial information. The Group will also consider the impact of the remaining phases of IFRS 9.

IFRS 15 'Revenue from contract with customers' (effective 1 January 2018) supersedes current revenue recognition guidance including IAS 18 'Revenue' and specifies how and when entities recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. The impact on the Group's financial statements is currently being assessed.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

IFRS 16 'Leases' (effective 1 January 2019) removes the current distinction between an operating and finance lease, introducing consistent requirements for all leases similar to the current finance lease accounting. The impact on the Group's financial statements is currently being assessed and it is anticipated that the standard will be adopted in the Group's financial statements in line with the effective date stated above.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

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 historic experience and other factors, including expectations of future events that are believed to be reasonable in the circumstances.

Critical accounting estimates and assumptions

Where the Group makes estimates and assumptions concerning the future, the resulting accounting estimates will seldom exactly match actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below.

Fair value of acquired assets

Intangibles - Technology

In estimating the fair value of Technology, a variation of the Income Approach called the Relief from Royalty Method is used. This methodology is considered the standard and preferred technique to value assets such as trademark, core technology and patents.

Intangibles - Customer Relationships and IPR&D

The Customer Relationships and IPR&D have been valued based on the Excess Earnings Method. This valuation method is based on discounting the cash flows that can be attributed to the intangible asset, after taking into account the contribution of other assets.

Deferred tax

Deferred tax assets have been recognised in relation to tax losses carried forward in Aerocrine and Prosonix, but only to the extent of deferred tax liabilities arising in the same jurisdictions as the brought forward losses. Management have concluded that it is not yet probable that taxable profits will be available in the relevant jurisdictions to utilise brought forward losses in excess of deferred tax liabilities. Judgement is required in making this determination. Management anticipate that taxable profits will be considered probable for the purposes of recognising deferred tax assets under IAS 12 only when there is a stable history of profitability in those tax jurisdictions.

Share issue costs

In June 2015 the Group completed an offer and placement of new shares to finance the acquisitions of Aerocrine and Prosonix. Under IFRS incremental costs that are directly attributable to an equity transaction that otherwise would have been avoided had the equity instruments not been issued are accounted for through equity. Any acquisition related costs (for example due diligence) must be expensed in the income statement. There is a level of judgement in determining which costs meet the criteria of an equity transaction.

Goodwill and other intangible assets

Goodwill and other intangible assets 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 (CGU) containing the goodwill taking into account key assumptions (see note 14) about the product candidates. If the Group is unable to obtain regulatory approval or to commercialise its product candidates, or experiences significant delays in doing so, this could result in an impairment of the related goodwill and intellectual property rights.

Share based payments

Options were valued using the Black Scholes option pricing model or the Monte Carlo Simulation depending on the type of option issued. For each relevant option grant, individual valuation assumptions were assessed based upon conditions at the date of grant. The range of assumptions in the calculation of share based payments is given in note 25.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

Non-underlying items

The Group presents certain items of income and expense as non-underlying in the Consolidated Statement of Comprehensive Income. The determination that an item should be presented as non-underlying is a judgement of the management. The management considers whether providing separate disclosure is helpful in understanding the underlying performance of the business, based on the nature and size of the items and infrequency of the events giving rise to them.

Business combinations

The Group accounts for all business combinations under the acquisition method. Under the acquisition method, the identifiable assets acquired and liabilities and contingent liabilities assumed are measured at their fair value at the acquisition date. Judgements are made in determining the basis on which goodwill arising on business combinations is allocated to CGUs. Estimates are made in relation to the cash flow forecasts, probability factors and discount rates used for this purpose.

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 on transactions between Group companies are eliminated. Accounting policies of subsidiaries are consistent with the policies adopted by the Group.

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 three business segments during 2016, Allergy, Respiratory and NIOX®. 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.

Clinical study expenses

Where payments to clinical study sites are made in advance for the purchase of stocks of materials for use in clinical studies, the relevant costs are included in receivables as prepaid clinical study expenses. Expenses are charged to the income statement as clinical study services are carried out by third party suppliers, or clinical study materials are received.

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.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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, as its cash, cash equivalents and short-term deposits are sufficient to finance its current operations. 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).

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.

Goodwill and Intangible assets

Intangible fixed assets, relating to goodwill, customer relationships, technology and intellectual property rights acquired through licensing or assigning patents and know-how are carried at historic 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	Estimated useful lives
IPR&D	5 - 10 years
Customer Relationships	18 years
Technology	15 - 20 years
Software	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.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

Computer Software

Expenditure on software costs are 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.

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.

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	Depreciation rate
Leasehold improvements	Over the life of the unbreakable portion of the lease
Plant and equipment	10% - 33%
Fixtures and fittings	20%

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.

Trade and other receivables

Trade receivables are carried at original invoice amount less any provisions for doubtful debts. Provisions are made where there is evidence of a risk of non-payment, taking into account ageing, previous experience and general economic conditions. When a trade receivable is determined to be uncollectable, it is written off, firstly against any provision available and then to the income statement. Subsequent recoveries of amounts previously provided for are credited to the income statement. Other receivables are recognised initially at fair value and subsequently measured at amortised cost, using the effective interest method, less provision for impairment. A provision for impairment of other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

Trade payables

Trade 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.

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.

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.

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 25. 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 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.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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.

Revenue
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. Sales are reported as income when the significant risks and benefits have transferred to the buyer and the seller no longer has any significant control over the goods. The Group provides 12 month guarantees for certain products and includes a provision for estimated future claims.

Licence income

Technology and product licensing revenue represents amounts earned for licences granted under licensing agreements, including up-front payments, milestone payments and technology access fees. Revenues are recognised when this income becomes non-refundable under the terms of the licence and where the Group's obligations related to the revenues have been completed. Refundable licensing revenue is treated as deferred until such time that it is no longer refundable. In general, up-front payments are deferred and amortised in line with the period of development. Milestone payments relating to defined project achievements are recognised as income when the milestone is accomplished.

Royalty revenue is recognised on an accrued basis and represents income earned as a percentage of product sales in accordance with the relevant agreement net of any amounts contractually payable to others under the terms of the relevant royalty agreement.

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 'Finance costs or income'.

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.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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.

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 2015, the Company issued 95,469,537 Ordinary shares which funded the acquisitions of Aerocrine and Prosonix. The shares were offered at 288.05p each, raising gross proceeds of £275.0 million. The Group's capital is comprised of share capital and share premium, which are disclosed in notes 24 and 26 respectively. The Group monitors the availability of capital with regard to its forecast 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 pound sterling, but a significant proportion of its expenditure and subsidiary results are in various currencies including US dollars, Swedish krona and Euros. 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 Sterling, United States dollars, Euro or Swedish krona. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities. The nature or level of risk that the Group is exposed to has changed during 2016 as a result of the UK referendum decision to leave the European Union. It is considered that it is too early to quantify the exact impact for the Group and the Directors will keep the situation under review and act to mitigate any increased risks accordingly.

In relation to foreign currency risk, the Group's policy is to hold the majority of its funds in Sterling, and to use short - medium term currency purchase options (including spot purchases and forward contracts) and interest-bearing foreign currency deposits to manage short - medium term fluctuations in exchange rates.

The change in foreign exchange rates that is assessed to be reasonably likely for each currency in 2016 is 15% (2015: 5%).

At 31 December 2016, if the Euro had weakened/strengthened by 15% against Sterling with all other variables held constant, the post tax loss for the year would have been £1.6 million (2015: £0.5 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 2016 of a 15% weakening/strengthening of the US dollar against Sterling with all other variables held constant would have been a decrease/increase of £0.6 million (2015: £1.3 million).

The impact on post tax loss at 31 December 2016 of a 15% weakening/strengthening of the Swedish krona against Sterling with all other variables held constant would have been a decrease/increase of £0.3 million (2015: £1.1 million).

The Group is also exposed to currency translation risk in respect of the foreign currency denominated assets and liabilities of its overseas subsidiaries. At present, the Group does not consider this to be a significant risk since the Group does not intend to move assets between Group companies.

Notes to the financial statements

2. Financial and capital risk management (continued)

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 2016 would have been an increase/decrease of £0.1 million (2015: £0.2 million) due to changes in the amount of interest receivable.

Credit risk

The Group's policy following Admission to the London Stock Exchange is to place funds with financial institutions which have a minimum credit rating with Fitch IBCA of A- long term / F1 short-term. During 2016 the Group placed funds on deposit with 7 banks (2015: 10 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.

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. There were no financial liabilities outstanding for periods greater than one year. The amounts disclosed in the table are the contracted undiscounted cash flows:

At 31 December

Less than 1 year

2016

£m

Less than 1 year

2015

£m

Trade and other payables

21.5

48.3

Total

21.5

48.3

Derivative financial instruments and hedging

There were no derivatives at 31 December 2016 or 31 December 2015.

3. Operating segments

The chief operating decision-maker (the Executive Directors) 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 2016 operating segments are identified within the Group by product portfolios:

- Allergy: relates to a range of immunotherapy development products.

- NIOX® relates to the portfolio of products used to improve asthma diagnosis and management by measuring fractional exhaled nitric oxide (FeNO) and

- Respiratory relates to the portfolio of asthma and chronic obstructive pulmonary disease product candidates.

The table below presents information regarding the Group's operating segments for the years ended 31 December 2016 and 2015. During 2016 the Aerocrine and Prosonix businesses acquired in June 2015 have been further integrated into the Group resulting in consolidation of some operations (mainly support functions). Hence some costs are now shared between the segments and are not allocated to individual segments for decision making purposes.

Notes to the financial statements

3. Operating segments (continued)

Segment operating loss


Year ended 31 December 2016	Allergy	NIOX®	Respiratory	Unallocated	Total
	£m	£m	£m	£m	£m
Revenue (from external customers by country, based on the destination of the customer)
US	-	7.8	-	-	7.8
EU	-	7.8	-	-	7.8
Other countries	-	7.5	-	-	7.5
Total segment revenue	-	23.1	-	-	23.1

Research and development	(25.4)	(7.7)	(6.8)	(4.3)	(44.2)
Sales and marketing	-	(28.3)	-	-	(28.3)
Administrative expenses	-	(4.2)	-	(9.8)	(14.0)
Depreciation, amortisation and impairment ⁽¹⁾	(74.8)	(4.4)	(0.4)	(0.5)	(80.1)
Other	-	(8.0)	-	-	(8.0)
Operating loss	(100.2)	(29.5)	(7.2)	(14.6)	(151.5)

Year ended 31 December 2015	Allergy	NIOX®	Respiratory	Unallocated	Total
	£m	£m	£m	£m	£m
Revenue (from external customers by country, based on the destination of the customer)
US	-	3.6	0.3	-	3.9
EU	-	3.9	0.2	-	4.1
Other countries	-	2.8	-	-	2.8
Total segment revenue	-	10.3	0.5	-	10.8

Research and development	(37.3)	(2.0)	(5.5)	-	(44.8)
Sales and marketing	(5.2)	(7.5)	-	-	(12.7)
Administrative expenses	(10.6)	(2.2)	(0.9)	-	(13.7)
Depreciation and amortisation ⁽¹⁾	(0.1)	(2.2)	(0.6)	-	(2.9)
Other	1.1	(4.1)	(0.1)	-	(3.1)
Operating loss	(52.1)	(7.7)	(6.6)	-	(66.4)

⁽¹⁾Depreciation, amortisation and impairment is included on the face of the statement of comprehensive income within 'Research and development costs', 'Sales and marketing' and 'Administrative expenses'

Assets by segment


As at 31 December 2016	Allergy	NIOX®	Respiratory	Unallocated	Total
	£m	£m	£m	£m	£m
Cash, cash equivalents and short term deposits	-	7.3	3.5	106.6	117.4
Property, plant and equipment	-	-	-	1.4	1.4
Goodwill	-	5.3	4.4	-	9.7
Intangible assets	-	59.5	107.6	-	167.1
Deferred tax assets	-	-	-	16.6	16.6
Investment in joint venture	-	-	-	0.9	0.9
Inventories	-	-	-	4.6	4.6
Trade and other receivables	-	-	-	7.7	7.7
Current tax assets	-	-	-	8.7	8.7
Total assets	-	72.1	115.5	146.5	334.1

Aa at 31 December 2015	Allergy	NIOX®	Respiratory	Unallocated	Total
	£m	£m	£m	£m	£m
Cash, cash equivalents and short term deposits	200.4	0.4	3.0	-	203.8
Property, plant and equipment	-	-	-	1.3	1.3
Goodwill	72.1	4.7	4.4	-	81.2
Intangible assets	0.4	57.7	107.5	-	165.6
Deferred tax assets	-	-	-	17.2	17.2
Investment in joint venture	-	-	-	0.2	0.2
Inventories	-	-	-	3.0	3.0
Trade and other receivables	-	-	-	5.1	5.1
Current tax assets	-	-	-	11.8	11.8
Total assets	272.9	62.8	114.9	38.6	489.2

Notes to the financial statements

3. Operating segments (continued)

Following the cat allergy immunotherapy phase III study results in 2016, the Allergy portfolio value has been fully written down resulting in the goodwill impairment charge of £74.5 million. In addition, related licences and patents have been fully impaired resulting in £0.3 million impairment charge to Allergy intangible assets.

4. Revenue

The Group derives the following types of revenue:

	2016 £m	2015 £m
Sale of goods	23.0	10.3
Licence and milestone revenue	0.1	0.5
Total revenue	23.1	10.8

5. Employees and directors

The average monthly number of persons (including Executive Directors) employed by the Group during the year was:

By activity	2016 Number	2015 Number
Office and management	46	49
Sales and marketing	138	67
Research and development	107	88
Total average headcount	291	204

The average number of administration staff employed by the Company during the year, including Executive Directors, was 2 (2015: 2).

For 2015 medical affairs staff was reclassified from sales and marketing to research and development to align reporting with 2016.

Employee benefit costs	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
Wages and salaries	28.1	13.2	1.1	1.5
Social security costs	2.8	2.2	0.2	0.1
Other pension costs	1.2	0.5	0.1	0.1
Share options expense	2.4	2.7	-	-
Total employee benefit costs	34.5	18.6	1.4	1.7

The Group contributes to defined contribution pension schemes for its Executive Directors and employees. Contributions of £101,236 (included in other payables) were payable to the funds at the year end (2015: £52,979).

The details of Directors of the Group who received emoluments from the Group during the year are shown in the Annual report on remuneration in the Remuneration Committee report.

Key management personnel

Key management personnel during the year included Directors (Executive and Non-executive), the Chief Commercial Officer, the General Counsel, VP of Human Resources and the Chief Business Officer. The compensation paid or payable to key management is set out below.

	2016 £m	2015 £m
Short term employee benefits (including bonus)	2.3	3.4
Post-employment benefits	0.2	0.2
Share based payment	1.5	1.1
Total	4.0	4.7

Notes to the financial statements

6. Finance income and costs

	2016 £m	2015 £m
Finance costs:
Bank charges and interest payable	(0.1)	-
Total finance costs	(0.1)	-

Finance income:
Bank interest receivable	0.9	1.7
Net gain on foreign exchange	5.2	1.8
Total finance income	6.1	3.5

7. Operating expenses

Operating loss is stated after charging the following:

	2016 £m	2015 £m
Employee benefit costs (note 5)	34.5	18.6
Externally contracted research & development	27.6	36.4
Legal and professional fees including patent costs	5.1	6.8
Depreciation ⁽¹⁾	0.7	0.5
Amortisation ⁽¹⁾	4.6	2.4
Impairment of goodwill and other intangible assets	74.8	-
Operating lease	1.6	0.8

⁽¹⁾ Depreciation and amortisation is included on the face of the statement of comprehensive income within 'Research and development costs' and 'Sales and marketing'

8. Auditors' remuneration

Services provided by the Group's auditors and their associates

During the year the Group obtained services from the auditors as detailed below:

	2016 £m	2015 £m
Fees payable to the Group's auditors and their associates for the audit of the parent company and consolidated financial statements	0.2	0.2
Fees payable to the Group's auditors and their associates for other services:
The audit of the Company's subsidiaries	0.1	0.1
Other assurance services ⁽¹⁾	0.3	0.2
Total	0.6	0.5

⁽¹⁾ Other assurance services in 2016 mainly relate to due diligence services performed on perspective acquisitions. In 2015 the costs related to services performed in respect of the acquisition of Aerocrine and Prosonix. 2015 costs were offset against the share premium reserve.

9. Other gains

2016

£m

2015

£m

Forward contract foreign exchange gain

1.1

Notes to the financial statements

10. Non-underlying items

Non-underlying items charged to loss for the year comprise significant non-recurring items. Management considers that providing separate disclosure of such items is helpful in understanding the underlying performance of the business.

The following non-underlying items have been recognised in the income statement for the year:

	2016 £m	2015 £m
Charged to research and development costs
Onerous contract costs	2.4	-
Restructuring costs	1.2	-
Intangible assets impairment	0.3	-
	3.9	-
Charged to sales and marketing costs
Restructuring costs	1.3	-
Goodwill impairment	74.5	-
	75.8	-
Charged to administrative expenses
Restructuring costs	0.3	-
	0.3	-
Total	80.0	-

Onerous contract costs

Following the negative result from the cat allergy phase III study, management has reassessed R&D expenditure in line with the updated strategy resulting in termination of some trial batch manufacturing contracts.

Restructuring costs

Restructuring costs comprise cost optimisation initiatives including severance payments, compensation for loss of office, property and other contract termination costs.

Goodwill and other intangible assets impairment

Impairments totalling £74.8 million (2015: £nil) were recognised in the year following the negative result from the cat allergy phase III study. Further disclosures are given in notes 14 and 15.

11. 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 2016 and 2015 represents the credit receivable by the Group for the year and adjustments to prior years. The 2016 amounts have not yet been agreed with the relevant tax authorities.

	2016 £m	2015 £m
Current tax
United Kingdom corporation tax research and development credit	(8.6)	(10.3)
Adjustments in respect of prior year	(0.2)	(0.3)
Total current tax	(8.8)	(10.6)

Deferred tax
(Increase) / decrease in deferred tax assets	(0.8)	0.5
Increase / (decrease) in deferred tax liabilities	0.6	(2.7)
Adjustments in respect of prior year	1.5	-
Total deferred tax	1.3	(2.2)
Total tax	(7.5)	(12.8)

Notes to the financial statements

11. Taxation (continued)

The tax credit for the year is lower (2015: higher) than the standard rate of corporation tax in the UK of 20% (2015: 20.25%). The differences are explained below:

	2016 £m	2015 £m
Loss on ordinary activities before tax	(144.9)	(62.8)
Loss on ordinary activities before tax multiplied by the standard rate of corporation tax in the UK of 20% (2015: 20.25%)	(29.0)	(12.7)
Expenses not deductible for tax purposes (permanent differences)	15.6	0.8
Temporary timing differences on employee share options	0.2	-
Research & development relief uplift	(3.5)	(4.0)
Utilisation of losses not previously recognised	-	(0.2)
Adjustments in respect of prior year	1.3	(0.3)
Tax losses for which no deferred income tax asset was recognised	7.9	3.6
Tax credit for the year	(7.5)	(12.8)

At 31 December 2016, the Group has tax losses to be carried forward of approximately £292.8 million (2015: £223.3 million).

At 31 December 2016, the Group has current tax assets arising from tax credits in the United Kingdom for certain research and development expenditure of £8.7 million (2015: £11.8 million).

A reduction in the rate of UK corporation tax to 19% from 1 April 2017 and to 17% from 1 April 2020 has been substantively enacted. UK deferred tax assets and liabilities are recognised at a rate of 17% (2015: 18%).

12. 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.

	2016	2016	2016	2015
	Underlying operations	Non-underlying items	Total	Total

Loss from continuing operations attributable to ordinary equity owners of the parent company (£m)	(57.3)	(80.0)	(137.3)	(49.9)
Weighted average number of Ordinary shares in issue (Number)	284,889,171	284,889,171	284,889,171	249,578,520
Loss per share	£(0.20)	£(0.28)	£(0.48)	£(0.20)

As net losses from continuing operations were recorded in 2016 and 2015, the dilutive potential shares are anti-dilutive and therefore were excluded from the earnings per share calculation.

Notes to the financial statements

13. Property, plant and equipment

	Leasehold improvements	Fixtures and fittings	Plant and machinery	Assets under construction	Total property, plant and equipment
Group	£m	£m	£m	£m	£m
At 1 January 2015
Cost	0.3	-	-	-	0.3
Accumulated depreciation	-	-	-	-	-
Net book amount	0.3	-	-	-	0.3

Year ended 31 December 2015
Opening net book amount	0.3	-	-	-	0.3
Acquisition of subsidiaries	0.2	0.1	0.5	0.5	1.3
Additions	-	-	0.1	0.1	0.2
Depreciation	(0.2)	-	(0.3)	-	(0.5)
Transfers	-	-	0.6	(0.6)	-
Closing net book amount	0.3	0.1	0.9	-	1.3

At 31 December 2015
Cost	0.5	0.1	1.2	-	1.8
Accumulated depreciation	(0.2)	-	(0.3)	-	(0.5)
Net book amount	0.3	0.1	0.9	-	1.3

Year ended 31 December 2016
Opening net book amount	0.3	0.1	0.9	-	1.3
Additions	0.1	0.1	0.5	-	0.7
Depreciation	(0.2)	(0.1)	(0.4)	-	(0.7)
Exchange differences	-	0.1	-	-	0.1
Closing net book amount	0.2	0.2	1.0	-	1.4

At 31 December 2016
Cost	0.6	0.3	1.7	-	2.6
Accumulated depreciation	(0.4)	(0.1)	(0.7)	-	(1.2)
Net book amount	0.2	0.2	1.0	-	1.4

Notes to the financial statements

14. Goodwill

	2016 £m	2015 £m
At 1 January
Cost	81.2	1.8
Accumulated impairment	-	-
Net book amount	81.2	1.8

Year ended 31 December
Opening net book amount	81.2	1.8
Acquisition of businesses	-	77.2
Impairment	(74.5)	-
Exchange differences	3.0	2.2
Closing net book amount	9.7	81.2

At 31 December
Cost	84.2	81.2
Accumulated impairment	(74.5)	-
Net book amount	9.7	81.2

During 2015, Circassia completed the acquisition of two businesses, resulting in the recognition of £77.2 million of goodwill. The majority of this goodwill related to the acquisition of Aerocrine AB (NIOX® business). This goodwill was allocated to the NIOX® and Allergy (existing Circassia business) cash generating units (CGUs) for impairment testing purposes as the benefits of the Aerocrine acquisition were split between these CGUs. The goodwill recognised on the acquisition of Prosonix Limited (Respiratory business) has been allocated to the Respiratory CGU, being the CGU for impairment testing purposes.

The goodwill arising on the Aerocrine acquisition was attributable to the benefit of having an established sales force with future customer relationships. A large element of the advantages of having an established sales force was expected to accrue to the Allergy business as its products could have been cross sold to the same customers by this sales force. The acquisition of Aerocrine was based on a strategic benefit to the Allergy CGU in leveraging the existing sales force within the business to generate future sales within Circassia. Goodwill was allocated based on the proportion of discounted cash flows attributable to each CGU. For this reason, 94% of the goodwill acquired on acquisition of Aerocrine was allocated to the Allergy CGU.

Following the cat allergy immunotherapy phase III study results, the Allergy portfolio value has been fully discounted resulting in the impairment charge during 2016 for the Allergy CGU of £74.5 million.

The carrying value of goodwill, translated at year end exchange rates, is allocated to the following CGUs:

	2016	2015
Cash generating unit	£m	£m
Allergy	-	72.1
NIOX®	5.3	4.7
Respiratory	4.4	4.4
	9.7	81.2

The recoverable amount of the Respiratory CGU 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 Respiratory CGU was calculated over a ten year period using a discount factor of 13% (being a weighted average cost of capital rate for the CGU used by some analysts covering the Group). The calculations use pre-tax cash flow projections. In light of the stage of development of the product candidates these cover a ten year period. 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, particularly in relation to the assumed successful launch of the Group's products in the expected timeframe and the resulting sales.

Notes to the financial statements

14. Goodwill (continued)

As a result of recent strategic developments, management deemed it appropriate to change the valuation basis for the NIOX® CGU. The recoverable amount of the NIOX® CGU is assessed using a fair value less costs of disposal model (2015: value in use model). Fair value less costs of disposal is calculated using a discounted cash flow approach, with a pre-tax discount rate applied to the projected risk-adjusted pre-tax cash flows and terminal value of the CGU to which the goodwill is allocated. The valuation methodology uses significant inputs which are not based on observable market data, therefore this valuation technique is classified as level 3 in the fair value hierarchy.

The fair value less costs of disposal for the NIOX® CGU was calculated over a ten year period using a discount factor of 10% (being a weighted average cost of capital rate for the CGU used by some analysts covering the Group). The calculations use pre-tax cash flow projections. 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 key assumptions used for the valuations of the Respiratory and NIOX® CGUs are as follows:

	Respiratory CGU	NIOX® CGU
Valuation basis	Value in use	Fair value less cost of disposal
Anticipated launch dates	Group product candidate portfolio 2017 - 2026	n/a - commercialised product
Research and development costs	Based on management forecasts of clinical study costs for its product candidates, as well as related expenses associated with the regulatory approval process and commercialisation
Sales value, volume and growth rates	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
Advertising and promotion investment	Based on management forecasts of advertising and promotion required in the key territories
Profit margins	Margins reflect management's forecasts of sales values and costs of manufacture adjusted for its expectations of market developments	Margins reflect past experience adjusted for management's expectations of market developments
Period of specified projected cash flows	10 years	10 years
Terminal growth rate	Terminal growth rates based on management's estimate of future long term average growth rate 2016 - 1% 2015 - 1%
Discount rate	Discount rates based on weighted average cost of capital for the CGU, adjusted where appropriate. The discount factor has been adjusted to reflect the change in the risk profile of the CGU 2016 -13% 2015 - 10%	Discount rates based on weighted average cost of capital for the CGU, adjusted where appropriate. The discount factor has been adjusted to reflect the change in the risk profile of the CGU 2016 - 10% 2015 - 10%

In each case the valuations of Respiratory and NIOX® 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

Delayed launch of key product candidate in the Respiratory CGU

Management have, in their sensitivity analysis, assessed the impact of the possibility that the launch of one of the key product candidates in the Respiratory CGU is delayed by two years.

Reduction in revenue growth in the NIOX® CGU

Management have, in their sensitivity analysis, assessed the impact of the possibility that the sales in the NIOX® CGU growth is less than that of internal forecasts.

Neither change in the key assumption mentioned above would have resulted in an impairment charge.

Notes to the financial statements

15. Intangible assets

	IPR&D	Customer relationships	Technology	Other	Total intangible assets
Group	£m	£m	£m	£m	£m
At 1 January 2015
Cost	-	-	-	0.5	0.5
Accumulated amortisation and impairment	-	-	-	(0.3)	(0.3)
Net book amount	-	-	-	0.2	0.2

Year ended 31 December 2015:
Opening net book amount	-	-	-	0.2	0.2
Acquisition of businesses	88.9	29.9	46.0	1.2	166.0
Additions	-	-	-	0.1	0.1
Amortisation charge	-	(0.9)	(0.9)	(0.6)	(2.4)
Exchange differences	-	0.9	0.8	-	1.7
Closing net book amount	88.9	29.9	45.9	0.9	165.6

At 31 December 2015
Cost	88.9	30.8	46.8	1.8	168.3
Accumulated amortisation and impairment	-	(0.9)	(0.9)	(0.9)	(2.7)
Net book amount	88.9	29.9	45.9	0.9	165.6

Year ended 31 December 2016:
Opening net book amount	88.9	29.9	45.9	0.9	165.6
Amortisation charge	(0.1)	(1.8)	(2.0)	(0.7)	(4.6)
Impairment charge	-	-	-	(0.3)	(0.3)
Exchange differences	-	3.3	3.0	0.1	6.4
Closing net book amount	88.8	31.4	46.9	-	167.1

At 31 December 2016
Cost	88.9	34.3	50.0	1.6	174.8
Accumulated amortisation and impairment	(0.1)	(2.9)	(3.1)	(1.6)	(7.7)
Net book amount	88.8	31.4	46.9	-	167.1

An impairment test is performed annually based on the value in use of the intangible assets.

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. Due to the negative result of the investigational cat allergy immunotherapy phase III study and the subsequent impact on a wider Allergy product portfolio, related licences and patents have been fully impaired in 2016. Key assumptions and sensitivities used in the impairment review are disclosed in note 14.

In-Process Research & Development (IPR&D)

IPR&D comprise a portfolio of asthma and chronic obstructive pulmonary disease product candidates still in development.

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.

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.

Notes to the financial statements

15. Intangible assets (continued)

Technology

Prosonix achieves a sophisticated level of control over the physicochemical properties of drug particles via an integrated platform of unique and proprietary particle engineering technologies and formulation processes. The Relief from Royalty Method was used to determine the fair value of the acquired Technology. In the Relief from Royalty Method, estimates of the value of these types of intangible assets are made by capitalising the royalties saved because the company owns the intangible asset. A remaining useful life of 20 years was determined at acquisition and amortisation will commence when the products underpinned by this technology become available for commercial use. A value in use model is used in testing for impairment.

Aerocrine has been developing 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 and is continuously developing the measurement 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.

16. Investments in subsidiaries

	2016 £m	2015 £m
Investments in subsidiaries at 1 January	242.6	3.0
Investment in Prosonix Limited	-	100.3
Investment in Aerocrine AB	3.2	136.9
Investment in Circassia Pharmaceuticals Inc (formerly Aerocrine Inc)	15.5	-
Equity settled instruments granted to employees of subsidiaries	2.4	2.4
Impairment of Circassia Limited investment	(1.7)	-
Investments in subsidiaries at 31 December	262.0	242.6

The capital contribution relating to share based payment is for 7,660,654 (2015: 5,532,518) 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 25.

Following the cat allergy immunotherapy phase III study results, the investment relating to the Allergy technology purchase has been fully impaired.

Details of the Company's related entities are provided below. All subsidiaries are included in the consolidation and the Directors believe that the fair value of the investment in all subsidiaries exceeds their carrying values.

Name	Registered address	Nature of business	Proportion of ordinary shares held
Adiga Life Sciences	McMaster Innovation Park, Suite 305, 175 Longwood Road South Hamilton, Ontario, Canada	Pharmaceutical research	50%
Circassia Limited	The Magdalen Centre, Robert Robinson Avenue, Science Park, Oxford, OX4 4GA, UK	Pharmaceutical research and sale of devices for management of asthma	100%
Circassia Pharma Limited	The Magdalen Centre, Robert Robinson Avenue, Science Park, Oxford, OX4 4GA, UK	Pharmaceutical research	100%
Circassia Pharmaceuticals Inc	5151 McCrimmon Parkway, Suite 260, Morrisville, North Carolina 27560, USA	Pharmaceutical research and sale of devices for management of asthma	100%
Circassia AB	Fyrislundsgatan 80, 754 50, Uppsala, Sweden	Development and sale of devices for management of asthma	100%
Circassia AG	Louisenstraße 21, 61348, Bad Homburg, Germany	Sale of devices for management of asthma	100%
Prosonix Limited	The Magdalen Centre, 1 Robert Robinson Avenue, Oxford Science Park, Oxford, OX4 4GA, UK	Pharmaceutical research	100%

Notes to the financial statements

17. Investment in joint venture

	2016 £m	2015 £m
At 1 January	0.2	0.1
Share of profit	0.6	0.1
Share of other comprehensive income	0.1	-
At 31 December	0.9	0.2

Nature of investment in joint venture 2016 and 2015

Name of entity	Registered address	% of ownership interest	Nature of the relationship	Measurement method
Adiga Life Sciences	McMaster Innovation Park, Suite 305, 175 Longwood Road South Hamilton, Ontario, Canada	50	Note 1	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.

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 below is the summarised financial information for Adiga which is accounted for using the equity method.


Summarised statement of financial position at 31 December	2016 £m	2015 £m
Current assets
Trade and other receivables	1.0	1.2
Cash	0.8	0.2
	1.8	1.4
Current liabilities
Trade payables	-	(0.9)
Other payables	-	(0.1)
	-	(1.0)
Net assets	1.8	0.4
Summarised statement of comprehensive income
for the year ended 31 December	2016 £m	2015 £m
Revenue	1.8	2.3
Research & development costs	(1.8)	(2.6)
Administration expense	0.2	(0.2)
Profit/(loss) from continuing operations	0.2	(0.5)
Income tax	1.0	0.7
Post tax profit from continuing operations	1.2	0.2
Other comprehensive income:
Currency translation differences	0.2	-
Total comprehensive income	1.4	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).

Notes to the financial statements

17. Investment in joint venture (continued)

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	2016 £m	2015 £m
Opening net assets 1 January	0.4	0.2
Profit for the year	1.2	0.2
Other comprehensive income	0.2	-
Closing net assets	1.8	0.4
Interest in joint venture @ 50%	0.9	0.2
Carrying value	0.9	0.2

18. Inventories

	2016	2015
	£m	£m
Finished goods	4.6	3.0

Inventories recognised as an expense during the year ended 31 December 2016 amounted to £7.1 million (2015: £3.6 million). These were included in 'Cost of sales'.

Write-down of inventories to net realisable value amounted to £0.5 million (2015: £0.5 million). These were recognised as an expense during the year and included in 'Cost of sales'.

19. Trade and other receivables

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
Trade receivables	3.4	3.0	-	-
Other receivables	2.1	1.4	1.9	0.3
Prepayments and accrued interest	2.2	0.7	0.4	0.2
Receivables from subsidiary undertakings	-	-	218.6	184.5
Total trade and other receivables	7.7	5.1	220.9	185.0

The fair value of other receivables are their current book values. Included within receivables is £1.2 million (2015: £0.3 million) of trade receivables that were past due at the end of the reporting period 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 receivable is unsecured, interest free and has no fixed date of repayment. Recoverability of the amounts are dependent on the success of those studies and future profitability of subsidiary undertakings.

The carrying amounts of the Group and Company receivables, excluding prepayments and recoverable taxes, are denominated in the following currencies:

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
UK pound	0.6	0.4	192.1	176.2
United States dollar	2.0	1.4	27.7	4.8
Swedish krona	1.2	0.9	1.1	2.0
Euro	1.5	1.1	-	2.0
	5.3	3.8	220.9	185.0

Notes to the financial statements

20. Cash and cash equivalents and short-term bank deposits

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
Short-term bank deposit, with original maturity:
More than 3 months	20.0	37.8	20.0	37.8
Total short-term bank deposits	20.0	37.8	20.0	37.8

Cash and cash equivalents:
Cash at bank and in hand	97.4	166.0	73.0	130.7
Total cash and cash equivalents	97.4	166.0	73.0	130.7

The Group and Company cash and cash equivalents and short-term deposits are held with institutions with the following Fitch IBCA long-term rating:

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
AA	0.8	-	-	-
AA-	32.7	33.1	11.9	0.5
A+	35.0	72.7	35.0	70.0
A	48.9	90.7	46.1	90.7
A-	-	7.3	-	7.3
	117.4	203.8	93.0	168.5

The Group and Company cash and cash equivalents and short-term deposits are held in the following currencies at 31 December:

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
UK pound	96.0	138.3	90.9	135.5
United States dollar	3.2	22.2	-	20.5
Canadian dollar	0.6	8.5	-	7.3
Euro	10.5	7.5	2.1	5.2
Swiss franc	2.0	7.1	-	-
Swedish krona	5.0	20.2	-	-
Chinese yuan renminbi	0.1	-	-	-
	117.4	203.8	93.0	168.5

21. Trade and other payables

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
Trade payables	9.2	5.1	0.1	0.1
Social security and other taxes	0.5	0.3	-	-
Accruals	8.1	12.0	0.2	0.1
Other payables	3.7	0.9	-	-
Contingent consideration⁽¹⁾	-	30.0	-	30.0
Payables to subsidiary undertakings	-	-	5.1	-
Total trade and other payables	21.5	48.3	5.4	30.2

⁽¹⁾The contingent consideration arrangement required the Group to pay the former owners of Prosonix Limited £30.0 million upon the Company receiving a product marketing authorisation in respect of Prosonix Limited's lead product in the United Kingdom on or before 31 December 2016. UK marketing approval was received during 2015 and the contingent consideration of £30.0 million was paid on 6 January 2016. The fair value of the contingent consideration as at 31 December 2015 was equal to its book value and was no longer contingent.

Notes to the financial statements

22. 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:

	2016	2015
Assets	£m	£m
Cash and cash equivalents	97.4	166.0
Short-term bank deposits	20.0	37.8
Trade and other receivables	5.3	3.8
Loans and receivables	122.7	207.6


	2016	2015
Liabilities	£m	£m
Trade and other payables - current	18.4	47.5
Financial liabilities at amortised cost	18.4	47.5

The Company had the following financial instruments at 31 December each year:


	2016	2015
Assets	£m	£m
Cash and cash equivalents	73.0	130.7
Short-term bank deposits	20.0	37.8
Other receivables	2.3	0.5
Receivable from subsidiary undertaking	218.6	184.5
Loans and receivables	313.9	353.5


	2016	2015
Liabilities	£m	£m
Trade and other payables - current	0.3	30.2
Payables to subsidiary undertakings	5.1	-
Financial liabilities at amortised cost	5.4	30.2

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 IAS 39 'Financial Instruments Recognition and Measurement' 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 2016 or 31 December 2015.

Fair value

The Directors consider that the fair values of the Group's financial instruments do not differ significantly from their book values.

Notes to the financial statements

23. Deferred taxation

	Intangibles	Tax losses	Net deferred tax liability
	£m	£m	£m
As at 1 January 2015	-	-	-
Acquisitions	34.0	(17.8)	16.2
Change in rate	(2.2)	0.5	(1.7)
(Credit)/charge to the income statement	(0.6)	0.1	(0.5)
As at 31 December 2015	31.2	(17.2)	14.0

As at 1 January 2016	31.2	(17.2)	14.0
Charge to the income statement	0.7	0.6	1.3
As at 31 December 2016	31.9	(16.6)	15.3

In 2015 on acquisition of Aerocrine and Prosonix, the Group recognised a net deferred tax liability of £16.2 million, comprising a deferred tax liability of £34.0 million, offset by a deferred tax asset arising in the same jurisdictions of £17.8 million.

	2016 £m	2015 £m
Deferred tax liabilities	31.9	31.2
Deferred tax assets	(16.6)	(17.2)
Total deferred tax position	15.3	14.0

The Group has the following unrecognised potential deferred tax assets as at 31 December:

	2016 £m	2015 £m
Losses	51.8	40.2
Accelerated capital allowances	-	0.5
Share based payments and provisions	1.3	1.7
Total unrecognised deferred tax asset	53.1	42.4

24. Share capital

Authorised, called up and fully paid

2016

£m

2015

£m

284,889,171 (2015: 284,889,171) Ordinary shares of 0.08p each

0.2

On 11 June 2015, the Company issued 95,469,537 Ordinary shares which funded the acquisitions of Aerocrine and Prosonix. The shares were offered at 288.05p each, raising gross proceeds of £275.0 million. Deal costs relating to the acquisitions and the share issue were £12.8 million, of which £8.8 million was offset against the Share Premium Account and £4.0 million of indirect Admission costs were included in the income statement in 2015.

Notes to the financial statements

25. Share based payments

Share options

Options have been awarded under the Circassia PSP Share Option Scheme ("the PSP Scheme"), the Circassia EMI Share Option Scheme ("the EMI Scheme") and the Circassia Unapproved Share Option Scheme ("the Unapproved Scheme").

The share options outstanding can be summarised as follows:

	2016 Number of Ordinary shares ('000)	2015 Number of Ordinary shares ('000)
PSP Scheme⁽ⁱ⁾	6,610	4,336
EMI Scheme⁽ⁱⁱ⁾	535	535
Unapproved Scheme⁽ⁱⁱⁱ⁾	516	661
	7,661	5,532

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.

(i) Options granted under the PSP Scheme do not have a fixed exercise price and are subject to additional vesting performance conditions. 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.

(ii) Options granted under the EMI Scheme have a fixed exercise price based on the market price at the date of grant.

(iii) 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:

	2016	2016		2015	2015
	Number ('000)		Weighted average exercise price (£)	Number ('000)	Weighted average exercise price (£)
Outstanding at 1 January	5,532		0.15	3,165	0.25
Granted	3,346		0.0008	2,853	0.0008
Expired	-		n/a	-	n/a
Forfeited	(1,217)		0.29	(486)	0.0003
Exercised	-		n/a	-	n/a
Outstanding at 31 December	7,661		0.06	5,532	0.15
Exercisable at 31 December	1,014		0.36	708	0.0008

The exercise prices of the share options outstanding at the end of the year were £nil, £0.0008 and £2.42 (2015: £nil, £0.0008 and £2.42). The weighted average remaining contractual life of share options outstanding at the end of the period was 7.9 years (2015: 8.2 years).

There were no options exercised during the year ended 31 December 2016 or 2015.

Notes to the financial statements

25. Share based payments (continued)

Valuation models

The fair value of PSP share options granted during the period was determined using the Monte Carlo Simulation model and Black Scholes model dependent on the performance vesting conditions.

There have been no EMI Scheme or Unapproved Scheme options granted during the year (2015: nil), all options granted in previous years were valued using the Black Scholes model.

Black Scholes

There were no options granted during the year (2015: 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:

	2016	2015
Exercise price	£0.0008	£0.0008
Expected volatility	35%	32%
Expected life	3 years	3 years
Expected dividends	0%	0%
Risk free interest rate	0.4%	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 period determined using the Monte Carlo Simulation model at the grant date was £1.75 per option (2015: £2.04).

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 0.1 million Ordinary shares of 0.08p (2015: 0.6 million Ordinary shares of 0.08p) in issue at 31 December 2016.

Deferred shares

During the year the Group awarded 156,035 (2015: 110,845) deferred shares to Executive Directors as part of a deferred bonus for 2015. 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.

Notes to the financial statements

26. Share premium

Group and Company	2016 £m	2015 £m
At 1 January	564.0	297.9
Issue of new shares	-	274.9
Expenses relating to share issue	(0.2)	(8.8)
At 31 December	563.8	564.0

27. (Accumulated losses) / retained earnings


	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
At 1 January	(158.5)	(108.6)	(2.0)	1.2
(Loss)/profit for the year	(137.3)	(49.9)	2.4	(3.2)
At 31 December	(295.8)	(158.5)	0.4	(2.0)

28. Other reserves

	Share option reserve	Translation reserve	Treasury shares reserve	Transactions with non-controlling interests ^{(a, b)}	Total other reserves
Group	£m	£m	£m	£m	£m
At 1 January 2015	1.3	-	-	-	1.3
Employee share option scheme	2.7	-	-	-	2.7
Currency translation differences	-	3.1	-	-	3.1
Purchase of own shares (note 33)	-	-	(0.3)	-	(0.3)
Transactions with non-controlling interests	-	-	-	(4.0)	(4.0)
At 31 December 2015	4.0	3.1	(0.3)	(4.0)	2.8
Employee share option scheme	2.4	-	-	-	2.4
Currency translation joint venture	-	0.1	-	-	0.1
Other currency translation differences	-	9.7	-	-	9.7
Purchase of own shares (note 33)	-	-	(0.4)	-	(0.4)
Transactions with non-controlling interests	-	-	-	(2.1)	(2.1)
At 31 December 2016	6.4	12.9	(0.7)	(6.1)	12.5

^(a)On 1 July and 4 July 2015, the Group acquired an additional 4.6% and 0.7% respectively of the issued shares of Aerocrine AB for SEK94.3 million (£7.2 million). Immediately prior to the purchase, the carrying amount of the existing 7.4% non-controlling interests in Aerocrine AB was £4.5 million. The Group recognised a decrease in non-controlling interests of £3.2 million and a decrease in equity attributable to owners of the parent of £4.0 million.

^(b)On 13 May 2016, the Group acquired the remaining 2.1% of the issued shares of Aerocrine AB for SEK37.6 million (£3.2 million) to become the owner of 100% of the shares in Aerocrine AB. Immediately prior to the purchase, the carrying amount of the existing 2.1% non-controlling interests in Aerocrine AB was £1.1 million. The Group recognised a decrease in non-controlling interests of £1.1 million and a decrease in equity attributable to owners of the parent of £2.1 million.

The effect on the equity attributable to the owners of Circassia Pharmaceuticals plc is summarised as follows:

	2016 £m	2015 £m
Carrying amount of non-controlling interests acquired	1.1	3.2
Consideration paid to non-controlling interests	(3.2)	(7.2)
Excess of consideration paid recognised in the transactions with non-controlling interests reserve within equity	(2.1)	(4.0)

Notes to the financial statements

28. Other reserves (continued)

Company	Share option reserve	Total other reserves
	£m	£m
At 1 January 2015	1.3	1.3
Employee share option scheme	2.4	2.4
At 31 December 2015	3.7	3.7
Employee share option scheme	2.4	2.4
At 31 December 2016	6.1	6.1

29. Cash used in operations

Reconciliation of (loss)/profit before tax to net cash used in operations

	Group		Company
	2016 £m	2015 £m	2016 £m	2015 £m
Continuing operations
(Loss)/profit before tax	(144.9)	(62.8)	2.4	(3.2)
Adjustment for:
Interest income	(0.9)	(1.7)	(0.9)	(1.6)
Interest expense	0.1	-	0.1	-
Depreciation	0.7	0.5	-	-
Amortisation	4.6	2.4	-	-
Impairment	74.8	-	1.7	-
Share of joint venture profit	(0.6)	(0.1)	-	-
Fair value gain on forward contract	-	(1.1)	-	-
Share based payment charge	2.4	2.7	-	-
Foreign exchange on non-operating cash flows	(7.8)	(1.1)	-	0.1
Changes in working capital:
(Increase) / decrease in trade and other receivables	(1.4)	1.5	(1.6)	(0.3)
Increase in inventories	(1.2)	(0.4)	-	-
Increase / (decrease) in trade and other payables	5.8	(4.8)	0.2	(0.8)
Net cash (used in) / generated from operations	(68.4)	(64.9)	1.9	(5.8)

30. Contingent liabilities

There were no contingent liabilities at 31 December 2016 or at 31 December 2015.

31. 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:

	2016 £m	2015 £m
Due within one year	1.0	1.0
Due between one and five years	1.7	0.8
Over five years	0.7	-

The Group leases various offices and warehouses under non-cancellable operating leases expiring within one to over five years.

32. Capital commitments

The Group had no capital commitments at 31 December 2016 or at 31 December 2015.

Notes to the financial statements

33. 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 2016 are as follows: Invesco Asset Management (35.13% of total voting rights); Woodford Investment Management (22.17% of total voting rights); OppenheimerFunds Inc (10.58% of total voting rights); Touchstone Innovations (9.30% of total voting rights); Aviva Investors (5.57% of total voting rights).

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

Related party	2016 Purchases £'000	2015 Purchases £'000	2016 Payables £'000	2015 Payables £'000
Adiga Life Sciences (Joint venture)	1,929	1,370	-	7
Touchstone Innovations⁽¹⁾	42	42	-	-
Iterum Pharmaceuticals LLC⁽²⁾	-	89	-	-
⁽¹⁾ 'Purchases' includes compensation paid or payable in respect of services provided by Russ Cummings as Non-Executive Director of the Company. ⁽²⁾Iterum Pharmaceuticals LLC was considered a related party by virtue of Paul Edick, a Non-Executive Director of the Company, being the Chairman of the Board until 19 May 2016.

Disclosure of compensation provided to Directors is given in the Annual Report on Remuneration and in note 5 for key management. Included within key management personnel is Chief Commercial Officer Linda Szyper. Linda is the spouse of Paul Edick, a Non-Executive Director of the Company who stepped down on 19 May 2016. The compensation paid or payable to Linda up to 19 May 2016 is shown below:

	2016 £m	2015 £m
Linda Szyper:
Short-term employee benefits (including bonus)	0.3	0.5
Share based payment	0.1	0.1
Total	0.4	0.6

Company

The following transactions with subsidiaries occurred in the year:


Related party	2016 £m	2015 £m
Rendering of services to Circassia Limited ⁽¹⁾	0.8	1.3
Settlement of liabilities on behalf of the subsidiaries	(5.5)	(139.2)
Net transfer of funds to subsidiaries	33.6	201.4
	28.9	63.5

⁽¹⁾Remuneration costs (excluding share options charges) relating to Steven Harris and Julien Cotta in respect of services rendered to Circassia Limited.

	2016 £m	2015 £m
Balances due from subsidiary companies	218.6	184.5
Balances due to subsidiary companies	(5.1)	-

The amount due is unsecured, interest free and has no fixed date of repayment.

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. A total of £414,729 of funding was paid into the Trust by the Company during the year ended 31 December 2016 (2015: £291,081).

A total of 156,035 shares (0.08p nominal value each) were purchased by the Trust during the year ended 31 December 2016 (2015: 110,845). As at 31 December 2016 a cash balance of £5,068 (2015: £5,080) was held by the Trust.

Notes to the financial statements

34. Events occurring after the reporting date

Collaboration and profit share arrangement with AstraZeneca

On 17 March 2017 Circassia Pharmaceuticals Plc announced a collaboration and profit share arrangement with AstraZeneca and secured certain US commercial rights to Tudorza® and Duaklir® for a maximum total consideration of $230 million (including $50 million in ordinary shares) plus future sales based royalties upon the commercialisation of Duaklir® in the United States.

The consideration is structured as follows:

- Circassia issued 47,355,417 ordinary shares with a value of US$50 million to AstraZeneca;

- Circassia 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;

- Circassia will initially enter a commercial collaboration and profit share arrangement with AstraZeneca for Tudorza® in the United States. Based on the sales performance of Tudorza® in a 12 month period ending no earlier than 30 September 2018, or if Duaklir® gains FDA approval before 31 December 2019, Circassia will have the option to secure the remaining commercial rights and economic benefits of Tudorza®. If this option is taken, Circassia will make further payments to AstraZeneca of up to $80 million dependent on the level of Tudorza®'s sales in the United States;

- Circassia will pay royalties to AstraZeneca on sales of Duaklir® in the United States; and

- Circassia will make R&D contributions of up to $62.5 million payable to AstraZeneca as deferred payments.

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.

This information is provided by RNS

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