Allergy Thera. Regulatory News (AGY)

22 September 2014

Allergy Therapeutics plc

("Allergy Therapeutics" or "the Company")

Preliminary results for the year ended 30 June 2014

Solid momentum across all business segments

Allergy Therapeutics plc, the fully integrated specialty pharmaceutical company, announces its preliminary results for the year ended 30 June 2014.

Highlights

· 13% increase in gross revenue (excluding rebate and discounts) to £46.8m (2013: £41.5m)

· 7% increase in gross revenue (excluding rebate and discounts) at constant currency* to £44.3m (2013: £41.5m)

· 7% increase in revenue to £42.0m (2013: £39.3m)

· Gross profit increased 10% to £30.0m (2013: £27.3m)

· Increased investment in clinical studies to £1.5m (2013: £0.3m)

· Operating profit increased 71% to £1.2m (2013: £0.7m)

· Cash balance improved to £2.0m (2013: £1.3m)

· Competitive position in our key European markets strengthened with average market share increasing by 9%

· European roll out of probiotic products

· Appointment of Professor Tim Higenbottam as Research and Development Director

· Canadian Health Authority approved the submission of the Clinical Trial Application (CTA) for environmental challenge chamber study

* Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements.

Manuel Llobet, Chief Executive Officer, commented:

"We have made good progress this year. Our improved financial performance was underpinned by significant growth in our average market share in the countries in which we operate. This was supplemented by the launch of new products and advances in our clinical development programme. During the year we also grew the team under our new R&D director, Professor Tim Higenbottam, which will allow us to continue to effectively meet the challenges of modern medicine development.

"Whilst the European allergy market faces a number of challenges, our continuing momentum across all segments gives us confidence that the outlook for Allergy Therapeutics remains positive. We expect to improve our market share again next year and to further consolidate our position in our European markets. We also aim to continue to progress our clinical development programme within the TAV framework in Germany.

"Finally, we are very excited by recent developments in the US allergy market. The US market represents a potentially transformational opportunity for the Company and we continue to develop an agreed roadmap to register MATA MPL Grass in the US to realise this."

For further information

Notes to editors

About Allergy Therapeutics

Allergy Therapeutics is a specialty pharmaceutical company focused on allergy vaccination. It has a growing business achieving revenue in the current financial year of £42 million mainly in Europe through its own sales and marketing infrastructure and further afield through distributors. The Company is expanding its infrastructure into the Emerging Markets.

Chairman's Statement

I am pleased to report that this is the fifth consecutive year the Company has reported an operating profit, with a 71% increase to £1.2 million (2013: £0.7 million). Furthermore, the Company's gross revenue increased by 13%, excluding the impact of rebates and discounts, to £46.8 million (2013: £41.5 million) in markets that have shown improvement over the year, but remain challenging (see revenue table in the Financial Review). The Company's competitive position in European markets continued to strengthen with market share increasing by 9% with consistent improvements across our key European market.

In addition to the strong financial results, this year has seen the Company maintaining its positive momentum across all its activities. Professor Tim Higenbottam has joined the Company as Research and Development Director and is strengthening our team of pharmaceutical experts to enable the Company to continue to meet the challenges of modern medicine development. The Research and Development expenditure increased during the year to support the completion of the Phase II clinical study for the Pollinex Quattro® Birch under the TAV regulatory framework in Germany. Regulatory progress in the US is still on going and the positive changes seen in the US immunotherapy market confirm our confidence to continue to explore a range of options to exploit this commercial opportunity.

We have successfully launched Acarovac, a modified-allergen product developed for the treatment of perennial mite allergy in Spain and added Syngut to our probiotic range of products. Our scientific development department published an important paper detailing the results of short course immunotherapy efficacy, using Tyrosine plus MPL, in reducing ragweed pollen allergy in The Journal of Allergy and Clinical Immunology. The manufacturing, clinical and pharmacovigilance departments successfully passed three stringent health authority inspections in the UK, Austria and Germany, respectively, which clearly demonstrates that the Company works to high regulatory standards.

I would like to thank all our employees for their important contribution to a successful year that continues to demonstrate the Company's potential based on sound financial and business activity continuing to deliver shareholder value.

Peter Jensen

Chairman

19 September 2014

Chief Executive Officer's Review

The core business of the Company, being mainly concentrated in the European Community, continued to show improvement in market penetration and revenue during the year resulting in an increase of 13% (7% at a constant currency basis*), excluding the impact of rebates and discounts, to £46.8 million (2013: £41.5 million). This increase in sales strengthens the Company's ability to build its market share, which increased by 9% in the territories in which we operate. The Company continues to be one of the top performers in its market segment in Europe. Bencard Allergy, our German subsidiary, is now continually outperforming the market with an increase of 11% in gross sales at constant currency to £28.0 million (2013: £25.3 million). Sales in the rest of central Europe showed strong growth with an increase of 7% at constant currency in the year. Southern Europe, despite a declining market, grew by 10% at constant currency. In contrast, Latin America is still experiencing regulatory hurdles and sales were minimal during the year.

This is the fifth year of reporting an operating profit which grew to £1.2 million (2013: £0.7 million) in spite of a significant investment in clinical studies during the year.

Overall, it has been a busy year with continued positive momentum. In the early part of the year we launched a new allergoid vaccine for mites in Spain, Acarovac, which has been well received. The registration of dossiers continues to be very active. The clinical trials the Company has undertaken recently have been completed and there has been continued progress on the other side of the Atlantic with the FDA and the Canadian Health authorities.

The Company's team of pharmaceutical experts has been strengthened during the year with the recruitment of a new Director of Research and Development, an International Medical Director, a pharmacovigilance expert, an additional qualified person and a new regulatory manager. These appointments over the year greatly strengthen the Company's ability to meet the challenges of modern medicine development.

The positive recommendations of the Food and Drug Administration (FDA) for several sublingual vaccines have resulted in three products being rolled out to the market. This change to the market reinforces our confidence in the North American opportunity. Our discussions over the year with the FDA and the Canadian Health authorities have been positive. We are planning a G304 phase III study involving two clinical sites, one in the USA and one in Canada, involving 600 patients, who will use multiple environmental exposure chambers allowing for a controlled allergen exposure to study the response to the MATA MPL, Grass MATA and a placebo.

The Phase II clinical study for Pollinex Quattro Birch under the Therapieallergene-Verordnung (TAV) regulatory framework to compare the difference between four individual regimes has been completed. The study was conducted in Germany, Austria and Poland and met its primary end point, demonstrating a dose response and remarkable freedom from side effects. The Company is now using the results of the study to plan its remaining studies under the TAV ordinance.

The probiotic range was increased during the year with the addition of Syngut, a probiotic specifically designed for food intolerance launched in September 2013 in Italy and Spain and rolled out to Austria, Germany and Portugal earlier this year.

The Company currently holds licences in a number of European countries for diagnostic tests, with 96 tests registered in Germany and sees opportunities to increase the number of markets it globally supplies.

This has been a prolific year for our scientific development department, with three peer reviewed scientific papers published, and 12 posters accepted at the EAACI congress in Denmark in early June. One published paper highlighted the advantages of L-Tyrosine as an alternative naturally occurring biodegradable alternative to aluminium1. The other papers focused on Probiotics2 and Acarovac plus3.

* Constant currency uses prior year weighted average exchange rates to translate current year foreign currency denominated revenue to give a year on year comparison excluding the effects of foreign exchange movements. See table in the Financial Review for an analysis of revenue.

1. Aluminium in allergen-specific subcutaneous immunotherapy- a German perspective.

Kramer MF, Heath MD. Vaccine. 2014 Jul 16;32(33):4140-8.

2. Probiotics in the treatment of chronic rhinoconjunctivitis and chronic rhinosinusitis.

Kramer MF, Heath MD. J Allergy (Cairo). 2014;2014:983635.

3. A novel and well tolerated mite allergoid subcutaneous immunotherapy: evidence of clinical and immunologic efficacy. Roger, A; Depreux, M; Jurgens, Y; Heath, MD; Garcia, G and Skinner MA. Immunity, Inflammation and Disease, Volume 2, Issue 2, pages 92-98, August 2014.

Outlook

The European allergy market continues to face a number of challenges, but with the continued momentum across the Company's activities, the outlook is positive and we expect to continue to improve our market share into the next year whilst also showing continued momentum in the other areas that I have reported upon. The Company expects to continue to consolidate its position in the European markets as well as progressing its clinical development program within the TAV framework in Germany.

Finally, we are very excited by the opportunity in the US market, and in making the transformational opportunity happen by developing an agreed roadmap to registering MATA MPL Grass in the US and we continue to explore a range of options to exploit this commercial opportunity.

Manuel Llobet

CEO

19 September 2014

Financial Review

Overview

The results for the twelve months to 30 June 2014 demonstrate not just continuing profitability, but an improvement in performance despite difficult market conditions and an increased investment in clinical studies, with an operating profit of £1.2 million (2013: £0.7 million). Operating profit includes a credit of £0.7 million relating to the fair valuation of forward currency exchange contracts (2013: charge £0.8 million) and a credit of £0.5 million in relation to changes in inventory standard costs. However, during the year investment in clinical studies increased to £1.5 million (2013: £0.3 million); operating profit before this investment has increased to £2.7 million from £1.0 million for 2013.

Revenue

Despite weak allergy vaccine markets in Europe, revenue at constant currency*, excluding the impact of rebates and discounts, was 7% better at £44.3 million (2013: £41.5 million). This can be seen in the table below:

With a stronger EUR:GBP average exchange rate during the year compared to the prior year, revenue increased by 7% to £42.0 million (2013: £39.3 million). The average EUR: GBP exchange rate in the year was 1.17 compared to 1.24 in the previous year; the stronger Euro positively impacted revenue by £2.2 million. The Group has continued to grow its revenue in markets outside Germany, and to reduce its reliance on the German market, with 61% of revenue in Germany this year compared to 73% in 2009. The key flagship product Pollinex Quattro, which accounts for 51% of sales, grew very well in the year at a constant currency growth rate of 11.3%. In addition to the sale of allergy vaccines, the Group has continued to look to increase its revenue from other products. Total sales from other products contributed £0.7 million for the year ended 30 June 2014 (2013: £0.7 million); the prior year included £0.2 million sales of Anapen until the product was withdrawn from the market during 2013.

Revenue in Germany grew well in the year with gross revenue (before rebates and discounts) at constant currency increasing to £28.0 million (2013: £25.3 million); an increase of 11%. During the year, the Group was subject to the full rebate charge in Germany, whereas for the first half of the prior financial year, the group benefited from an exemption to the increased rate. The European Commission investigation into whether the exemption from the increase in rebates in Germany constitutes state aid is on-going. If it is eventually concluded that the exemptions constitute state aid, then all unlawful aid may have to be repaid (please refer to Note 11). The full rebate charge in H1 was 16% of sales, reducing to 6% in January 2014, before finally being agreed at a new on-going level of 7% in April 2014.

In Spain and Italy, sales at constant currency increased by 10%, which was a strong result given the weak market during the year. Similarly, Austria showed strong growth in sales of 21% in the year at constant currency. Sales in the Latin American market were lower than planned for the year owing to a number of registration delays.

Gross Profit

Despite the increased sales, tight management of manufacturing overheads plus the benefit of changing the method of allocating overheads to intermediate products (generating a gain through cost of goods of £0.5 million), helped maintain cost of sales at the prior year's level of £12.0 million (2013: £12.0 million). This, together with the revenue increase of £2.7 million increased the gross profit percentage by 1.9% points, to 71.5%, leading to a gross margin of £30.0 million (2013: £27.3 million). For a full explanation of the change to standard costs refer to Note 2, sources of estimation uncertainty (e).

Operating Expenses

Total overheads are £2.2 million higher against the prior year at £28.9 million (2013: £26.7 million). Investments in supporting the sales and marketing infrastructure and the stronger Euro increased distribution costs, which are mainly European sales and marketing costs, to £17.9 million (2013: £16.3 million). Administration expenses include a credit relating to the fair valuation of foreign exchange hedges, generating an asset at the year end of £0.3 million. At the prior year end the fair valuation generated a liability; together these created a gain in the year of £0.7 million (2013: loss £0.8 million). The dose ranging study for Pollinex Quattro Birch continued during the year and was the main factor behind the increase in R&D costs to £3.0 million (2013: £2.5 million).

Tax

The tax charge in the year relates mainly to the Italian subsidiary. The recognition of a deferred tax asset in the prior year generated the tax credit of £0.1 million. This credit offset tax charges in some of the overseas subsidiaries.

Balance Sheet

With the major capital investment programme now complete and a lower maintenance level of spend now required, property, plant and equipment has fallen from £7.3 million to £7.0 million as the depreciation charge for the period is higher than new equipment purchases. In the prior year a review of the expected useful lives of all assets was conducted, resulting in an extension of some asset lives, generating a reduction in the charge to the income statement of £0.5 million in that period compared to the preceding year. Goodwill has reduced to £2.5 million (2013: £2.6 million) as a result of small foreign exchange rate movements, whilst other intangible assets have fallen by £0.1 million as a result of amortisation.

Total current assets excluding cash have decreased by £1.0 million to £12.2 million (2013: £13.2 million). This is mainly due to a decrease in debtors as a result of the collection of rebate refunds in Germany, improved cash collection in Italy and the collection of the second milestone payment from the appointment of a new distributor in the prior year in Canada.

Retirement benefit obligations, which relate solely to the German pension scheme, increased to £6.4 million (2013: £6.2 million). The increase in the liability was driven by a fall in German bond yields at the year-end compared to the previous year.

Net cash generated by operations remained positive, with a reported inflow of £2.3 million (2013: £3.0 million).

Financing

The Group had no debt on its balance sheet at the close of the financial year other than the convertible loan liability of £49,000. The annual overdraft had been fully repaid in November 2013 and has been renewed for a further 12 months to cover the seasonal funding requirements over the summer of 2014.

The Directors believe that the Group will have adequate facilities for the future and accordingly they continue to adopt the going concern basis in preparing the full year results.

Ian Postlethwaite

Finance Director

19 September 2014

ALLERGY THERAPEUTICS PLC

Consolidated Statement of Changes in Equity

ALLERGY THERAPEUTICS PLC

NOTES TO THE FINANCIAL STATEMENTS

1. BASIS OF PREPARATION

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006.

Allergy Therapeutics plc is the Group's parent company. The Company is a limited liability company incorporated and domiciled in England. The address of Allergy Therapeutics plc's registered office and its principal place of business is Dominion Way, Worthing, West Sussex and its shares are listed on the Alternative Investment Market (AIM).

The consolidated financial statements for the year ended 30 June 2014 (including comparatives) have been prepared under the historical cost convention except for land and buildings and derivative financial instruments which have been measured at fair value. They were approved and authorised for issue by the Board of Directors on 19 September 2014.

New standards adopted

There are no IFRS or IAS interpretations that are effective for the first time in this financial period that have had a material impact on the Group.

In preparing the consolidated accounts the Group has adopted the following new IFRS and IAS interpretations.

IFRS 10 Consolidated Financial Statements (effective 1 January 2014 - adopted early)

This IFRS establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

IFRS 12 Disclosure of Interests in Other Entities (effective 1 January 2014 - adopted early)

This IFRS looks at the disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, the Group's interests in other entities, and the effects of those interests on its financial position, financial performance and cash flows.

IFRS 13 Fair Value Measurement (effective 1 January 2013)

IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a 'fair value hierarchy'.

IFRS 13 clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It does not affect which items are required to be fair valued.

Amendments to IAS 19 (Revised June 2011) Employee Benefits (effective 1 January 2013)

IAS 19 reviews the treatment of employee benefits with a view to recognising the cost in the period in which the benefit is earned by the employee, rather than when it is paid or payable.

The revised version of IAS 19 'Employee Benefits' (IAS19R) (as of 1 January 2013) makes a number of changes to the accounting for employee benefits, the most significant relating to defined benefit plans. IAS 19R:

· eliminates the 'corridor method' and requires the recognition of remeasurements (including actuarial gains and losses) arising in the reporting period in other comprehensive income

· changes the measurement and presentation of certain components of the defined benefit cost. The net amount in profit or loss is affected by the removal of the expected return on plan assets and interest cost components and their replacement by a net interest cost based on the net defined benefit asset or liability

· enhances disclosures, including more information about the characteristics of defined benefit plans and related risks

IAS 19R has been applied retrospectively in accordance with its transitional provisions. Consequently, the Group has restated its reported results throughout the comparative periods presented. There was no adjustment to total equity.

The effects on the income statement and the statement of comprehensive income for the current year and the prior year are:

Following the adoption of IAS 19R remeasurement of investments related to the retirement benefit plan that had previously been passed through the revaluation reserve have been reclassified to retained earnings. As at 1st of July 2012 the revaluation reserve was reduced by £136,000 from £1,297,000 to £1,161,000 with a corresponding credit to retained earnings.

The application of IAS 19R did not have an effect on the statement of cash flows for the year ended 30 June 2014 and the prior year.

IAS 27 (Revised) Separate Financial Statements (effective 1 January 2013)

IAS 27 is concerned with the preparation and presentation of consolidated financial statements for a group of entities under the control of a parent, and in accounting for investments in subsidiaries, jointly controlled entities and associates when an entity elects, or is required by local regulations, to present separate (non-consolidated) financial statements.

Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group in the 30 June 2014 financial statements

At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective. Not all of these have yet been adopted by the EU. The Group has not adopted any of these pronouncements early. The new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements are as follows:

IFRS 9 Financial Instruments (effective 1 January 2015)

This IFRS replaces IAS39 and addresses the usefulness for users of financial statements by simplifying the classification and measurement requirements for financial instruments. Management are currently assessing the detailed impact on the Group's financial statements.

IFRS 15 Revenue from Contracts with Customers (issued in May 2014 and effective 1 January 2017)

IFRS 15 supersedes current revenue recognition guidance including IAS 18, Revenue, and specifies how and when entities recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers.

Management anticipate that the above pronouncements will be adopted in the Group's financial statements in line with the effective dates stated above. Management are currently assessing their detailed impact on the Group's financial statements.

Other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements.

Going concern

For the year ended 30 June 2014, and for the fifth year in succession, the Group has reported an operating profit and an operating cash inflow. Operating profit in the period was £1.2 million (2013: £0.7 million); net cash from operations was £2.3 million (2013: £3.0 million).

The Group has prepared detailed budgets, including cash flow projections, for the periods ending 30 June 2015 and 30 June 2016. These projections include assumptions on the trading performance of the operating business and the continued availability of the existing overdraft facilities. After making appropriate enquiries, which included a review of the annual budget, by considering the cash flow requirements for the foreseeable future and the effects of sales and other sensitivities on the Group's funding plans, the Directors continue to believe that the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly have applied the going concern principle in drawing up the financial statements. In reaching this view, the Directors have considered and prioritised the actions that could be taken to offset the impact of any shortfall in operating performance.

2. ACCOUNTING POLICIES (extract)

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented unless otherwise stated.

Revenue recognition

Revenue is measured by reference to the fair value of consideration received or receivable by the Group for goods supplied and services provided, net of statutory rebates paid in Germany and excluding value added tax. Revenue is recognised upon the performance of services or transfer of risk to the customer.

Sale of goods

Revenue from the sale of goods is recognised when all the following conditions have been satisfied:

· the Group has transferred to the buyer the significant risks and rewards of ownership of the goods, which is generally when the customer has physically received the goods.

· the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold which is again when the customer has physically received the goods.

· the amount of revenue can be measured reliably.

· it is probable that the economic benefits associated with the transaction will flow to the Group, and

· the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Where the Group provides services to new distributors, which mainly include marketing and customer information, in exchange for an up-front lump sum fee, revenue is recognised in line with these services being delivered. Services are fair valued and pro-rated to agree to the total fee receivable. Where there is an on-going responsibility to provide services, the balance relating to those services is recognised in future periods as the service is performed.

A small proportion of the Group's overseas sales are made through distributors and agents.

Arrangements for sales through distributors

For all distributor arrangements, the distributor is invoiced at the time of delivery and title to the product passes upon full and final settlement of the invoice to which the delivery relates. The distributor has full discretion over the setting of the final selling price to the end customer and is responsible for all customer returns of product.

It is considered that the significant risks and rewards of ownership of the product are transferred to the distributor at the point of delivery and therefore revenue is recognised at this point in accordance with IAS 18.

Where the Group sells to distributors at initially low margin and there is further consideration receivable by the group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances the deferred consideration is accrued at a discounted value at the point of delivery.

Arrangements for sales through agents

For all agreements with agents, the agent places orders with the Group, and goods are then shipped to them. The Group however, holds title to these products until they are sold on to a third party. The selling price to the end user is set by the relevant Government body and the agent receives a fixed percentage of this selling price. The agent notifies the Group monthly on stock levels and this is reconciled to a statement which generates an invoice for payment by the agent. The Group is responsible for any customer returns of product.

It is considered that the significant risks and rewards of ownership of the product are not transferred from the Group until the agent has sold the product to a third party and therefore revenue on these sales is recognised only at this point by the Group in accordance with IAS 18 appendix 2 (c).

Statutory Rebates

In Germany, Pharmaceutical companies are required to pay a manufacturer's rebate to the government as a contribution to the cost of medicines paid for by the State and private health funds. This is similar to a sales tax and the rebate is therefore treated as a deduction from revenue in accordance with IAS18.8.

Rebates have been in the region of 6% (inclusive of VAT). However, in 2010 the German government increased the rate to 16%. In certain circumstances, companies could apply for an exemption from the rebate increase, for limited periods at a time. If the application for the exemption is successful, a preliminary exemption is normally granted to be converted to a final exemption at a later date when audited financial statements are available.

Allergy Therapeutics plc has been successful in obtaining preliminary exemptions up to 30 June 2012, which have been subsequently confirmed as final.

Revenue is recognised initially net of the 16% rebate, as at that stage it is not considered probable that any refund of the rebate will be received. When the preliminary exemption is granted, it is considered probable, based on our past experience, that the rebate refund will be received. Therefore, as it is probable that the economic benefits will flow to Allergy Therapeutics Plc, in accordance with IAS 18.14(d), revenue is adjusted at that time.

Inventories

Inventory is carried at the lower of cost or net realisable value. The costs of raw materials, consumables, work in progress and finished goods are measured by means of weighted average cost using standard costing techniques. Cost of finished goods and work in progress comprises direct production costs such as raw materials, consumables, utilities and labour, and production overheads such as employee costs, depreciation, maintenance and indirect factory costs. Standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards.

As part of the continuous refinement of standard costs, in July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £486,000. If this allocation method had been used in the prior year, inventory would have increased by approximately £500,000.

Net realisable value is calculated based on the revenue from sale in the normal course of business less any costs to sell.

Research & Development Investment Credits

Investment credits are directly related to the Group's qualifying research and development expenditure and have a monetary value that is independent of the Group's tax liability. Such investment credits are dealt with in other income in the income statement.

Convertible loan notes

Convertible loan notes are regarded as compound instruments consisting of a liability component and an equity component. At the date of issue the fair value of the liability component is estimated using a discount rate for an equivalent liability without the conversion feature. The difference between the proceeds of issue of the convertible loan note and the fair value assigned to liability component, representing the embedded option to convert the liability into equity of the Group, is included in equity.

Use of accounting estimates and judgements

Many of the amounts included in the financial statements involve the use of judgement and/or estimation. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances, having regard to prior experience, but actual results may differ from the amounts included in the financial statements. Information about such judgements and estimation is contained in the accounting policies and/or the notes to the financial statements and the key areas are summarised below:

Judgements in applying accounting policies

a) Capitalisation of development costs requires analysis of the technical feasibility and commercial viability of the project concerned. Capitalisation of the costs will be made only where there is evidence that an economic benefit will accrue to the Group. To date no development costs have been capitalised and all costs have been expensed in the Income statement as research and development expenditure, £3.0m (2013: £2.5m)

b) The Directors assume that the convertible loan note will be repayable in September 2014 rather than any earlier date nominated by the note holder. Repayment of the principal has been treated as not substantive as the repayment of principal and reinvestment in equity are viewed as occurring at the same time in contemplation of one another.

c) Where the Group sells to distributors at initially low margin and there is further consideration receivable by the group, this deferred consideration forms part of the fair valuation of consideration receivable by the Group for goods supplied. In these instances the deferred consideration is accrued at a discounted value at the point of delivery.

The directors considered the following points in applying this accounting treatment:

Although a significant portion of the sales price is received upon a further sale to an end customer, substantially all the risks and rewards of ownership are passed to the distributor when the goods are shipped, and the distributor is acting as principal (not merely as agent) when arranging to resell the goods. The directors have reached this conclusion because;

i. The group does not have any continued managerial involvement in the distributor's onward sale of goods;

ii. The distributor does not have the right to return any goods.

More information on the reasoning behind the treatment of sales to distributors can be found in the 'Sale of goods' accounting policy description. The additional consideration can be measured reliably because it is based on a fixed list price and our past experience indicates that the distributor will sell the vaccines

The directors have assessed that the deferred consideration of £0.2m is recoverable and will crystallise in future periods and has been carried forward in prepayments and accrued income (2013: £0.1m).

Sources of estimation uncertainty

a) Depreciation rates are based on estimates of the useful lives and residual values of the assets involved. There is inherent uncertainty in the useful lives of assets, which means that they are constantly reviewed by management.

b) Estimates of future profitability are required for the decision whether or not to carry forward a deferred tax asset.

c) Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating unit to which the goodwill has been allocated. This value in use calculation requires an estimation of the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the present value.

d) The Group has been awarded a provisional exemption to the increased rebate charge in Germany for the period July to December 2012. Revenue of £1.1m has been accrued in relation to this exemption. During the year £0.6m has been collected with £0.5m remaining to be collected. While the Group is confident that the exemption will be confirmed, there is a possibility that this will not happen.

e) Inventory standard costs are reviewed regularly in order to ensure relevant measures of utilisation, production lead time and appropriate levels of manufacturing expense are reflected in the standards. As part of the continuous refinement of standard costs, in July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £0.5m. If this allocation method had been used in the prior year, inventory would have increased by approximately £0.5m.

f) In relation to the accrued additional revenue due from distributors referred to in the Judgements section (point (c) above); there is some uncertainty that the additional revenue will crystallise as it is dependent on a further sale by the distributor. The directors consider that the additional consideration can be measured reliably because it is based on a fixed list price, and our past experience indicates that the distributor will sell the vaccines.

The directors have assessed that the deferred consideration of £0.2m is recoverable and will crystallise in future periods and has been carried forward in prepayments and accrued income (2013: £0.1m).

3. REVENUE

An analysis of revenue by category is set out in the table below:

Rendering of services relates to the supply of services to a new distributor in the prior year to assist them in setting up operations in their territory.

4. SEGMENTAL REPORTING

The Group's operating segments are reported based on the financial information provided to the Executive Directors, who are defined as the Chief Operating Decision-Maker (CODM), to enable them to allocate resources and make strategic decisions.

The CODM reviews information based on geographical market sectors and assesses performance at an EBITDA (operating profit before interest, tax, depreciation and amortisation) and operating profit level. Management have identified that the reportable segments are Central Europe (which includes the following operating segments; Germany, Austria, Switzerland and the Netherlands), Southern Europe (Italy and Spain), the UK (including Latin America) and Rest of World.

Revenue by segment

Revenues from external customers in all segments are derived principally from the sale of a range of pharmaceutical products designed for the immunological treatment of the allergic condition.

Rest of World revenues include sales through distributors and agents in several markets including Czech and Slovak Republics, Canada and South Korea. These include rendering of services revenues (note 3).Inter-segment revenues represent sales of product from the UK to the operating subsidiaries. The price is set on an arms-length basis which is eliminated on consolidation.

The CODM also reviews revenue by segment on a constant currency basis to provide relevant year on year comparisons.

The following revenue table is based on a constant currency rate of € 1.20: £1.00 which was the rate used in the 2014 budget.

The Group has no customers which individually account for more than 10% of the Group's revenue.

Depreciation and amortisation by segment

EBITDA by segment

Total assets by segment

Included within Central Europe are non-current assets to the value of £2,480,000 (2013: £2,560,000) relating to Goodwill and within Southern Europe assets to the value of £1,085,000 (2013: £1,207,000) relating to freehold land and buildings.

Total liabilities by segment

5. FINANCE EXPENSE

6. FINANCE INCOME

Other finance income relates to the unwinding of the discount on accrued revenue.

7. EARNINGS PER SHARE

Earnings per share for 2013 is re-stated so as to include ordinary shares to be issued on conversion of the convertible loan note (Note 11) and adjustments for the implementation of IAS19 (revised).

8. INVENTORIES

In July 2013 a new cost set was applied in which an increased proportion of manufacturing cost was absorbed by intermediate processes (rather than finishing processes) as this more accurately reflects the conversion cost of inventory. This resulted in an increased value of inventory at 30 June 2014 of £0.5m. If this allocation method had been used in the prior year, inventory would have increased by approximately £0.5m.

The cost of inventories recognised as an expense in cost of sales during the year was £11.0m (2013: £11.0m) including write-downs in the year amounting to £0.9m (2013: £1.2m).

The value of inventories measured at fair value less cost to sell was £162,000 (2013: £77,000).

9. BORROWINGS

The overdraft facility is provided by The Royal Bank of Scotland Plc and has a variable limit during the year up to a maximum of £4.5 million. Interest on the overdraft is at the bank's base rate plus a fixed margin of 2.75%. The facility is secured in favour of The Royal Bank of Scotland Plc by means of debentures granted by the Company and its principal subsidiaries and share pledge agreements relating to Bencard Allergie GmbH, Allergy Therapeutics Italia SRL and Allergy Therapeutics Iberica SL. The overdraft facility is due for renewal in May 2015.

The Convertible loan notes were issued in April 2012 (Note 11). The liability relates to the interest payable over the next year.

10. ISSUED SHARE CAPITAL

The deferred shares have no voting rights, dividend rights or value attached to them.

No share options were exercised in the year (2013: Share options exercised with proceeds of £148,000).

In April 2012, Allergy Therapeutics plc issued a convertible loan note to a major investor, CFR Pharmaceuticals SA (CFR). The loan agreement stated that the loan of £4,042,469 would be repaid on 20 April 2014 or an earlier date advised by the note holder (with at least 15 business days' notice). On the repayment date, the loan had to be repaid and on the same date the note holder had to purchase 41,674,938 shares at a fixed price of 9.7p per share. Interest is payable at a rate of 3% per annum during the term of the notes.

The Directors concluded that the repayment of the principal and the mandatory investment were linked such that in substance this represents the conversion of the loan into a fixed number of shares, and hence the loan note was split into a liability and an equity component. The liability component of £222,000 represented the present value of the interest payments on the loan, with the balance of £3,820,000 treated as equity.

In April 2014, CFR and Allergy Therapeutics plc mutually agreed to amend the agreement to defer the repayment date until 30 September 2014. The only substantive effect of this amendment was the agreement to pay further interest of £49,000 over the remaining period of the loan. This is effectively a loss on the remeasurement of the debt. As this was incurred with an equity shareholder, it was treated as a transaction with owners and dealt with directly in the statement of changes in equity; with Allergy Therapeutics plc recognising a corresponding further liability of £49,000 within current liabilities.

11. CONTINGENT LIABILITIES

Allergy Therapeutics (UK) Ltd, a subsidiary of Allergy Therapeutics plc, has guaranteed the deposits required for leases on cars and rented office space of Bencard Allergie GmbH. The amount as at 30 June 2014 was

€107,426; £85,996 (2013: €107,426; £91,833).

A cross-guarantee exists between Allergy Therapeutics (Holdings) Ltd, Allergy Therapeutics (UK) Ltd, Bencard Allergie GmbH, Allergy Therapeutics Italia srl. and Allergy Therapeutics Iberica SL. in which the liabilities of each entity to the Royal Bank of Scotland Plc are guaranteed by all the others.

The European Commission is carrying out an investigation into whether the exemption of pharmaceutical manufacturers from the increase in rebates in Germany constitutes state aid. If it is eventually concluded that the exemptions constitute state aid, then all unlawful aid may have to be repaid. On the balance of probabilities, the Group does not consider that it will have to repay any rebate exemptions. However, should a repayment be required, then the maximum amount to be repaid would be approximately £5 million. Included in other receivables is an amount of £0.5 million (2013: £1.5 million) in respect of exempted rebates which the Group continues to collect.

12. ULTIMATE CONTROLLING PARTY

As at 30 June 2014, and 30 June 2013, the Directors consider the controlling party in Allergy Therapeutics plc to be CFR Pharmaceuticals SA.