Alliance Pharma Regulatory News (APH)

ALLIANCE PHARMA PLC

("Alliance" or the "Group")

Preliminary results for the year ended 31 December 2012

Alliance Pharma plc (AIM: APH), the speciality pharmaceutical company, is pleased to announce its preliminary results for the year ended 31 December 2012.

Financial Highlights

• Sales of £44.9m (2011: £46.0m) with underlying sales growth* of 13%

• Pre-tax profit of £10.8m (2011: £10.7m)

• Basic EPS of 3.61p (2011: 3.62p)

• Free cash flow of £11.0m (2011: £8.4m)

• Net bank debt £21.8m (2011: £18.4m)

• Low gearing with Debt : EBITDA ratio of 1.3 times**

• Proposed dividend:

o Final dividend up 10% to 0.55p per share (2011: 0.50p)

o Full year dividend up 10% to 0.825p per share (2011: 0.75p)

* excluding DeltacortrilTM and ImmuCystTM

** including pro forma EBITDA of acquisitions

Operational Highlights

• Two acquisitions of products in 2012 expected to add £3.2m EBITDA on a full year basis

• First stage of European expansion plan completed with French and German country managers appointed and first significant sales in France

• HydromolTM continues strong growth, achieving year on year sales growth of 29%

• ImmuCyst was growing at 18% per annum before production was interrupted

• Sales of Deltacortril reduced to £1.8m (2011: £4.7m), as anticipated

Commenting on the results, Michael Gatenby, Alliance's Chairman, said: "We look forward with confidence to growth in 2013. In addition to the underlying strength of our portfolio we can expect a full year's contribution from our 2012 acquisitions.

"We aim to supplement this growth with further acquisitions, and look to maintain or increase our deal rate. We are exploring opportunities in the UK and continental Europe."

For further information:

Business Review

Our underlying performance in 2012 was robust, with good organic sales growth from our promoted products and a small increase in pre-tax profits. There was a substantial sales contribution from the five acquisitions made over the past two years. This was more than enough to offset the expected decline of Deltacortril sales, which resulted from the launch of a second generic competitor and changing clinical preferences. However, sales growth was affected by a setback in the summer, when Sanofi Pasteur suspended production of the ImmuCyst bladder cancer treatment until late 2013 because of regulatory issues at its manufacturing facility.

Important developments in 2012 that have prepared the ground for renewed growth include the launch of new operations in France and Germany, where we have recruited Country Managers.

We have already commenced sales in France, following our acquisition in August 2012 of the anti-malarial brands Paludrine™, Avloclor™ and Savarine™ from AstraZeneca. These brands are sold in a number of countries but mainly in the UK and France. As well established and well known products they are sold over the counter as well as on prescription, and come with around £1.1m per annum of EBITDA.

To add impetus to our growth in the UK we also acquired Opus Group in October 2012. This business sells products for stoma care, including skin creams and cleansers, and has been growing strongly: sales rose 14% in 2012. The main influences of its sales are the hospital units already served by our secondary care sales force, which has capacity to give it particularly strong support during the ImmuCyst supply hiatus. We expect Opus to add around £2m to annual operating profit initially.

Financial performance

Sales were impacted by the loss of ImmuCyst from May onwards and the diminished contribution from Deltacortril. However, these negative effects were largely offset by growth in the rest of the business as we benefited from two acquisitions in the second half and further strong growth in Hydromol sales. The net effect was a 2% reduction in sales to £44.9m (2011: £46.0m) although the underlying performance, excluding Deltacortril and ImmuCyst, was 13% growth.

It is worth noting that our 2012 sales still represent a 45% increase over the past three years. This demonstrates the effectiveness of our acquisition strategy, and the Group's resilience in the face of short-term headwinds. The temporary boost that Deltacortril provided in 2010 and 2011 has enabled us to fund acquisitions to provide a sustainable business.

Despite the slight reduction in sales, pre-tax profit edged ahead to £10.8m (2011: £10.7m). This reflected a substantial strengthening of the gross margin to 55.9% (2011: 53.3%), due largely to changes in the sales mix and our successful efforts to reduce distribution costs. In cash terms the gross margin was £0.6m higher than 2011 at £25.1m (2011: £24.5m).

The uplift in cash margin was offset by a £0.6m increase in administration and marketing costs. A large proportion of this increase was due to investment in establishing our presence in France and Germany. Some cost savings were realised, offsetting the impact of inflation.

Borrowing rose over the year as we spent some £12.8m on acquisitions. However, with strong cash generation, net debt rose only £3.4m to £21.8m at the year-end (2011: £18.4m). As both acquisitions were completed in the second half, the average debt over the year was lower; helping to reduce financing costs slightly to £1.5m (2011: £1.6m). We also continued to benefit from investors demonstrating their confidence in the business by switching their convertible loan stock into equity. The total amount of convertible loan stock outstanding reduced to £4.2m at the year-end (2011: £4.5m), and has since fallen to £3.8m. The option to convert remains open until November 2013.

The ratio of bank debt to EBITDA (including annualised EBITDA from acquisitions) remains very comfortable at 1.3 times (2011: 1.3 times).

Dividend

The Board's confidence in the business is reflected in our progressive dividend policy. We are recommending a final dividend of 0.55p per ordinary share (2011: 0.50p), making a total for the year of 0.825p (2011: 0.75p), a 10% increase. At this level, the dividend is covered 4.4 times by after-tax earnings (2011: 4.8 times).

Strategy

Alliance acquires and licenses established products with stable sales in niche areas. While most of these require little or no promotional support, we actively market a number of products with clear growth potential. These promoted products account for around a fifth of our sales. We have two UK field forces, one focused on dermatology and the other focused on specialist hospital products, and have scope for economies of scale when we bring in products that these teams can promote alongside the existing ones.

We currently generate just under a fifth of our sales outside the UK, and aim to diversify the business by increasing this proportion - primarily through increased sales in Western Europe. For most of our existing portfolio, the opportunities for expanding international sales are limited; so our international strategy is to replicate the successful UK model by acquiring established products in overseas markets. Our research indicates that other Western European countries are well suited to this approach.

In 2012 we appointed two Country Managers to drive the acquisition and development of product portfolios in Western Europe. Dr Philippe Pasdelou has this role in France, and Lars Börger covers Germany, Switzerland and Austria. Having a presence on the Continent has already increased the flow of opportunities available to us.

Marketing

We now have a portfolio of over 60 products. Organic sales growth in 2012 was led by the Hydromol dermatology range, which achieved a record £1.1m increase - up 29% on the previous year. Hydromol is now almost a £5m brand and one of our largest. Customers like the products, the pricing is competitive, and we continue to invest in the brand. Hydromol is one of the fastest growing brands in the emollient market. With a share of less than 3% in a fragmented market, there is still plenty of scope for future growth.

Our toxicology product was on the upswing of its 30 month sales cycle in 2012, and sales rose by £0.6m to £2.1m. Sales will reach their peak level in the first half of 2013, giving a useful boost to turnover.

Gelclair™ was another growth story in 2012 as sales reached £1.0m for the first time. This product, acquired alongside ImmuCyst from Cambridge Laboratories, relieves oral mucositis, a painful and debilitating side effect of cancer chemotherapy and radiotherapy. We are seeing good results from our marketing support and clinicians are recognising the clear benefits for their patients.

Sales of ImmuCyst had been growing well until production was suspended in June, and the moving annual sales total had reached £4.4m. The competitor is likely to gain some ground during the hiatus, pending ImmuCyst's return to the market, which is still expected at the beginning of 2014.

As predicted, our Nu-Seals™ enteric-coated low-dose aspirin, sold mainly in the Irish Republic, suffered from the arrival of two new generic competitors. Sales fell 25% to £4.0m, and we expect a further reduction this year as the Irish government enacts long-anticipated legislation to introduce both reference pricing and generic substitution. To mitigate the impact we have been strengthening relationships with pharmacists through a contracted field force.

As previously announced, a group of nine products which Alliance has distributed on behalf of Novartis for many years is being transferred back to Novartis. Between them these products have been generating a combined gross margin of about £0.5m a year.

When we acquired Ashton & Parsons from Reckitt Benckiser in 2011 we cautioned that this infant teething product's sales would be limited initially by unresolved manufacturing issues. We are now implementing a solution which should relieve volume constraints, unlocking the prospect of significant sales growth. We expect the higher production volumes to commence in the second half of 2013.

Team

Apart from the appointment of our two European Country Managers, staff numbers were stable in 2012. However, some additional recruitment is taking place in 2013 to strengthen the support functions in anticipation of further growth.

In particular, we need to maintain effective control of the supply chain as our product range expands: the number of stock keeping units has increased to over 230. We therefore intend to appoint an Operations Director to oversee the supply chain and we are planning to upgrade our systems to more efficiently integrate our operations overall.

Charity

We continue to donate about £20,000 worth of products a year to International Health Partners, a charity that distributes medicines to doctors in the world's neediest areas.

Outlook

We look forward with confidence to growth in 2013. In addition to the underlying strength of our portfolio we can expect a full year's contribution from our 2012 acquisitions and a top-of-cycle contribution from our toxicology product.

We aim to supplement this growth with further acquisitions, and look to maintain or increase our deal rate. We are exploring opportunities in the UK and continental Europe and in December we agreed with our bankers a £10m extension to our acquisition facility. This gives us headroom on the current acquisition facilities of £13.5m, which will be further augmented by continuing strong cash generation during the year.

Financial Review

Revenue

2012 has been an important year for Alliance. Strong growth of 29% in our leading dermatology brand Hydromol, acquisition of our anti-malarials and stoma care products and the full year effect of acquisitions made in 2011 largely offset the headwinds from the supply issues affecting ImmuCyst, the slowdown in Deltacortril and generic competition for Nu-Seals. Total turnover for the year was £44.9m (2011: £46.0m).

The acquisition of stoma care products and the anti-malarial portfolio added sales of £1.6m in 2012 and the full year effect of 2011 acquisitions was an additional £2.1m of sales.

Profit and other key performance indicators

Operating profit, a key metric, was £12.3m (2011: £12.3m). As a percentage of sales this remains strong at 27.4% (2011: 26.8%). Profit before tax increased to £10.8m from £10.7m.

Gross profit increased by £0.6m to £25.1m, while gross margins improved from 53.3% to 55.9%. The improvement in gross margins reflected a change in sales mix, partly as a result of the acquisitions.

Administration and marketing expenses were £11.9m, an increase of £0.6m on 2011. These costs include the addition of our two Country Managers and the strengthening of infrastructure in preparation for European expansion.

Amortisation costs have fallen from £0.7m to £0.6m. The ImmuCyst licence renewal in 2011 for a further 7 years extends the period over which it is amortised, reducing the annual cost.

Finance costs and funding

Interest payable in the year fell slightly to £1.5m (2011: £1.6m). Net bank debt at the year end was £21.8m (2011: £18.4m). The increase of £3.4m was after funding two acquisitions in the year for £12.8m.

At the end of 2012, net bank debt stood at £21.8m (2011: £18.4m). We were pleased that Lloyds Banking Group agreed to provide an additional £10.0m Revolving Credit Facility in December 2012. This increased headroom to £13.5m on the acquisition facilities.

Our previous interest rate hedges have expired and so since the year end we have put in place new interest rate swaps fixing the LIBOR element of our debt costs at 1.24% on £18m of our debt for the next 5 years. This means that approximately 80% of current bank debt is hedged at a very low rate.

The Convertible Unsecured Loan Stock ("CULS") carries a fixed interest rate of 8% and can be converted at any time until 30 November 2013 at 21p per share. CULS not converted at this date are due to be redeemed at par. During the year £0.3m (2011: £0.4m) nominal value of CULS were converted resulting in £4.2m outstanding as at 31 December 2012 and since the year end a further £0.4m have converted.

Covenants

The main financial covenants applying to the facilities with our Bank are that leverage (the ratio of net bank debt to EBITDA) should not exceed 2.0 times, interest cover (the ratio of EBITDA to finance charges) should be no less than 3.0 times, and operating cash flows must exceed debt service cash flows. The Group continues to comply comfortably with these covenants.

Net bank debt at the year end was £21.8m (2011: £18.4m) and the net bank debt to EBITDA ratio was 1.7 times, though as measured for the bank covenant (including pro forma EBITDA of recent acquisitions) the ratio was just 1.3 times.

Earnings per share and dividends

Basic EPS was virtually unchanged at 3.61p (2011: 3.62p), while diluted EPS was 3.40p (2011: 3.39p). During 2012 the number of shares in issue increased from 240.1m to 243.0m. A total of 1.4m shares were issued on the conversion of £0.3m nominal of the CULS and a further 1.5m were issued on the exercise of employee share options. Since the year end a further 1.9m shares have been issued on conversion of CULS. If all the remaining CULS convert by the 30 November 2013 the issued share capital will increase by 18.1m shares or 7%.

As a result of the strong underlying performance of the business and strong cash generation an interim dividend of 0.275p was paid on 15 January 2013 and the Board is recommending a final dividend of 0.55p, which would make a total dividend for the year of 0.825p, a 10% increase on the prior year. The final dividend will be paid, subject to shareholder approval, on 11 July 2013 to shareholders on the register at 14 June 2013.

Cashflow

Trading cashflow improved £2.7m to £14.4m, reflecting an improvement in working capital. Free cash flow in turn improved by £2.6m to £11.0m.

Corporation tax paid during the period was £2.0m (2011: £1.5m). The Group continues to benefit from tax relief on most of its intangible assets. The effective cash rate of tax for 2012 was 18.3%.

£12.8m was used to fund acquisitions in 2012. Hence the majority of the investment in acquisitions was funded from cash generation in the year. The overall increase in net bank debt was just £3.4m, to £21.8m.

Assets and working capital

Additions to intangibles totalled £14.3m, virtually all of which was due to the two acquisitions during the year.

The net book value of intangible assets stands at £79.9m at the year end (2011: £66.1m).

Working capital balances continue to be carefully managed and controlled. Inventory on hand at December 2012 represents a ratio of 3.2 months, a slight increase on the 2011 ratio of 3.1 months, due to the additional stock acquired in October for the stoma care products.

The Group's net assets stood at £51.8m at December 2012, £7.7m higher than December 2011.

Managing Capital

Our objective in managing the business' capital structure is to ensure that Alliance has the financial capacity, liquidity and flexibility to support the existing business and to fund acquisition opportunities as they arise.

The business is profitable and cash generative. In line with the bank covenants, the business is managed to ensure that it is sufficiently cash generative to meet debt servicing needs and dividend payments.

Smaller acquisitions are typically financed purely with bank debt, while larger acquisitions typically involve a combination of bank debt and additional equity. The mixture of debt and equity is varied, taking into account the desire to maximise shareholder returns while keeping gearing at comfortable levels.

Risk Management

To reduce the risk arising from changes in interest rates, the Group uses interest rate swaps, where appropriate, and the CULS pay a fixed coupon.

The Group's main transactional currencies are Sterling and Euro, with the majority of income and expenditure in Sterling. The Euro-denominated income matches the Euro-denominated expenditure quite closely and so the Group has limited exposure to exchange rate movements.

Consolidated Income Statement

Consolidated Statement of Comprehensive Income

Consolidated Balance Sheet

Consolidated Statement of Changes in Equity

Consolidated Cash Flow Statement

1. Basis of preparation

The financial information set out in the announcement does not constitute the Group's statutory accounts for the year ended 31 December 2012 or 31 December 2011. The auditors reported on those accounts; their report was (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain statements under section 498 (2) or (3) of the Companies Act 2006. The statutory accounts for the year ended 31 December 2012 have not yet been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 December 2011 were delivered to the Registrar of Companies as published on the Group's website on 13 June 2012.

2. Finance costs

Notional interest relates to the unwinding of the discount applied to provisions.

3. Taxation

Analysis of charge in period.

4. Dividends

The proposed final dividend of 0.55p per share for the current financial year was approved by the Board of Directors on 20 March 2013 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 31 December 2012 in accordance with IAS 10 Events After the Balance Sheet Date. The interim dividend for the current financial year was paid on 15 January 2013. Subject to shareholder approval, the final dividend will be paid on 11 July 2013 to shareholders who are on the register of members on 14 June 2013.

5. Earnings per share (EPS)

Basic EPS is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares.

A reconciliation of the weighted average number of ordinary shares used in the measures is given below:

A reconciliation of the earnings used in the different measures is given below:

The resulting EPS measures are:

6. Intangible assets

7. Trade and other receivables

8. Trade and other payables - current

9. Cash generated from operations

10. Cash and cash equivalents