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Edited Transcript of AGY.L earnings conference call or presentation 4-Mar-20 9:30am GMT

Half Year 2020 Allergy Therapeutics PLC Earnings Call

London Mar 28, 2020 (Thomson StreetEvents) -- Edited Transcript of Allergy Therapeutics PLC earnings conference call or presentation Wednesday, March 4, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Bullimore

Allergy Therapeutics plc - Head of Communication & Market Development

* Manuel Llobet

Allergy Therapeutics plc - CEO & Executive Director

* Nicolas Alexander Ulrich Wykeman

Allergy Therapeutics plc - CFO & Director

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Conference Call Participants

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* James Francis Thomas Mainwaring

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Max Stephen Herrmann

Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD

* Michael Clive Mitchell

Panmure Gordon (UK) Limited, Research Division - Healthcare Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Allergy Therapeutics Interim Results for the 6 months ended 31st of December 2019 Conference Call. (Operator Instructions) As a reminder, today's call is being recorded today, and you will hear music until the presentation begins.

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [2]

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Hello, everybody, hello all the people on the phone, and thank you very much for coming today for the interim results announcement. This is Manuel Llobet, the CEO, and we have today with us Nick Wykeman, our CFO; and Alan Bullimore, our Head of Strategic Communications. I'm very glad to take you through the half year results. So at the end of the presentation, we'll have questions from people in the room and from people outside the room.

So let's start with the financial and operational highlights. We grew 9% in constant currency, achieving a revenue of GBP 50.5 million compared to GBP 46.7 million last year. We increased 10% our operating profit pre R&D. We reached a cash balance of almost GBP 40 million, GBP 39.7 million, compared to GBP 27.4 million last year. And on the clinical side, the 2 headlines are the publication of the preclinical data. Up to now we've been able to say not too much about our vaccine for peanut because we were building IP and we waiting -- we were waiting for this publication. Now it's published and Alan will take us through the main aspects of that preclinical model. And then also, all the preparations for the Phase III trial of Grass are ready and we are ready to starting in few months the final phase of this clinical development plan.

In this Slide #5, we show our organic business. Remember that we define ourselves as a hybrid company with an organic and development components. The organic model, it's doing pretty well. We had a very good first half year, growing high single digit and that completes a series of, again, 20 years growing high single-digit or low double-digit compound annual growth rate. And probably the numbers by themselves are not that spectacular, but I think the value of this slide is that we've been probably one of the few companies in the field consistently growing year after year after year at this level, high single digit, low double digit, and as we do so, improving our margins. We have reached for the first time this half year, 32% operational margin pre R&D. And that's thanks to the scale that we are weighting, to the efficiencies that we are incorporating. And it's part of the business that it's consistently, steadily growing year after year at a good rate in a market that is relatively flat. We have to say that this year, we have seen growth in the European market for the first time in many years. And it's -- again, it's been a growth, that it's been spread across all the key markets and all the key products. So it's healthy growth based mainly on volume, not on price increases. So very strong, I would say, business model, delivering year-on-year consistently over the time.

And then in the next slide, I'll hand over to Alan, where we want to give you a bit of flavor on the peanut project that we've been always talking very superficially. And also, we have 1 slide for the Grass program that is ready to start its final phase.

So I hand over to you, Alan.

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Alan Bullimore, Allergy Therapeutics plc - Head of Communication & Market Development [3]

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Thank you, Manuel. So as Manuel discussed, R&D and clinical updates for this year, mainly focusing on the publication, the preclinical Polyvac peanut data. We published in The Journal of Allergy and Clinical Immunology the updates what we've managed to research in the preclinical work. We've got some really exciting data. We've been unable to talk to you previously because we've been focusing on gaining IP, we've been focusing on getting the right data out there. And what we've managed to do is we've managed to get a really good proof-of-concept package together. And what we've described in the JACI paper, all vaccines for allergy require low reactogenicity. What this means is that the vaccine must be given to an allergic patient and it doesn't cause them to have an allergic action.

We've managed to show this. You can see in the graph on this slide. We've looked at roasted peanut. We've looked at Ara h 1 and Ara h 2 and native peanuts combined with VLP. And if you look, all of the peanut sections that are combined with VLP do not cause any kind of anaphylaxis in the preclinical model that we use. Where we used no VLP, so there's no vaccine component, just the peanut component, you can see there was a distinct anaphylactic reaction in that group. So this goes to show the preclinical work demonstrates that the product is viable. It does not cause anaphylaxis in the preclinical model.

Now the second part of preclinical proof-of-concept is not only must it not cause an anaphylactic reaction, it must also then protect against subsequent peanut exposure after the vaccine. And we don't show the data on this slide, but it's all available in the paper. We did similar sets of groups of peanut candidates, and we managed to show that on subsequent challenge with peanut extract, whole peanut and constituent allergens of different peanuts, so Ara h 1, Ara h 2, different major allergens, that we saw a very similar type of graph. We see very -- we see no anaphylaxis in those animal models and we saw in the control groups that anaphylaxis happened. So we're showing a clear overview that we've got no anaphylaxis in naive mice. And then once we've vaccinated them and challenged them, they also don't experience anaphylaxis. So we're not only non-reactogenic but also protected.

The other thing that had -- we'd never seen -- it's never been demonstrated before is that we managed to have a single peanut allergen. So rather than a combination of major allergens, Ara h 1, Ara h 2, Ara h 6, one single allergen in the vaccine protected against the entire peanut sample. So you can actually vaccinate against a single allergen and you can protect the model against all peanut allergens that they're exposed to. So that's never been demonstrated before. It's very exciting. It underpins the different nature of this vaccine, I think. It's not desensitization therapy as normal allergy immunotherapy is. It's a vaccine in effect. It is a different type of immunotherapy. So we're quite excited by this piece of work.

We've still got IP factors that we need to work through, and we'll be able to provide much more detail on the vaccine itself, its manufacturer and more detailed plans of how we're going to progress once we've got some other details in place. But in terms of an update, the program is progressing really, really well.

So on Slide 8, the proof-of-concept is established, as I explained. We've got sustained immunity and we've got non-reactogenicity. We've managed to -- in the scale-up processes, we've identified an optimal bacterial stream that we can express the product in. So that's how this product is manufactured. It's a recombinant immunotherapy. Our manufacturing process and the methods by which we're going to complete GMP manufacture have been set and we are working through those. Batches have been manufactured and stability and toxicology testing is now underway in preclinical data packages and discussions with regulatory authorities to get work underway there.

We've also had 3 scientific advice meetings with European regulators, updating them on our proposed development plan. This is a new type of development plan in the field of allergies. So we're working very closely with them. We've got great collaboration going on, and there's a good dialogue between all of us on how we're going to achieve this. So we're still expecting a CTA submission around 2021.

So moving on to the Grass program on Slide 9. We're really looking forward to the G309 stepwise trial beginning this year. We have reached out to study sites to investigators. We're meeting them in the coming weeks to arrange recruitment and to arrange initiation of the study. So this is the 2-part Phase III studies that we've adapted following these results. You may remember the Phase II G205 study produced highly statistically significant dose responses using our dose selection model. And we're moving forward with 27,000 SC dose. And this stepwise approach should enable us to get a good indication on how we can proceed with a pivotal study the following year.

I'll pass on to Nick.

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Nicolas Alexander Ulrich Wykeman, Allergy Therapeutics plc - CFO & Director [4]

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Thank you very much, Alan. Moving on to the financial results, so move to Slide 11. As Manuel has already said, for the half year, we had revenues of GBP 50.5 million. That's up 8% on an actual rate and 9% in constant terms against the half year last year. The gross profit margin was slightly lower than last year. That's been driven by additional Brexit costs and a credit we received last year, but generally, we are improving our leverage. There's been good control on the overheads, some operating efficiencies there, so our operating profit pre R&D was GBP 17.3 million. That's up 10% on the previous year. So we continue to show that leverage.

I'm afraid I have to bore you with a bit of accounting, which is that this year, we've had 2 accounting standards and they've affected the overall shape of the P&L. IFRS 16, which is related to lease assets, means we now need to put our operating leases on to the balance sheet. It also means in the P&L with a movement between the costs that we show, we no longer show leasing costs in the operating costs and that's actually moved then into depreciation and finance charge. So actually, our operating profit pre R&D, the difference between this year and last year is hardly anything. But if you also look at the EBITDA, you need to be warned that actually a significant -- and in the half year it's about GBP 0.7 million, has moved between the operating costs into depreciation.

The second change that's happened in the accounting world is IFRIC 23, which is a different way of looking at the tax position. So instead of taking a single view on what the overall potential liability for taxes, we need to take a weighted view of what the potential outcomes could be. And since we have a significant number of years outstanding for German tax that needs to be closed, that's due to the fact that German tax authorities take quite a long time to review the tax, not the fact that we've got any particular dispute or anything with them, it means that our tax charge has increased. And you can see that in the tax line where we've got a charge of GBP 0.6 million against GBP 0.4 million in the previous year. However, that still leaves us with a very strong profit after tax of GBP 15.3 million for the half year, as I say, very much driven by the top line growth in revenue and good operating efficiency.

Moving on to Slide 12 to take a closer look at the sales line. As Manuel has said, we've had good strong sales, particularly driven in Northern Europe and Spain. We had strong growth in Germany, in Spain, Netherlands and Switzerland across the broad range of products, but particularly in Pollinex, Pollinex Quattro and Venomil, which is our bee and wasp venom treatment.

The -- overall, there was actually a very small exchange rate difference as you can see in the figures I've put down below to show what the rates are. The constant rate was GBP 1.12, and current rate for this half year is GBP 1.13. It has obviously moved since then, the euro-sterling rates, but only a small difference in FX.

Moving on to Slide 13, which shows the balance sheet. As I mentioned before, I think the key thing here where you can see significant movements is this IFRS 16 adjustment we've made. And you can see in the top, noncurrent assets, we've included on that right-of-use assets. So that's all our lease assets. So that's mainly in actually buildings, most of our properties are leased, and as well as a certain amount of cars and so on. So we've put GBP 9 million on to the balance sheet there. And also further down, if you look further down in the liabilities, we've got lease liabilities of GBP 9 million also on the balance sheet.

Overall, we've kept good control of our working capital and we worked very hard on reducing our debtors, particularly for the Europe and distributors and also in Italy. Our stock levels have dropped slightly. That's an indication that we're actually not in the period where we're just coming up to a key point for Brexit. So we're actually working our stock off at the moment. But what will happen is, as we start to move to the end of December 2020, we're likely to be building up stock again because there's another potential hard Brexit point, and we obviously won't have as much product -- approved product manufactured and sitting in Spain as possible at that stage.

Apart from that, as Manuel has mentioned, we finished the half year with a very strong cash balance of almost GBP 40 million, reflecting the strong performance in trading. And we had debt of GBP 2 million, which we continue to pay off.

Moving on to Slide 14, which is the cash flow. As I've already mentioned, the cash flow is really driven by -- the strong cash flow is driven by a very good trading performance and also by good control of working capital. There's been a reasonable amount of investments with continued investments in the factory and things of that sort and in machinery related to Brexit, but overall, yes, it's a very good performance.

So moving on to the outlook. I'll hand back to Manuel.

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [5]

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Yes. That's the one that you have seen many, many times. In fact, we wanted to change it for you because I think you are a bit bored to see this slide over and over again. But that's really what we are doing.

These are the 3 pillars of our development. So Europe, where we are developing the company, as I mentioned before. And it's a steady growth, not disruptive, but steady, organic and order -- done in an orderly manner. That sustains and supports all the development in the next 2 areas: one, development of the pipeline, where we have the late-stage assets like PQ Grass, and as Alan said, we are ready to start Phase II this year; the -- and also the early stage like the peanut, which is -- we'll start the first studies in humans this summer, but the Phase I trials will extend for 12 months. So we expect to work on safety trials at least until summer 2021; and the preparations for the U.S. market, which is basically to deliver on the PQ Grass development plan and file as soon as we get the results of the G306. So these remain the 3 main pillars of development of the company.

And finally, as I wrap up, I'll allow Nick finish the presentation.

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Nicolas Alexander Ulrich Wykeman, Allergy Therapeutics plc - CFO & Director [6]

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Thank you, Manuel. So 2020 is going to be a key year, both the financial year but also talking about the calendar year. We expect consistent sales growth. I think we've shown already for the half year, we continue our momentum of increasing sales across the whole portfolio and we expect to continue gaining market share over the period.

As Manuel has talked about, we're also busy preparing for the beginning of the 2-stage Grass trial, which will start in the autumn of this calendar year and run in 2 stages, with the second stage reporting with final results from the efficacy trial in the autumn of 2022. We're working obviously on the peanut, which is a very exciting project, and we'll move into that critical Phase I trial with safety in 2021.

As Manuel has talked about, the 3 pillars, we are continuing to develop in Europe the pipeline. We are moving ahead on the pipeline. We're also looking at various opportunities in the VLP area outside of allergy, which is something we'll probably come back and talk about in the next few months.

And finally, we're continuing our groundwork for entry into the U.S., which obviously will lead on from the success in the Grass trial. So there's a lot to look forward to. Thank you.

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [7]

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I'm happy to take questions from the room first and then from the phone.

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Nicolas Alexander Ulrich Wykeman, Allergy Therapeutics plc - CFO & Director [8]

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Yes, please.

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Questions and Answers

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James Francis Thomas Mainwaring, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [1]

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I'm James Mainwaring from Stifel. Just 2 questions and they're sort of linked together. The first one, in your statement, you talked about the European sort of regulation kind of increasing and perhaps sort of getting a bit more, I'd say, uncertain. If I could just get your kind of view on, I'd say, the opportunities or difficulties that might kind of beset you?

And then the second one, linked to that, is on the PQ Birch product. With your talks to the regulators, is there any kind of sort of time line, deadline in which you need to redo that trial? Or any other kind of context within that?

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [2]

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Right. Thank you for your questions. Yes. No, this comment that it was in my quote regarding the regulatory environment, as you will remember, the TAV, the therapy ordinance regulation in Germany started, I think, in 2009 or so and it's coming to an end. So it's been 10, 11 years from now. And we expect that the regulation should end around 2026 or so. So from -- if you take -- from that time perspective, all in all, it will have been 15, 16 years, this transitional period which has been quite generous, I think. But it means that 2/3 of this period have gone. So there is only about 5 to 6 years, and that means that the products that have not been able to achieve the regulatory hurdles will be out of the market. In fact, I think we've mentioned that at the beginning of the process, there were about 144, 145 notifications. We have now less than 50% of this, meaning that half of the notifications have withdrawn. We've been, so far, the only company that has been able to keep all the notifications in the TAV process. And therefore, we just wanted to highlight that, that's ongoing. So that that regulation is maturing, and at some point, will end and will have some consequences for players in the market. So that it was more -- and it was not to flag any specific thing but just to frame that -- the regulatory process, it's at 2/3 of its expiry date, let's say.

And regarding your second question with PQ Birch. I think we informed that we are in dialogue with the German regulatory authority. We have agreed with them that the product would remain within the TAV, meaning that we would allowed to be -- to keep the product sort of business as usual. We'll repeat the study. We have analyzed and we believe that we have identified the causes that made the study not to meet the primary endpoint. We also informed in this same forum in October that we were not going to disclose why because that -- we believed it was commercially sensitive. But we are -- it's been a thorough, long investigation and we are happy to -- with the conclusions. It's unfortunate that we did not meet the primary endpoint, but this is science. We are an R&D-focused company. The SCID segment of this market is much more difficult than the SLIT in terms of clinical development. The placebo effect is much higher. And there are many other factors that make these trials in the SCID segment more challenging than on the SLIT ones. But we believe that the future is the SCID pathology. The SLIT pathology has a very low compliance, which is unacceptable, we believe. And SCID is much more compliant. Doctors have much more control over the treatments and the patients. And we will it see a core strategy to our SCID portfolio. So I would say no further comments. I mean we have agreed with the [authority] that the product would remain in the TAV, business as usual. We'll repeat the study. And we have -- we believe that we have identified the causes why we did not meet the primary endpoint.

Mike?

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Michael Clive Mitchell, Panmure Gordon (UK) Limited, Research Division - Healthcare Analyst [3]

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Mike Mitchell, Panmure. With peanuts and the introduction of the in vitro work now, I'm just thinking about how we've got to this position on the -- into the -- or sort of traveled through the regulators. So we've got 3 regulators that you've engaged within Europe. Was that always the plan? Has there been a lot of consistency or some very specific feedback from one or more regulators that has led you to the decision to introduce the in-vitro work? And how does this compare against what has previously or historically been done in preclinical peanut studies to date?

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [4]

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Do you want to answer that?

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Alan Bullimore, Allergy Therapeutics plc - Head of Communication & Market Development [5]

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Yes, yes. So we never had a direct plan to meet with a certain number of regulators. The -- as the field advances and as we get more information, we are working in collaboration with the regulators. It's a new therapy. It's a first in allergy immunotherapy to offer this kind of vaccine, this type and style of treatment so we've adapted our strategy accordingly. We've got great feedback, and the regulatory authorities have actually given us some things for us to think about on how we can best prepare for the success and how we can -- early preparation means that we can increase that chance of success later on.

In terms of how it differs to other processes that have gone before, I mean, it differs hugely because they're completely different programs. So for example, if you were to develop a peanut therapy based on whole peanuts that you take orally, you wouldn't have to do a lot of toxicology work, for example, because you know -- because you're allergic, it's toxic for you. So we don't need to do this type of work. So it's a completely different area. But the -- we're encouraged by the feedback that we've got from the agencies and they're really engaged and working with us to get the right plan moving forward.

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Michael Clive Mitchell, Panmure Gordon (UK) Limited, Research Division - Healthcare Analyst [6]

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Okay. And you had them at this stage and is this sort of the study, the testing, design already in place then? Or is there something that you're still working through at the moment?

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [7]

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So, you'll answer that.

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Alan Bullimore, Allergy Therapeutics plc - Head of Communication & Market Development [8]

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So yes, there's some standard protocols in place so we can -- and we'll work according to those protocols.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [9]

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It's Max Herrmann from Stifel. Just on the peanut program. It sounds like you're going -- neutralizing antibodies, and that's the mechanism or mode of action. Obviously, that changes a little bit the development approach because you're more like a classical vaccine rather than a tolerizing immunotherapy. How does that alter the development program?

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Alan Bullimore, Allergy Therapeutics plc - Head of Communication & Market Development [10]

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It doesn't alter the development program substantially because we always envisaged that the vac -- the proposed product, the candidate would be vaccination style rather than desensitization like traditional immunotherapy. The preclinical work in the human cell testing that we're doing -- or that we're planning is designed so that we can look at how the vaccine is immunologically working within humans, doing it in human cells before we then go into actual first-in-man studies which we have planned.

But in terms of -- we won't have all those answers until we complete those studies and neutralizing antibody production and the associated composition and what if you ingest peanut accidentally or something. And we'll be able to elucidate the mechanisms after that and update how it happened.

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Max Stephen Herrmann, Stifel, Nicolaus & Company, Incorporated, Research Division - Head of European Healthcare Equity Research & MD [11]

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So this isn't anything -- the way that the a-immune and -- those are working more on the classical IT. Yes. Okay.

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Unidentified Analyst, [12]

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Nick, could you give a bit more information with respect to rebates? So have they gone up as an absolute or as a rate? And is that going to continue going forward?

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Nicolas Alexander Ulrich Wykeman, Allergy Therapeutics plc - CFO & Director [13]

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There's been no change in the rate. This is purely a reflection of, well, 2 factors. One factor is simply the overall increased sales which naturally drives higher rebates. And there is a certain amount of price increase. Every price increase is controlled by an increase in rebates. So we do naturally tend to increase our prices a bit, but then that is taken off at the rebate level. So there's no change in rates.

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [14]

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Okay. Thank you. Any question from microphone?

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Operator [15]

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(Operator Instructions)

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Manuel Llobet, Allergy Therapeutics plc - CEO & Executive Director [16]

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No questions. Okay. Thank you very much again for being here and sharing with us these H1 results and we'll keep in touch. Thank you very much. Have a nice day.

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Alan Bullimore, Allergy Therapeutics plc - Head of Communication & Market Development [17]

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Thank you.

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Operator [18]

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Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.