CIR.L Regulatory News (CIR)

CIRCASSIA PHARMACEUTICALS PLC

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017

Strong NIOX® sales growth

Good progress in AstraZeneca US commercial partnership

Compelling clinical data for Tudorza® and Duaklir®

Commercial platform expansion in US and China

Refocused investment strategy to support commercial expansion

Oxford, UK - 24 April 2018: 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 2017 and a post-period update.

Strong NIOX® progress

· Sales increased 18% (12% at CER1) to £27.3 million (2016 CER: £24.4 million)

· Direct clinical sales (non-research sales2) increased 26% (20% at CER) compared with 2016

· US clinical revenues grew 34% (27% at CER) vs 2016

· China clinical sales increased 44% (36% at CER) vs 2016

· New NICE guidelines issued in November highly supportive for FeNO testing in asthma diagnosis

· NIOX VERO® product evolution and digital app in development; targeting 2019 launch in Europe

AstraZeneca (AZ) US commercial partnership progressing well

· Transformational transaction for COPD products Tudorza® and Duaklir®3 completed April 2017

· Tudorza® profit share revenues £19.0 million from transaction completion to year end

· Tudorza® prescriptions stabilised; year ended 52% ahead of 2017 declining trend established prior to Circassia's full promotion

· Tudorza® ASCENT study met primary endpoints; compelling data to be filed for inclusion in label

· Duaklir® AMPLIFY phase III study met primary endpoints; AZ to submit NDA H1 2018

· AstraZeneca to increase equity stake in Circassia from 14.2% up to a maximum of 19.9%

Expanding commercial growth platform

· US sales force expanded to 200 with approximately 50-strong support team

· China commercial expansion; targeting NIOX® sales growth and platform for third-party products

Financial highlights

The following table includes key performance indicators (KPIs) representing the Group's underlying operations at the time of operation; these include allergy R&D costs and exclude a one-off R&D contribution to AZ and R&D impairments

2018 investment strategy refocused

· Investment strategy increases focus on commercial expansion to drive revenue growth

· Strategic plan to out-license / partner respiratory direct substitute and novel formulation candidates

· R&D annualised expenditure to decrease by approximately £5 million

· G&A cost containment to deliver annualised savings of approximately £2 million

· S&M investment to increase approximately £7 million in 2018

Steve Harris, Circassia's Chief Executive, said: "2017 was a period of major transformation for Circassia, with the Company making good progress to becoming a commercially-focused specialty respiratory business. During the year our market-leading NIOX® asthma management products continued their strong growth, and in November we welcomed new NICE recommendations that are highly supportive for our products. We also established a major US collaboration with AstraZeneca for COPD products Tudorza® and Duaklir®, and markedly expanded our specialty sales infrastructure in the United States. The partnership is making good progress, and with Tudorza® US prescriptions well ahead of the trend prior to our involvement, we aim to increase uptake in the coming year. We also received compelling clinical data from large trials of both COPD products, and we look forward to filings seeking Duaklir® approval and an extension to Tudorza®'s label."

"With our revenues doubling in 2017 and our cost containment measures delivering tangible savings, we are driving our business towards self-sustainability. We intend to maintain this progress during 2018. We have refocused our investment strategy to support the ongoing expansion of our commercial platform, particularly in China, whilst reducing our R&D and corporate costs. During 2018, we will benefit from a full year's contribution from our enlarged US sales team and our collaboration with AstraZeneca, 'locking in' significant growth potential. With a strong commercial infrastructure, compelling portfolio and increasingly attractive platform for third-party products we look forward to the coming year with great optimism."

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 posted in the Media section of the Company's website at www.circassia.com.

Enquiries

About Circassia

Circassia is a world-class specialty pharmaceutical business focused on respiratory disease. Circassia 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. In 2017, the Company established a commercial collaboration with AstraZeneca in the United States in which it promotes the chronic obstructive pulmonary disease (COPD) treatment Tudorza®, and has the commercial rights to pre-NDA COPD product Duaklir®. For more information please visit www.circassia.com.

\* The Financial highlights section contains key performance indicators (KPIs) that management believes better represent the underlying performance of the Group, reflecting the functioning of the departments at the time of operation; where relevant these exclude irregular or infrequent items

1Constant exchange rates (CER) for 2016 represent reported 2016 numbers re‐stated using 2017 average exchange rates; management believes constant currency numbers better represent the underlying performance of the Group due to subsidiary functional currency fluctuations against Sterling

2Direct clinical sales to clinicians, hospitals and distributors; research sales to pharmaceutical companies for use in clinical studies

3Duaklir® is a registered trademark in Europe and other markets; use of the trademark in the US is subject to review and approval by the FDA

4In-house R&D: includes expenditure on underlying and discontinued operations excluding impairments to better reflect management expenditure at the time of operation

5Underlying operations, see consolidated statement of comprehensive income

6Underlying operations restated to show the results of the allergy business in discontinued operations; see note 10 of the consolidated financial statements for further details

7Cash, 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

I am pleased to report that Circassia made good progress in 2017, achieving significant growth following the major changes to its business the prior year. With its investment in the allergy field halted, Circassia has focused resolutely on building its respiratory franchise, and consequently has transitioned into a very different business in a relatively short period. Circassia is now highly commercially focused, with a broad sales infrastructure, which it plans to expand further through a refocused investment strategy, and a portfolio of marketed products.

Building strategic momentum

In 2016, the Board reviewed and reconfirmed Circassia's strategy of building a self-sustaining specialty pharmaceutical company focused on respiratory disease. At the end of 2016, the Company significantly expanded its US commercial platform, both to increase revenues from its in-house NIOX® products and to attract in-licensing, partnering and acquisition opportunities. This growth strategy proved successful, and in 2017 Circassia established a flagship US partnership with AstraZeneca for the chronic obstructive pulmonary disease (COPD) products Tudorza® and Duaklir®. With the collaboration making good progress, Circassia plans to build on this momentum by deploying a refocused investment strategy pursuing a similar approach in China. By leveraging its existing presence in the country to establish an initial sales force, Circassia plans to boost its NIOX® revenues and provide a commercialisation option for third-party products in this major market.

Refocused investment strategy

Under its refocused strategy, Circassia intends to reallocate its resources and complete its transformation into a commercial business. The Company plans to fund commercial investment through a combination of growing revenues, corporate cost containment and reductions in research and development (R&D) expenditure by seeking to out-license / partner its respiratory pipeline of directly substitutable generic products and novel formulations of currently approved drugs. These development candidates are based on approved molecules, thereby reducing their risk profile, and the Company plans to initiate discussions with a number of potential partners. This strategy will allow Circassia to retain a stake in the products' future potential success whilst utilising third-party financing to progress the programmes through development. The Company will continue to invest in its R&D, medical affairs, pharmacovigilance, quality and regulatory activities supporting its US COPD products and global NIOX® franchise.

During the past year Circassia has made significant strategic progress, and with its refocused investment strategy the Company plans to complete its transition into a commercial business in the coming months. As a result, in a period of just two years Circassia will have transformed from an R&D-focused organisation into a growing commercial business with increasing revenues and global commercial infrastructure.

Significant operational progress

Throughout 2017, the Company's operational execution has underpinned this strategic progress. Following the establishment of its collaboration with AstraZeneca, Circassia rapidly doubled the size of its US field force, recruiting, training and launching the enlarged team in under two months. This new sales team has performed well, and at the end of the year Tudorza® prescriptions were significantly ahead of the declining trend established prior to Circassia's full promotion and are set for future growth. In parallel, Circassia's global commercial team continued to grow NIOX® revenues, while the R&D team filed for additional NIOX® approvals. The Company also advanced its broader pipeline, in-licensing novel nebuliser technology from Philips and preparing several programmes for clinical studies, positioning the products for potential out-licensing / partnering under Circassia's refocused investment strategy.

Evolving team

The rapid changes to Circassia's business are reflected in the make-up of its team. During 2017, the commercial group grew substantially, accounting for over 75% of the Company's headcount at the end of the year, while the R&D team was reduced by approximately 40%. This changing profile also extends to the Board. Circassia recently welcomed new Non-Executive Directors Jo Le Couilliard, Sharon Curran and Dr Heribert Staudinger, who bring significant commercial, specialty pharmaceutical and respiratory development experience to the Company. At the same time, the Board thanks Dr Jean-Jacques Garaud and Marvin S Samson for their invaluable advice and strategic counsel, and wishes them well on their retirement at the forthcoming Annual General Meeting.

Positioned for growth

With a period of extensive change nearing completion, Circassia is emerging as a strong, commercially-focused specialty pharmaceutical business. The Company's revenues doubled in 2017 and are positioned for further growth. During the coming year, Circassia plans to drive sales in its NIOX® franchise, building on positive new recommendations issued by the UK's National Institute for Health and Care Excellence (NICE). The Company will also benefit from a full year's revenues from its Tudorza® collaboration. In the coming year, Circassia anticipates exercising its option to acquire the full US commercial rights to Tudorza® from AstraZeneca and looks forward to its partner filing for Duaklir® approval.

During 2018, Circassia intends to leverage the ongoing momentum in its business, continuing its transition towards self-sufficiency. It plans to extend its commercial platform in China and seek additional third-party products to commercialise through its specialty infrastructure. Having undergone a period of difficult decisions and great change, Circassia's ambition to build a world-class global specialty pharmaceutical company, creating significant shareholder value, remains stronger than ever.

Dr Francesco Granata

Chairman

OPERATING REVIEW

Circassia made significant progress during the past year, continuing its transition into a commercial specialty pharmaceutical business focused on respiratory disease. The Company established a transformational US commercial collaboration with AstraZeneca for the COPD products Tudorza® and Duaklir® and its NIOX® asthma management franchise continued to grow strongly. Circassia expanded its commercial growth platform, doubling its US sales force to promote both Tudorza® and NIOX®, and its UK direct sales team performed well during its first full year since launch. As a result, the Company's revenues grew by 100%, while in parallel, Circassia's cost control measures delivered savings.

NIOX® asthma management products

Fractional exhaled nitric oxide (FeNO) is an important biomarker of underlying Th2 airway inflammation, and its measurement is increasingly recognised as a valuable component of asthma diagnosis and management. NIOX® is the leading point-of-care FeNO testing system available across major markets and the current VERO® generation is sold in a large number of countries, including in the US, Europe, Japan and China.

Strong sales performance

NIOX® revenues continued to grow strongly during 2017, increasing 18% to £27.3 million (12% at CER). Sales for clinical use (ie excluding sales to pharmaceutical companies for use in clinical trials) increased at a faster rate, growing 26% worldwide (20% at CER), 34% in the United States (27% at CER) and 44% in China (36% at CER). In the UK, revenues more than doubled compared with 2016, increasing 134% during the first full year since the Company established its direct sales capability. Revenues in Germany declined by 5% (11% at CER) due to local restructuring to focus on market access and revised pricing to encourage greater test usage, which is now delivering results. Research sales to pharmaceutical companies also offset the growth in clinical sales to some extent, with these less controllable revenues decreasing 8% (13% at CER) in 2017 compared with the prior year.

Expanding access

In 2017, Circassia continued to expand market access for its NIOX® products. In the United States, we established new agreements with over 50 major healthcare providers and recently signed an Innovative Technology contract with Vizient Inc., the largest member-owned healthcare company in the country. In parallel, our market access team extended NIOX® coverage to an additional nine million Americans and at the beginning of 2018 Medicare increased its FeNO testing reimbursement rate.

Improving distributor performance

We sell NIOX® directly in the US, UK and Germany, and in a large number of additional countries through a network of international partners. During 2017, we extended our distributor base in the Middle East and we continue to review commercialisation opportunities in Canada and South East Asia. We are also undertaking initiatives to assist our distributors' performance, including the provision of dedicated NIOX® training to improve local promotion. We intend to continue this distributor support in 2018 with the provision of tailored marketing materials.

Expanding NIOX® clearances

As part of our NIOX® growth strategy, we are seeking product clearances in additional territories and for new applications in existing markets. During 2017, we submitted regulatory filings for NIOX VERO® in Singapore and South Korea, and recently we received approval from the authorities. We also plan to complete submissions in Mexico, Taiwan and Saudi Arabia. In Europe, we launched a primary ciliary dyskinesia screening application for NIOX VERO® at the world's largest respiratory conference, the European Respiratory Society International Congress. This new application was subsequently cleared for use in Australia and South Korea. We also made regulatory progress in the United States, where the VERO®'s six second test mode received FDA clearance, providing physicians with an additional option that can be easier for children to use.

NIOX® brand strategy development

As well as extending access to NIOX®, our commercial team has evolved the product's brand strategy to enhance its promotion. As part of a new 2018 marketing campaign, we have developed revised selling materials, customer economic modelling tools, pricing and payment options and enhanced visual aids. We plan to roll out a digital promotional strategy, which includes the use of targeted channels alongside a relaunch of our flagship NIOX.com web portal. The 2018 campaign will also include updated advertising, which is built around a new core theme: "If you could see it you would treat it differently". Creative work and market testing of potential adverts is nearing completion and roll out is planned for the coming months.

New publications support FeNO testing

At the end of November, the UK's National Institute for Health and Care Excellence (NICE) published new clinical guidelines recommending the use of FeNO testing as a key component of asthma diagnosis. The guidelines call for the establishment of diagnostic hubs to achieve economies of scale when implementing the new recommendations. This provides Circassia with the opportunity to target Clinical Commissioning Groups throughout the UK to help implement the NICE guidance locally. As a result, we plan to assess opportunities to expand our current commercial organisation to leverage these recommendations.

The new NICE guidelines were subsequently complemented by publications in the US and Germany. In the United States, the government Agency for Healthcare Research and Quality published an evidence report that highlights the use of FeNO testing as a valuable part of asthma diagnosis and management. In Germany, new guidelines issued by leading German and Austrian respiratory societies confirmed the important role FeNO testing can play in assisting asthma assessment and treatment.

NIOX® product evolution

During 2017 we completed market research with NIOX® users to identify potential improvements to the system. The results revealed strong satisfaction with the current VERO® device, as well as uncovering a number of areas where we could enhance the NIOX® user experience without requiring modifications to the core technology. As a result, we plan to introduce a rapid evolution to the current product, incorporating enhancements to the screen, user interface and power consumption. This update will also exploit NIOX®'s existing Bluetooth capability and cloud connectivity, providing additional iOS and Android functionality. Development work for this evolution is underway and we plan to launch the new upgrade in 2019 in Europe.

AstraZeneca US commercial collaboration

In the first half of 2017, we established a transformational commercial collaboration with AstraZeneca in the United States. Under the terms of the agreement we have an initial profit share arrangement for the COPD mono-therapy Tudorza®, with an option to acquire the full commercial rights exercisable from H2 2018. In addition, we acquired the commercial rights to the late-stage COPD combination product candidate Duaklir®.

The transaction structure is attractive, with AstraZeneca taking a 14% equity stake in the Company as upfront consideration of $50 million. Further payments are deferred with the exact level payable dependent on the success of the two products, and will be based on Tudorza®'s in-market sales and Duaklir®'s approval. Acquisition of Tudorza®'s full US commercial rights will trigger a payment of between $5 million and $80 million, and a further $100 million will be payable on Duaklir® approval, or at the end of H1 2019 if earlier. We anticipate satisfying these payments through third-party financing, and have agreed a vendor loan with AstraZeneca as a back stop.

AstraZeneca has agreed to increase its equity stake in Circassia. As a result, Circassia intends to issue AstraZeneca additional ordinary shares in the Company's share capital, subject to shareholder approval, such that AstraZeneca will increase its holding from 14.2% up to a maximum of 19.9%. Circassia will use the proceeds to fund a deferred R&D contribution of $20 million, which is payable by the end of 2018 under the agreement with AstraZeneca, and part fund a final R&D contribution of $25 million payable by the end of 2019. Additionally, AstraZeneca has agreed to include any remaining R&D contribution not paid by the end of 2019 in the loan arrangements in the existing development and commercialisation agreement. Circassia anticipates receiving approximately $9 million of tax credits relating to these R&D contribution payments.

Tudorza® commercial progress

Tudorza® contains the long-acting muscarinic antagonist (LAMA) aclidinium bromide. It is indicated for the long-term maintenance treatment of bronchospasm associated with COPD, including chronic bronchitis and emphysema. This twice-daily inhaled therapy is approved in the United States, and is available under a number of brand names in many countries around the world. Under our Tudorza® profit share arrangement we have responsibility for the product's promotion while AstraZeneca manages manufacturing, supply, regulatory and pharmacovigilance activities.

During the first year of our collaboration, Tudorza® has made good progress. By early June 2017 we had doubled the size of our sales force, completing the recruitment and training in under two months. We subsequently reached and exceeded our call targets well ahead of schedule and continue to regularly complete over 6,000 sales calls per week. Our 200-strong sales force is now supported by a team of over 50, including marketing, analytics, market access, training and medical affairs experts. Our Tudorza® promotional plan is highly focused, targeting the majority of existing customers and the modest number of physicians who account for the highest number of COPD prescriptions. The plan includes a significantly increased intensity of sales calls, with Tudorza® featuring in the number one product detailing position.

Less than a year since we began promoting Tudorza®, prescription rates have begun to respond positively. By the end of the 2017, previous declines were stabilising and prescriptions were more than 50% above the 2017 trend established prior to Circassia's full promotion of the product. As a result, we received £19.0 million in revenues from the profit share arrangement for the period from the completion of the transaction in April to the end of the year. Prescription levels continue to respond to promotion, and during the first quarter of 2018 we halted the previous decline and prescriptions are now stable at approximately 4,700 per week. During 2018 we plan to build on this progress and aim to increase product uptake. We recently began to roll out a new Tudorza® "TUNIGHT + TUMORROW" marketing campaign, which includes a range of new sales materials highlighting the benefit of twice-daily dosing, significantly improving lung function with an evening and morning dose.

Tudorza® offers Circassia a significant growth opportunity. With over 15 million Americans diagnosed with COPD, the disease is the third leading cause of death in the United States. As a result, the US pharmaceutical treatment market was estimated to exceed $5 billion in 2017. At the end of the year, Tudorza® accounted for approximately 2.4% of US LAMA-containing prescriptions. A modest increase in market share would substantially increase Circassia's revenues and third-party estimates suggest the product has annual peak sales potential of over $90 million.

Tudorza® clinical progress

In December 2017, Tudorza® successfully completed a phase IV post-marketing study requested by the FDA. This large study, which was conducted in approximately 3,600 patients with moderate-to-very severe COPD and cardiovascular risk factors, met its primary efficacy and safety endpoints. Secondary endpoints included the rate of hospitalisations due to COPD exacerbations. The results demonstrate that alongside background therapy Tudorza® is effective at reducing exacerbation rates in patients with cardiovascular disease or risk factors. AstraZeneca plans to present these compelling data at a forthcoming medical meeting, and to submit them to the FDA seeking inclusion in the product's label. If successful this would present a competitive advantage for Tudorza® as other LAMAs do not have these cardiovascular safety data in this at-risk population included in their prescribing information.

Duaklir® progress

Duaklir® is a twice-daily inhaled fixed-dose combination COPD product. It contains the same LAMA as Tudorza®, aclidinium bromide, in combination with the long-acting beta agonist (LABA) formoterol fumarate. The product is approved in a number of countries under several brand names, and during the second half of 2017, the US development programme made significant clinical progress. The product successfully completed its phase III study, AMPLIFY, in which it met both co-primary efficacy endpoints achieving significant lung function improvements compared with the individual LAMA and LABA components. Additionally, a sub-study of 24-hour bronchodilation showed that twice-daily products Duaklir® and Tudorza® demonstrated significantly greater night-time bronchodilation than once-daily Spiriva®. These positive results were supported by data from the ACHIEVE dose-ranging study, which showed Duaklir® contains the optimal dose of formoterol. AstraZeneca plans to incorporate these clinical studies in a New Drug Application (NDA) for Duaklir®, which it intends to submit to the FDA in the first half of 2018. Duaklir® targets a significant market opportunity, with third-party estimates suggesting annual peak sales potential of over $180 million.

Commercial platform expansion

In 2017, our newly-expanded US commercial platform was an important factor in attracting AstraZeneca as a partner. In the coming year, we intend to pursue this strategy beyond the United States, expanding our infrastructure to drive NIOX® growth and facilitate further in-licensing, partnering or product acquisition. To lead this expansion, we recently recruited the Head of Commercial Operations, Asia Pacific from Takeda, who has taken up the newly-created role of Senior Vice President, Commercial for Europe and Rest of World.

As part of our expansion strategy, we recently initiated a recruitment campaign in China and established a local subsidiary alongside our existing representative office. In the coming weeks, we plan to increase our Beijing-based team, which currently manages local distributors, and establish a commercial 'back office'. This will be complemented by a team of sales managers targeting new customers in key regional centres, enabling us to accelerate NIOX® sales in this important market. Later in the year we intend to recruit a modest sales force, which will complement our existing distributor base.

This new team will allow us to target top grade hospitals that are not currently NIOX® customers. We anticipate this strategy will substantially increase our China revenues beyond the £3.5 million achieved in 2017, which was itself an increase of 44% on the previous year. In addition, we anticipate our expanded capabilities will offer potential partners a commercialisation alternative in this major market.

Respiratory pipeline portfolio

Circassia's pipeline includes a number of respiratory products based on approved molecules, which are currently in clinical development or positioned to move into the clinic. Under our refocused investment strategy we now plan to out-license / partner these substitutable generic products and novel COPD treatment formulations to leverage third-party funding while retaining upside potential.

Substitutable generic products

Circassia's portfolio of substitute products target a number of marketed asthma and COPD treatments, exploiting regulatory processes that permit approval based on the demonstration of equivalence.

· The most advanced of these products is a particle-engineered formulation of the inhaled corticosteroid fluticasone propionate, which targets direct substitution of GlaxoSmithKline's Flixotide® / Flovent® pMDI. Prior to Circassia's ownership the product was out-licensed in key territories, including Europe and the US. With the United States remaining the main commercial opportunity, we sought to regain rights for the more modest European market. However, we did not reach agreement and the product rights remain with our partner.

· Our combination formulation containing fluticasone propionate and the LABA salmeterol xinafoate targets direct substitution of GSK's Seretide® pMDI. This targets a major market opportunity with GSK's product in pMDI and DPI formats achieving global sales of over $4 billion in 2017. During 2017 we initiated an additional pharmacokinetic study having further adjusted the product following previous iterative studies, and we anticipate receiving the results in the near future.

· Our formulation of tiotropium bromide targets direct substitution of Boehringer Ingelheim's LAMA, Spiriva Handihaler®. This represents a significant commercial opportunity, with Spiriva®'s total global revenues estimated to total over $3 billion in 2017. We recently completed manufacture of stability batches of our formulation in preparation to begin an initial pharmacokinetic clinical study.

Novel COPD treatment formulations

Circassia's development candidates targeting the specialist treatment of COPD are based on novel formulations of approved drugs. The most advanced of these, a combination LAMA / LABA, incorporates mesh nebulisation technology in-licensed from medical innovation company, Philips Respiratory Drug Delivery. This next generation hand-held nebuliser is battery powered, easy-to-clean, Bluetooth enabled and features a breath actuation algorithm to improve usability. Our development programme advanced during 2017 and we recently completed manufacture of stability batches in preparation for a dose-ranging clinical study of the mono-components.

Our second development programme focuses on a novel formulation of an approved product that targets the treatment of severe COPD in patients with a history of exacerbations. Circassia's development programme aims to improve the efficacy and tolerability profile of the marketed product for use in this at-risk population.

Cost containment

Following receipt of disappointing allergy clinical results in 2016 and 2017, we moved quickly to halt investment in the field and contain costs in our R&D activities and administrative functions. This included consolidating our facilities in the US, UK and Sweden and reducing the size of our R&D team. These measures have resulted in significant savings. Our G&A costs decreased over 25% during 2017 following the closure of our offices in Chicago and Solna, Sweden. In addition, we reduced our in-house R&D expenditure, with R&D headcount approximately 40% lower at the end of the year.

Refocused investment strategy

During the coming year, we intend to build on these cost containment measures as part of a refocused investment strategy. This strategy is designed to complete our transition into a fully commercially-focused specialty pharmaceutical business, with rapidly growing revenues, strong commercial platform and expanding product portfolio. The strategy has a number of key elements:

1. Commercial expansion

We plan to continue investing in our commercial platform to drive revenues from our existing portfolio and attract additional third-party products through acquisition, in-licensing and partnering. In particular, we are building an initial sales force in China to rapidly increase our sales and build on the 44% growth achieved in 2017. We also intend to review opportunities to expand our UK sales organisation to leverage the opportunity created by the publication of new NICE guidelines in 2017.

2. R&D refocusing

We intend to reduce our R&D investment and focus on supporting regulatory, medical affairs, pharmacovigilance, quality and supply chain activities for Tudorza® and Duaklir® and developing a near-term evolution of NIOX VERO® and subsequent next generation NIOX® product. In parallel, we plan to out-license / partner our respiratory pipeline portfolio based on currently approved products, which will allow us to retain potential financial upside whilst leveraging third-party funding for their development. A number of these candidates are positioned to enter the clinic, and clinical pharmacokinetic results are anticipated for the Seretide® pMDI substitute in the coming weeks.

3. Cost containment programme

Alongside the reductions in our R&D activities we plan to continue our broader programme of cost containment. In particular, we plan to decrease corporate overheads and reduce expenditure at our Oxford headquarters, including further consolidation of our facilities.

By implementing this investment strategy we plan to drive continued revenue growth from our portfolio of marketed products, while providing the financial flexibility to pursue additional product and geographical expansion opportunities. As a result of these measures, we expect annualised cost reductions of approximately £5 million in our R&D and approximately £2 million in our corporate expenditure, while increasing our 2018 sales and marketing investment by approximately £7 million.

Summary and outlook

During the past year, Circassia made significant progress in its transition to a fully-fledged commercial specialty pharmaceutical business focused on the respiratory field. With sales of our NIOX® asthma management products growing strongly, our flagship COPD collaboration with AstraZeneca making good progress and our commercial platform expanding, we are building a highly attractive business.

In the coming year, we plan to capitalise on this momentum to complete our commercial transformation. Our China expansion is progressing well, and we intend to substantially increase NIOX® sales while seeking additional products to commercialise through our platform. In the United States, we look forward to regulatory submissions for Duaklir® approval and to extend Tudorza®'s label. We will continue our focus on growing Tudorza® revenues, leveraging our new marketing campaign and established field force, while also exploiting our commercial capabilities to promote NIOX® to a larger potential customer base. In parallel, we plan to progress development of our NIOX VERO® evolution, while seeking partners for our respiratory pipeline.

During 2018, we anticipate continued strong revenue growth building on the significant increase we achieved in 2017. With a full year's contribution from our Tudorza® collaboration and rapidly growing NIOX® sales we have significant growth potential 'locked in'. During the second half of the year, we anticipate the opportunity to acquire the full US commercial rights to Tudorza®, which we intend to fund through third-party financing, and we look forward to updating the market on this important milestone.

Overall, Circassia has a clear strategy. Since the Company's founding we have worked hard to build a strong specialty pharmaceutical business, commercialising novel products in key markets with a broad and balanced portfolio. Circassia has made good progress towards this objective during the past year, and with compelling products and robust commercial growth platform we are closer than ever to achieving our goal.

FINANCIAL REVIEW

The financial results for the year reflect a period of transition for Circassia. The Company increased its revenues by 100% to £46.3 million (2016: £23.1 million) while reducing its in-house research and development (R&D) and underlying general and administrative (G&A) costs and increasing its sales and marketing investment to support its growing commercial platform. As a result, its underlying operating loss reduced to £39.6 million (2016 restated: £43.8 million) and the Group loss for the financial year from underlying activities was £36.9 million (2016 restated: £35.9 million). This is welcome progress, and a reduction in the net loss is expected in 2018 as a result of ongoing cost containment measures and increased revenues. The total loss for the period decreased to £99.1 million (2016: £137.4 million). Explanations of the difference can be found in this review.

The table below sets out results for the year ended 31 December 2017 for the Group separated into continuing and discontinued operations. Continuing operations are further divided into underlying and non-underlying operations. Underlying continuing operations include revenues and costs derived from the collaboration with AstraZeneca, as well as sales of NIOX® and costs for the existing underlying Circassia business. These are the measures primarily used by management to manage the business and measure performance. Significant irregular items are classified as non-underlying. In 2017 these include R&D contributions to AstraZeneca and impairments. Discontinued operations include direct costs and overheads associated with allergy programmes following the decision to stop all further development in the field in April 2017. The presentation of the results for the year ended 31 December 2016 has been restated in accordance with IFRS 5 to provide a clearer comparison.

1 Disclosed as a single amount in the consolidated statement of comprehensive income.

2 Restated to show the results of the allergy business in discontinued operations, see note 10 to the consolidated financial statements.

3 Includes cash and cash equivalents and short-term deposits.

4 Sales and marketing expenditure includes £74.5m goodwill impairment and research and development includes £0.3m intangible assets impairment.

Revenue

Circassia's revenues for the year increased by 100% to £46.3 million (2016: £23.1 million). These include NIOX® sales, which increased by 18% (12% at constant exchange rates (CER)) to £27.3 million (2016: £23.1 million), and revenues of £19.0 million from the partnership with AstraZeneca for the sale of Tudorza®, which were recognised from 12 April 2017 when the companies' collaboration agreement became unconditional.

NIOX® revenues include sales for use in clinical practice, which grew by 26% (20% CER) to £22.8 million (2016: £18.0 million), sales for use in pharmaceutical company research, which decreased by 8% (13% CER) to £4.1 million (2016: £4.5 million), and other revenues of £0.4 million (2016: £0.6 million), which include freight. NIOX® clinical revenues increased by 34% (27% CER) in the United States, 44% (36% CER) in China and 134% in the UK. Revenues in Germany decreased by 5% (11% CER) following restructuring to focus on market access and revised pricing to encourage greater test usage.

Tudorza® revenues reflect 50% of the joint profit arrangement with AstraZeneca from sales of the product. AstraZeneca records in-market sales, cost of sales and other operational costs while Circassia records the costs of the field force and promotion.

Gross profit

Gross margin increased from 65% to 78%. This was mainly due to the contribution of revenues from the AstraZeneca collaboration. The gross margin was higher in H2 2017 than in H1 2017 based on these revenues for the full six month period. Gross profit on NIOX® sales was £17.3 million (2016: £15.1 million), with a gross margin of 63% (2016: 65%). This decrease mainly reflects the weakening of sterling.

Sales and marketing

Sales and marketing costs increased to £49.6 million (2016 restated: £27.2 million). This was mainly due to an increase in the size of the US field force from 100 to 200 as part of the collaboration agreement with AstraZeneca. When including discontinued operations total sales and marketing costs decreased to £50.1 million (2016: £104.7 million), following a goodwill write-down of £74.5 million in 2016.

R&D activities

R&D expenditure for underlying continuing operations decreased to £15.3 million (2016 restated: £17.3 million). This includes development work on NIOX® and the respiratory portfolio. In-house R&D, which better reflects expenditure at the time of operation by including underlying and discontinued operations and excluding impairments, decreased by 54% to £20.9 million from £45.9 million in 2016.

R&D expenditure for non-underlying continuing operations increased to £82.1 million (2016 restated: £0.5 million), which includes one-off costs of £45.1 million ($62.5 million) for the R&D contributions to AstraZeneca, all of which have been expensed in the income statement in 2017. The remainder is due to impairments of product candidates in the respiratory portfolio. This includes the Seretide® pMDI substitute, for which the impairment reflects a decrease in the market potential following delays in product launch as a result of negative PK study results in the previous two years. It also includes the Flixotide® pMDI substitute (EU rights) and a partnered particle-engineered version of salmeterol xinafoate which are no longer being pursued.

Costs of £5.6 million (2016: £28.4 million) are included in discontinued operations, following the halting of expenditure on allergy programmes.

Administrative expenditure

Administrative expenditure from continuing operations decreased by 27% to £10.9 million (2016 restated: £14.9 million). This reflects a number of cost saving measures, including the closure of the Company's sites in Solna, Sweden and Chicago, US and decreased expenditure on patent maintenance.

Other gains and losses

Other gains for the Group increased to £10.4 million (2016 restated: £5.2 million). Included in this figure are £8.3 million (2016: £nil) of foreign exchange gains on payables to AstraZeneca due to weakening of the US dollar against sterling.

Net finance income

Net finance costs were £2.4 million (2016 restated: £0.8 million income) for the year. Finance costs of £2.7 million (2016: £nil) reflect a charge to the income statement, which is based on the difference in the time value of money on the discounted $100 million deferred consideration payable to AstraZeneca at the year end.

Taxation

Taxation for the year was a £21.0 million credit (2016: £7.5 million credit). The main component was the R&D tax credit on qualifying expenditure, which was £13.8 million (2016: £8.6 million). Of this £3.5 million (2016 restated: £1.9 million) is included in underlying continuing operations and has increased because of growth in expenditure on the respiratory programmes.

Included in non-underlying continuing operations is a tax credit of £16.5 million (2016: £nil). Of this, £10.2 million is an R&D tax credit (2016: £nil) for R&D contributions to AstraZeneca. The remaining £6.3 million credit relates to the reduction of a deferred tax liability as a result of impairment of intangible assets in the respiratory portfolio.

Loss after tax and loss per share

The loss per share for continuing operations was 29p (2016 restated: 13p), reflecting a loss for the financial period of £93.6 million (2016 restated: £36.9 million), with the increase mainly the result of non-underlying items of £82.1 million, which include the R&D contribution to AstraZeneca and impairment of intangible assets in the respiratory portfolio. Basic loss per share for the period was 31p (2016: 48p) reflecting a loss for the financial period of £99.1 million (2016: £137.4 million).

Statement of financial position

The Group's net assets at 31 December 2017 were £224.8 million (2016: £280.7 million). An increase in non-current assets is offset by a similar increase in non-current liabilities and the remaining decrease mainly reflects the decrease in the Company's cash balance.

Non-current assets have increased to £312.5 million (2016: £195.7 million). This is mainly due to the recognition of assets giving rights to collaborate with AstraZeneca on the commercialisation of Tudorza® in the United States and an increase in intangible assets relating to the acquisition of Duaklir®.

Non-current liabilities have increased to £146.8 million (2016: £31.9 million). This is mainly due to the $100 million consideration payable to AstraZeneca and recognition of the future royalties payable on Duaklir® sales.

Cash flow

The Group's cash position (including short-term deposits) decreased from £117.4 million at 31 December 2016 to £59.5 million at 31 December 2017. The main cash outflow was £57.6 million cash used in operations (2016: £56.7 million). Cash used in operations decreased in H2 2017 to £23.3 million (H1 2017: £34.3 million). H2 2017 included receipt of an R&D tax credit of £8.9 million and payment of an R&D contribution to AstraZeneca of £13.1 million as well as payments for discontinued operations.

Outlook

The outlook for 2018 is positive, reflecting the Company's increasing focus on commercial expansion and its intention to build on the cost containment measures achieved in 2017. With anticipated savings in R&D and administration, together with the benefit of a full year of Tudorza® sales and growing NIOX® revenues, the overall net loss in 2018 is expected to decrease significantly.

With this revenue growth potential in effect 'locked in' in 2018, Circassia also anticipates the first opportunity to acquire the full US rights to Tudorza® in the second half of the year. If this option is exercised, Circassia will make further payments to AstraZeneca of between $5 million and $80 million dependent on Duaklir®'s approval and Tudorza®'s US sales. Circassia anticipates utilising third-party financing to satisfy the consideration, and a vendor loan is in place in the event this cannot be secured.

During 2018, the Company also plans to implement its refocused investment strategy. As a result, sales and marketing costs are expected to increase by approximately £7 million in 2018, with the expanded US field force in the marketplace for the full year and the Company building a sales force in China. As part of this refocusing, annualised savings of approximately £5 million are expected in R&D expenditure compared with this year's underlying continuing operations. The reduction in R&D activities will also enable the Company to reduce its corporate and facilities overheads in Oxford, reducing anticipated G&A expenditure by approximately £2 million on an annualised basis. In addition, as a result of this change there may be an impairment in the carrying value of the respiratory cash generating unit in 2018.

Additionally, Circassia intends to issue further ordinary share capital to AstraZeneca, subject to shareholder approval, such that AstraZeneca's holding will increase from 14.2% to a maximum of 19.9%. Circassia will use the proceeds to fund a deferred R&D contribution of $20 million, which is payable by the end of 2018 under the agreement with AstraZeneca, and part fund a final R&D contribution of $25 million payable by the end of 2019. AstraZeneca has agreed to include any remaining R&D contribution not paid by the end of 2019 in the loan arrangements in the existing development and commercialisation agreement. Circassia anticipates receiving tax credits totalling approximately $9 million on the R&D payments.

With sales growth potential in place, cost containment measures delivering results and a refocused investment strategy targeting commercial expansion, we look forward to 2018 with optimism.

Julien Cotta

Chief Financial Officer

Consolidated statement of comprehensive income

for the year ended 31 December 2017

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

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

2 See note 11 for details

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

The profit for the parent Company for the year was £1.5 million (2016: £2.4 million).

The notes on pages 20 to 54 are an integral part of these consolidated financial statements.

Consolidated statement of financial position

as at 31 December 2017

The notes on pages 20 to 54 are an integral part of these consolidated financial statements.

The financial statements on pages 14 to 54 were authorised for issue by the Board of Directors on24 April 2018 and were signed on its behalf by

Registered number: 05822706

Parent Company statement of financial position

as at 31 December 2017

The notes on pages 20 to 54 are an integral part of these financial statements.

The financial statements on pages 14 to 54 were authorised for issue by the Board of Directors on

24 April 2018 and were signed on its behalf by

Registered number: 05822706

Consolidated and parent Company statement of cash flows

for the year ended 31 December 2017

The notes on pages 20 to 54 are an integral part of these consolidated financial statements.

Consolidated statement of changes in equity

for the year ended 31 December 2017

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

The notes on pages 20 to 54 are an integral part of these consolidated financial statements. 

Parent Company statement of changes in equity

for the year ended 31 December 2017

The notes on pages 20 to 54 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 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 2017 and 2016 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 2017 were approved by the Board of directors on 24 April 2018 and will be delivered to the Registrar of Companies in due course. The report of the auditors on those accounts was unqualified and did not contain an emphasis of matter paragraph nor any statement under Section 498 of the Companies Act 2006.

The exemption from audit has been claimed for the individual financial statements of Circassia Pharma Limited (registered number 6410308) and Prosonix Limited (registered number 05679156) for the year ended 31 December 2017 under section 479A of Companies Act 2006. Circassia Pharmaceuticals plc has given the required guarantee under section 479C in respect of the reporting year. Circassia Pharma Limited and Prosonix Limited results are included in these consolidated financial statements

Going concern

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

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 2017 but had no significant impact on the Group:

- IAS 7 (amendment) - Statement of cash flows

- IAS 12 (amendment) - Income taxes

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' (effective 1 January 2018): adopting IFRS 9 will impact hedge accounting and receivables provisions. The basis of documentation and effectiveness testing of hedges under the new standard will be linked more closely to the risk management objectives, which may generate different levels of ineffectiveness than the current testing under IAS 39. The Group currently does not adopt hedge accounting hence the changes are not expected to have any significant impact on the financial statements.

Receivables provisions will move from an incurred to an expected loss model. The Group's largest exposure is trade receivables with the gross value of £4.0 million as at 31 December 2017. The new model will impact the timing and value of provision recognition on higher risk balances. No material impact is anticipated as a result of these changes.

IFRS 15 'Revenue from contract with customers' (effective 1 January 2018): 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. The review of the impact of IFRS 15 requires an assessment at contract level to confirm the full impact of adopting this standard. Based on the analysis completed to date, the Directors consider that the new standard will not materially impact the revenue recognition for the Group business activities.

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 and are annotated with an asterisk.

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. In addition, a judgement is made as to determine the point at which control of a business passes to the Group and a business combination occurs. Until control is passed to the Group, consideration paid or payable is presented as a prepayment for the business combination.

Accounting for the Collaboration with AstraZeneca

Following the collaboration and profit share arrangement with AstraZeneca, a Purchase Price Allocation exercise was performed focusing on the following key accounting areas:

- Determination and allocation of the consideration

Under the terms of the agreement to secure certain US commercial rights to Tudorza® and Duaklir®, a maximum total consideration of $230 million plus future sales-based royalties is payable to AstraZeneca. For the purposes of IFRS 3, the total consideration included in the valuation consists of $50 million for shares issued to AstraZeneca, $100 million deferred non-contingent consideration and the fair value of royalties payable to AstraZeneca. It does not include the amount (up to $80 million) that would be paid to exercise the Tudorza® option, which will be accounted for once exercised.

Under IFRS 3, it is necessary to determine the amount of consideration which should be allocated to Duaklir®. As this

is an unusual scenario, there is no prescribed methodology for performing this exercise. Management has based the allocation of consideration between both products on a relative fair value approach. This was determined using a bottom-up business valuation for both products and allocating the amount expected to be paid for both products proportionately between both products. The valuation model was based on expected cash flows into perpetuity under two separate scenarios with certain key assumptions including the use of discount and terminal growth rates, revenue forecasts to 2034 incorporating a specific growth profile. These assumptions therefore give rise to a number of judgements in the valuation models.

- Initial valuation of Duaklir IPR&D

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

- Initial valuation of Royalties*

As part of the transaction, Circassia will pay royalties to AstraZeneca on future sales of Duaklir® in the United States. There is some uncertainty over the final amount of future sales and thus royalties due and therefore actual outcomes could differ significantly from the estimates made. Under IFRS 3, these royalties have been classified as additional consideration and initially recognised as an IPR&D asset with a corresponding contingent liability. The value of the IPR&D asset was calculated by management using a tax-effected NPV of the future royalty cash outflows at the date of the transaction. See note 35 for further details.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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 (CGUs) containing the goodwill taking into account key assumptions (see note 15) 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.

Investments*

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

Other accounting estimates and assumptions

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

Customer Relationships 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

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.

Share based payments

Options are 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 26.

Non-underlying items

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

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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 four business segments during 2017, Allergy, Respiratory, NIOX® and US AZ collaboration. This is consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance, has been identified as the Executive Directors, who make strategic decisions.

The allergy operating segment has been classified as a discontinued operation. Information about this discontinued segment is provided in note 10.

Discontinued operations

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

The allergy programme costs and the associated research and development tax credit for the year ended 31 December 2016 have been reclassified as discontinued operations in the consolidated statement of comprehensive income in accordance with IFRS 5 requirements. The decision to treat the allergy business as discontinued was made on 25 April 2017 when the Group announced a decision to cease all further activities on the allergy programmes.

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:

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

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

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

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

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

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

Computer Software

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

Notes to the financial statements

1. Summary of significant accounting policies (continued)

Investments

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

Inventories

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

Impairment of non-financial assets

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

Business combinations under common control

Transactions relating to asset and liability transfers between two Group entities are accounted for by applying the predecessor value method whereby the acquired assets and liabilities are recorded at their existing carrying values on the date of transfer. No new goodwill arises in predecessor accounting.

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:

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.

Deferred non-contingent consideration

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

Contingent royalty consideration

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

Cash and cash equivalents

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

Share capital

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

Employee benefit costs

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

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.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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

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

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

Other employee benefits

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

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.

Rendering of services

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

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 'Other gains and losses'. Previously foreign exchange differences were presented within 'Finance costs or income'. The change in the presentation reflects the fact that historically the foreign exchange differences were to a large extent driven by movements on foreign cash balances whereas following the AstraZeneca collaboration agreement the foreign exchange differences also arise from translation of monetary liabilities and as such the change in presentation to 'Other gains and losses' was deemed appropriate. This constitutes a voluntary change in accounting policy and has been applied retrospectively in the financial statements resulting in 2016 total finance income reducing by £5.2 million and Other gains increasing by £5.2 million. Had the foreign exchange differences for 2017 been presented within 'Finance costs or income', total finance income would have been £7.2 million higher and other gains £7.2 million lower. There has been no impact to total loss for the current or previous financial year as a result of the policy change. Had the current policy been applied to 2015 financial results total finance income would have been £1.8 million lower and other gains £1.8 million higher with no impact on total loss for the financial year.

Notes to the financial statements

1. Summary of significant accounting policies (continued)

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

Taxation including deferred tax

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

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

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

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

Deferred tax 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 2017, the Company issued 47,355,417 Ordinary shares with a value of $50 million to AstraZeneca (AZ) as part of the consideration to secure certain US commercial rights to Tudorza® and Duaklir®. The Group's capital is comprised of share capital and share premium, which are disclosed in notes 25 and 27 respectively. The Group monitors the availability of capital 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.

In relation to foreign currency risk, the Group's policy is to hold the majority of its funds in Sterling, monitor foreign currency rates and purchase foreign currency at spot rates.

The change in foreign exchange rates that is assessed to be reasonably likely for each currency in 2017 is 10% (2016: 15%).

At 31 December 2017, if the Euro had weakened/strengthened by 10% against Sterling with all other variables held constant, the post tax loss for the year would have been £0.4 million (2016: £1.6 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 2017 of a 10% weakening/strengthening of the US dollar against Sterling with all other variables held constant would have been a decrease/increase of £2.7 million (2016: £0.6 million).

Notes to the financial statements

2. Financial and capital risk management (continued)

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.

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 2017 would have been an increase/decrease of £0.1 million (2016: £0.1 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 2017 the Group placed funds on deposit with 6 banks (2016: 7 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. Financial liabilities outstanding for periods greater than one year in 2017 include non-contingent consideration, contingent royalty consideration and R&D contributions payable to AtraZeneca. There were no financial liabilities outstanding for periods greater than one year in 2016. The amounts disclosed in the table are the contracted cash flows discounted to present value where such impact is material:

Derivative financial instruments and hedging

There were no derivatives at 31 December 2017 or 31 December 2016.

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 2017 operating segments are identified within the Group by product portfolios:

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

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

- US AZ collaboration relates to the US collaboration agreement with AstraZeneca regarding the commercialisation of Tudorza® and of Duaklir® once approved.

The allergy operating segment has been classified as a discontinued operation. Information about this discontinued segment is provided in note 10.

There were no sales between the segments in either reporting year.

An impairment charge of £37.0 million in respiratory segment relates to three IPR&D intangible assets, see note 16 for further detail.

The table below presents information regarding the Group's operating segments for the years ended 31 December 2017 and 2016. Costs shared between the segments are not allocated to individual segments for decision making purposes. These are disclosed under the column headed 'Unallocated'.

Segment operating loss

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

Notes to the financial statements

3. Operating segments (continued)

Assets by segment

4. Revenue

The Group derives the following types of revenue:

5. Employees and directors

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

The average number of administration staff employed by the Company during the year, including Executive Directors, was 2 (2016: 2).

The Group contributes to defined contribution pension schemes for its Executive Directors and employees. Contributions of £95,356 (included in other payables) were payable to the funds at the year end (2016: £101,236).

Notes to the financial statements

5. Employees and directors (continued)

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 (to 2 March 2017), Senior VP of Commercial US (from 1 July 2017), the General Counsel and Chief Compliance Officer, VP of Human Resources and the Chief Business Officer. The compensation paid or payable to key management is set out below.

6. Other gains and losses

1 Restated to show Foreign exchange differences within 'Other gains and losses' (previously shown within 'Finance income and costs'.

Foreign exchange gains on non-underlying items of £8.3 million (2016: £nil) is made up of £5.4 million foreign exchange gain on the non-contingent consideration and £2.9 million foreign exchange gain on the contingent royalty consideration. See note 11 and note 35 for further details.

7. Finance income and costs