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Edited Transcript of APH.L earnings conference call or presentation 26-Mar-19 11:00am GMT

Full Year 2018 Alliance Pharma PLC Earnings Call

Chippenham Mar 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Alliance Pharma PLC earnings conference call or presentation Tuesday, March 26, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Timothy Franklin

Alliance Pharma plc - CFO & Executive Director

* Peter Jonathan Butterfield

Alliance Pharma plc - CEO & Executive Director

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Conference Call Participants

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* Andrew Mark Whitney

Investec Bank plc, Research Division - Analyst

* Edward Thomason

Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst

* Julie Simmonds

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

* Martin David Hall

Hardman & Co. - Head of Research

* Sally Anne Taylor

Numis Securities Limited, Research Division - Director & Healthcare Analyst

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Presentation

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [1]

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Okay, good morning, everybody. I think we'll get going. For those of you that don't know me, I'm Pete Butterfield, CEO of Alliance. I'm joined by Andrew Franklin, CFO of Alliance. And great to see so many of you here actually, and thank you for joining us for our full year results presentation. So today's meeting is being webcast. So at the end of the presentation, if you have any questions, there'll be a roving mic for you to ask any questions that you have, but to those joining us online, big welcome, and thank you for your interest in the company as well.

So let me take you through the presentation. Obviously, I'll run through the disclaimer all in there. We're going to take you through business overview first, just to sort of ground you, remind you of where Alliance is and the journey that we've been on over the last 3 or 4 years, deep dive into the financials with Andrew, then I'm going to give you a bit of an outlook for the business, which is something we haven't done before at these types of presentations, but just give you an idea of our -- where we are now and our vision for the business in the medium term as well just to take through that too, and then we'll have a quick summary and wrap up.

So in terms of 2018 our business overview. We made real significant progress in 2018 in terms of growing the business. Three key things that stand out for me operationally were the Nizoral acquisition of -- from Johnson & Johnson in the Asia Pacific region completed on that. That was great halfway through the year. Vamousse, we completed the integration of Vamousse last year and that's done very, very well indeed and that's allowed us to setup our U.S. office as well, which has been very exciting for us. And then right at the end of the year, we launched Xonvea, the first treatment for nausea and vomiting in pregnancy for 30 years in the U.K. So I'm going to give you an update on all of those.

Underlying that, the business is growing very, very well. So 22% growth, with -- including acquisitions, 4% organic underneath; increasing the dividend, which is very well covered; and the hallmark of the business continued strong cash generation has continued last year. I'll back a little bit by couple the tactical stock builds that we did have been well signposted, but that has left us very, very well set for both Brexit and the Falsified Medicines Directive as well. So a great very, very busy year for us, but very successful ultimately.

Now for those of you a little less familiar with Alliance. As a business, we are a growing international health care business. We're a very highly capable organization that's been built over 20 years, very experienced management team, great work force. And we've also got a very well invested infrastructure as well. We are a profitable cash generative and dividend paying company growing very well as well. As I say, great cash conversion, and our leverage is currently at 2.3x, but that's coming down, and Andrew will touch on that as we move through. And our growth strategy has really come through a business -- a proven business model, both organic growth in the portfolio, supplemented by targeted acquisitions over the years.

There's no R&D risk in the business. There's very, very little patent risk in our business. There's no manufacturing. So that promotes a very cash generative company. And we -- over the years, we've split the organic growth in the company through from our International Stars, and we'll do a little dive on each of those, the 5 of those: Kelo-cote; Nizoral; MacuShield; Vamousse; Xonvea. But that's supported by a very highly cash generative Local brands business, which has done well last year. I'll dive into that in a bit more detail as we move through.

On top of that, as I say, we have supplemented that through very strategic acquisitions. We got a great M&A team in-house. We've done over 35 deals in 20 years. And we are able to grow the acquisitions that we brought in. We've got some great examples of that in our portfolio, and those are continuing as we continue to grow. Our geographic reach has changed extensively, I'll take you through that journey. And we're also very diversified in terms of both market and in terms of product, so that helps spread risk from over 90 products in our portfolio.

I think it's also important moving through this slide to just remember where we've come from as a business. So as we stood here in 2015, we were turning over around GBP 45 million, GBP 50 million. The business has a 3-year CAGR now, both through organic and the acquisition growth of around 37%. And the portfolio has changed as well. So predominantly, we were a Local brands business, with 1 International Star around at that time. And we've really moved the needle on that. So still those Local brands very, very, very important to us, but the proportion in our International Star brands, which are providing quite a bit of growth, has also increased significantly. And our routes to market have changed. So we've changed from being predominantly a prescription-based business, an Rx business, which is great defensive cash flow. Occasionally growing, sometimes declining into a more balanced portfolio of 50% now is in the Rx, with 24% in OTC and 25 -- 26%, sorry, in OTX, the space where a health care provider will recommend the product and then a patient will go and buy out of pocket.

And also I mentioned our geographic reach. We've changed enormously as well over time too. So we've changed from in 2015 being predominantly a U.K. and Republic of Ireland business, over 88% in those markets, into something with a much more international flavor. So now 42% coming out of the U.K.; mainland Europe making up 20%; 34% in our international business driven heavily by our Asia Pacific region; and for the first time, with 4% of sales coming out of the U.S., very, very exciting for us. We employ over 200 people in our 9 offices around the world.

So that's just to orientate you and bring everybody back to the shape of the business as it stands today. Andrew is going to take you through 2018 financials, and then we're going to talk about the products in a little bit more depth and also the outlook for the business as well.

So I'm going to hand over to Andrew to take you through the results.

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [2]

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Thanks much indeed, Pete, and good morning to everybody. So I think we've -- like to start, so we had a very good result for the year. Sales of GBP 124 million. You can see 22% up, 23% on a constant-currency basis, and that's been drawn and developed through the growth within our International Star brands, both from Kelo-cote and also through Nizoral for the first -- for the second 6 months of the year. Excluding acquisitions, we grew 4%.

Just a quick word around see-through revenue versus statutory revenue. We have purchased the rights for Nizoral from Johnson & Johnson. And whilst those licenses are still with J&J, they are selling it on our behalf and that's included in the see-through revenue. The statutory revenue shows the margin we make on those products. Now over the next 2 years, the licenses will change from Johnson & Johnson through to Alliance, and therefore be a bit of a mix mode where we're selling it directly and through J&J, which will come through the statutory revenue. So the see-through revenue give a nice consistent view on the ongoing basis as we move through the transition.

Gross margin as we've seen before has improved, up 40 basis points, again coming through with the International Star brands, which have generally a higher gross margin and EBITDA and both PBT increasing 19% and 17% and that's after the investment we're putting into the growth of these International Star brands.

Just looking at the performance over the last 4 years. Look at the CAGRs, in that you can see that from a growth perspective from revenue 37% up from a revenue perspective, but also from an EBITDA and PBT, both in the same level. So again, good leverage coming through in the P&L.

EPS first time is over 4.5p, so 4.54p, up 12p -- up 12% from the prior period. And that's -- from that level of growth, we're looking to increase our dividend 10%, so the final dividend will be just under 1p, so 0.977p, making a full year dividend of just under 1.5p or 1.464p. So again continuing with that level of dividend growth, which is more than 3x covered earnings.

Pete's already mentioned about cash flow at GBP 16.1 million, very pleased where that's performed. And that's also net of this tactical stock build we put through for Brexit and for the new directive, Falsified Medicines Directive, and the prelaunch cost for Xonvea.

And moving down to net debt. We borrowed an additional GBP 28 million to part fund the Nizoral acquisition. Whilst net debt actually grew GBP 13.5 million, again that shows the level of cash generation within the business coming down from GBP 28 million down to GBP 85.8 million. And that's shown within our leverage reducing from our full year last year and also from our half year down to 2.33x, again that compares favorably with our covenants, which is set at 3x.

A focus on the P&L. This shows our underlying results. I've shown in the next slide for completeness, the non-underlying items. So this is focused on those that continue within the business. And revenues, as I say, up 22% coming through from the growth within Kelo-cote, up 68%; also got Nizoral for the full -- for the 6 months period we've owned it, just under GBP 11 million; but also strong growth coming through with regards to Vamousse, which grew 18% on a constant-currency basis under GBP 6 million. The increase we have within the operating cost reflects the level of spend we're putting behind those International Star brands to drive that, but also included in that for this year is the transition service fee with Johnson & Johnson and also the prelaunch cost for Xonvea. But as a percent of sales, 38.5% there out, 31% to sales which is very similar to 2017 at 30% to sales. At an EBITDA perspective, again growing nicely at 19% at GBP 32.4 million. And in that sweet spot where we say we like to be within that 25% to 30% range.

Depreciation and amortization includes noncash write-down of just under GBP 2 million relating to a supply agreement for MacuShield. And now breaking away from that allows us to now purchase the active ingredients around the globe. And actually, we can -- we should be able to drive additional cost savings from that freedom to purchase. And that is -- and the cost of that GBP 1.9 million has been offset by an equivalent opposite for a reduction in deferred consideration payment shown within financing, the financing line there. So that's the main reduction on last year.

When we look at profit before tax at GBP 28.1 million, again growing a nice, healthy level at 17% on prior period.

I mentioned before we'll share the non-underlying items. So these are well documented in our half year results. So I won't dwell on them at this point, there's no real -- no change from that was disclosed at the half year. I think the only point just to note here is the effective tax rate of 19.6%, broadly in line with where we've been for last year 2017. So it's going to be around that 20% mark going forward. For last year, 17%. As you may recall, the rates within both France and the U.S. reduced and that actually generated a tax benefit, a tax credit within our P&L. But actually, if we strip that out, as you'll see in the next slide, from EPS, that charge would have been around GBP 4.8 million, which again, as I say, comes to an effective tax rate of just under 20%.

On an earnings per share basis, when we look at comparing on a like-for-like basis, we generated for '17 an EPS of 4.05p. And from an adjusted basis underlying for this year, 2018, a 4.54p, so up 12% on the basic, but also still double-digit growth when we look at it on the -- on a diluted basis.

Cash flow remained strong within the business, and we're really pleased in the way which we have to churn the cash through with -- through Alliance. We had an outflow in the last year, in 2018 last year, of around about GBP 8 million. And part of that relates to just the overall growth of the business, but also the tactical stock build we put in for the Falsified Medicines Directive and also Brexit, but it also includes the H2 net income due from Johnson & Johnson. That was received during the first quarter this year in line with the transition service agreement. But as you can see from a tax payment of just under GBP 4 million interest in CapEx, we generated GBP 16 million worth of free cash flow. Now during 2019, we expect that increase to be higher than -- the cash flow to be higher than 2017 with GBP 22 million so north of that, as you see a full year's cash flow coming from Johnson & Johnson. And we're expecting also the modest stock build also to unwind relating to Brexit as we go through June this year, but we shall see.

On the balance sheet, the only key movements really on here relating to the increase in our intangibles, relating to the GBP 60 million acquisition we had from Nizoral. The joint ventures is now down to 0 as we've taken the impairments and write-offs for those at the half year. And working capital, we say the movements come through primarily around the increase in inventory, but also the transition service fee. And within deferred consideration, that GBP 0.5 million there relates to final payment to Duchesnay for the commercialization of Xonvea within the EU. So that then gets the second country is commercialized for Xonvea, then we'll be paying that GBP 0.5 million out.

Net debt increased from last year GBP 13.5 million from GBP 72 million to GBP 85.8 million, but this cross work shows how that's worked through the year. So we end -- so we started at 2.46 leverage, and we drew down the GBP 28 million to part fund the acquisition from Nizoral. And then as we move through, we then received some funds for the divestment of our joint venture in China of just under GBP 4 million, the final cash settlement from Sinclair. And that overall makes up our net debt result to just under GBP 86 million and from a leverage perspective at 2.33.

Now through the cash generation coming through the business for this year 2019, we expect that to be sub-2 as we go through the second half of this year, which is again, as I say, very comfortable within where we are with our covenants, which is set at 3x.

Okay, Pete?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [3]

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Thanks. Thank you, Andrew. We'll pick up questions at the end of the presentation and just keep going. So I want to take you through the brand performance in a little bit more depth, talking about the stars and then the Local brands and then also give you an outlook for the business moving forward.

So clearly, a very strong performance on strategy with our star brands. I think it's important to note that all of these brands are either growing ahead or on a category in terms of their growth rate, and I'll go through each of those individually.

The Local brands, as we all know, they had a slightly softer half 1 last year. Half 2 was up 9% on half 1. And we see those very, very much stabilizing as we move through. So down 5% last year. We expect those to be stable in 2019. And there's a variety of reasons behind those, which we documented at the first half in there in the RNS as well. So I won't dwell on those too much, but I'm pleased with where the trajectory for those Local brands is sitting now.

In terms of our operational highlights as well, just to close this part of the presentation. Clearly, the acquisition of Nizoral in the Asia Pacific region, very, very important to us giving us exposure to a fast-growing region with a great product. We're continuing to build our capability and scale within our organization. Our ERP system will go live this year. That's well on its way now. And that will provide us with a real scalable platform as we continue our growth into the future. We're delighted to get Xonvea, not only approved, but launched here in the U.K., adding that fifth International Star brand to the portfolio. We've been building our global infrastructure as well. So we've upscaled and upscaled our offices in Shanghai and Singapore to take on Nizoral and make sure we're well placed end market for that and opening our offices in the U.S. We have a team of 5 there dedicated to the Vamousse brand and that has responded very well to our promotional efforts.

We finished our strategic repositioning in China in terms of getting out some joint ventures that weren't working for us into our own affiliate now. And China is our biggest market for Kelo-cote with our largest distributor out there. It's also significant for the Nizoral brand as well. So we're really well placed to manage those distribution agreements now through our own affiliate.

And we've also, you may have seen, strengthened our board as well. So we brought on 2 new nonexecutive directors as the company continues to grow. Delighted to welcome Jo Le Couilliard from GSK to our board. She's got a wealth of experience, obviously, in commercial pharma, but some real deep domain experience in the Asia Pacific region, and also to Richard Jones. And Richard joins us today at the back of the room, but some of you may know Richard. He's worked on both the market side, and he is also an Operational CFO as well. So really delighted to welcome those 2 to the board. I think they've been great additions to our team actually and look forward to working with them moving forward.

So in terms of the International Star brands, we'll run through those. Kelo-cote, clearly, had a standout year last year. Kelo-cote is our patent protected scar reduction treatment that we acquired in 20 -- at the end of 2015 from Sinclair. And just to remind you, that asset was doing GBP 7.5 million when we acquired it. This year, it did GBP 22.5 million.

Want to give you a bit more insight into the end markets as well, just so you can understand the sort of size of market that we're playing in. So globally, we think that, that category is worth around GBP 600 million. We are well outstripping that category growth. So we are taking share in that market, which is great. When we got the asset, we came in to the Capital Markets Day and we said, "Oh, maybe a sort of GBP 20 million brand, might be GBP 25 million." We're revising our future brand potential to GBP 30 million plus. And clearly, there is a lot of headroom for Kelo-cote to continue growing.

What drove last year? Well, we had good growth in the Asia Pacific region. We had good growth in China. Our European business also opened up some new distribution channels, which is excellent as well. And we've worked very, very collaboratively with our partners. We brought on a new distributor in Thailand as well. So there is a blend of things going on with Kelo-cote. But what we are doing is maintaining our level of marketing support behind there. We were the lead sponsor of a very important conference in China, the G-Scar Society, which promotes best practice in scar management globally. We also had our first distributor meeting where we got all our distributors around the world. We had them together in Prague last year and that worked very, very well to share best practice and also to keep distributors interested and invigorated with a brand like Kelo-cote. So that's going very, very well for us. It won't grow 68% every year, I wish it would, but it certainly got a good growth trajectory and very much we will continue to focus on it.

So for 2019, we're obviously increasing our penetration in those existing markets. We're going to continue our geographic expansion. It is available in over 60 territories worldwide. So there's a few that we'd like to get into, but they're on the smaller side. But again, as you will see, with all of these star brands there, they're placed in inherently strong growth markets, both in terms of channel and also in terms of geography as well and that's very important to take out. The category fundamentals are very good.

The other large brand that we have onboard is Nizoral. So that was our latest acquisition. This may well challenge Kelo-cote to be the largest brand in our portfolio. As you remember, we acquired this from Johnson & Johnson in June last year. Nizoral, for those of you who don't know, is a medicated antidandruff shampoo, it is an antifungal. It is a gold standard placed either #1 or #2 in each market. The market size, just in Asia Pacific, is around $363 million. Hopefully, we have done all the others in pounds, which you can do the conversion yourself. But again, the future brand potential for Nizoral, we think around GBP 25 million to GBP 30 million. You will see what sales it did in -- sales at acquisition for the year, GBP 18.5 million. Just for the second half of last year, it did GBP 10.9 million. So slightly ahead of where we expected it to be.

So the -- there are 14 territories currently who have Nizoral. And we have a 2-year transition services agreement with Johnson & Johnson. So we're about 6, 7 months through that. Going well so far. Brand's done what we expected it to do. We've been around to all the distributors, some very high-quality distributors came with this acquisition. And we believe that the market demand for Nizoral is quite strong.

So now we're very much focused on making sure we can supply, making sure that the marketing authorizations get transferred, intact, and we're ready to receive those. So right now, it really is an operational job with Nizoral to make sure that we can maintain the demand in the market. And then as we move through, we'll be putting our global markets here in place. We'll be making sure that they have a coherent brand strategy across each of the different territory, very similar to what we've done with Kelo-cote. But we'll be basing that out of our Singapore office and out of our Shanghai office because brands like this are quite difficult to run from Chippenham. And we need to make sure we've got the right domain expertise and the quality of people that we've got in the operational side are excellent.

So we've had our first 4 employees coming now ahead of the curve for Nizoral. I'm very pleased with the way that that's shaping up. So 2019, as I say, is all about transferring the marketing authorizations, making sure our infrastructure is right in securing supply for Nizoral, but a really great band. It's been on the market since 1971, as I say, in an inherently strong marketplace in terms of demographic and growth. So very pleased with that.

Quite a busy slide. I won't make any apologies. There's a lot going on with all these 3 brands. MacuShield growing on category. It slowed off a little bit in the second half of last year. We didn't quite get the international markets that we wanted, but those will drop into this year. Fundamentally, the brand remains very, very strong. We've also got some interesting innovation coming through from MacuShield later on this year. We got -- we launched 3 territories in 2018. We got another 7 markets to come online in 2019. We've updated the packaging. If you will walk-in to booths, you will see brand-new packaging and still doing very, very well. I mean, the market size and the demographic, again, is growing. It's an enormous market in terms of global eye health supplements. And we believe we've got a very, very strong brand, certainly, in its home markets and looking to exploit that overseas.

Vamousse, Vamousse. So another product with USP and that's the other thing that all of these star brands have one hook. They have either a clinically relevant USP or a formulation USP. Vamousse is a very special brand actually. Very pleased to say that, that is doing really well in the U.S. And I think at constant currency, it was around 16% growth in that territory, and that was against a market that was declining at 6%. So well outstripping market in terms of its growth, taking share from a lot of bigger players. So we have a real focus, digital strategy in the U.S. and that's really worked well for us. As a brand itself, it actually grew at constant currency, 18%. That includes the U.K., where we've reinvigorated the promotion behind that brand and it seems to be responding. So again, market size in the U.S., again about $370 million. We -- this should be a GBP 10 million plus brand for us across both the U.K. and the U.S. and the other territories that we have for Vamousse. So it's just picking the right ones for Vamousse to internationalize because we have global rights to both the formulation and the brand for Vamousse. And just to remind you for MacuShield, we have global rights ex U.S. and for Kelo-cote, everything ex U.S. as well. So good brands with good global potential.

Then Xonvea. So, obviously, recorded -- was launched right at the end of last year, launched in October. We got the regulatory approval in July. I'm really pleased to say that the reception to the Xonvea proposition has been very, very good with CCGs. It really is early days for the brand right now. So I know you're all asking how is it going. And I think, what we can say is that we've had -- I was really pleased to say we got our first CCGs who have approved it, both in primary and secondary care with a green light, which is very, very good. It's also in line with the license indication that we have is which is where nausea and vomiting in pregnancy where conservative management has failed. So very, very good for Xonvea that we've got a significant number of CCGs interested who are going to be reviewing it very soon. So over the next 2 or 3 months, we should see more of those coming through. So yes, I've always said that the launch is on plan, it still remains on plan for Xonvea, and it's now about converting all that interest into prescriptions and making sure that patients get this product.

You'll also see that there was a survey out recently which highlighted the burden of nausea and vomiting in pregnancy on the NHS. 33,000 bed days lost every year to nausea and vomiting in pregnancy. We work with 1 CCG. They're dispatching an ambulance on a blue light every other day to take somebody to a hospital with this. So it's very much needed. It's the only licensed treatment available. In terms of our rollout, outside of the U.K., we have targeted the Republic of Ireland as our first international market to come. And the approval for that, we hope, is imminent. So that -- watch this space for that. So yes, again, we've always said that that brand across Europe should be between a GBP 30 million and GBP 40 million brand if it gains the traction that we think it absolutely deserves. So yes, very pleased with Xonvea.

So that's the star brands. As I say, just remember, in terms of category, either ahead or on category for all of those where we're promoting those.

Also important in our portfolio are our Local brands, which received an awful lot of attention at the first half of the year. And they have rebounded very, very nicely in the second half, as I say, up 9% on the first half. They're a key component of our portfolio and it's highly cash generative. They're sold in a limited number of markets, so it may be 1 or 2. And there's a mix of all sorts of products in there, that's prescription and consumer, but most are niche and have a really established place in medicinal therapy. And the revenues are broadly stable over time, you'll see that coming back in the second half of half 2.

Now our 2018 full year revenues were down because of that slower first half. But as I say, a lot of those issues have now either washed into the second half of last year or would be resolved in the first half of this year. So we've got a good line of sight in the revenue generation and sales line for these moving forward. And as I say, we're very comfortable that those should remain flat now for this year providing that strong cash generation, which helps us with leverage and helps us to acquire things as we move forward.

So I've just pulled out 2 different brands here as well because I think it's important to understand that we don't promote everything that we bring in, okay. So there's 2 examples. One non-promoted here and one promoted. So Timodine is a non-promoted brand. It's a cream, mainstay of treatment to treat certain inflamed skin conditions. It's a U.K.-only product, it's prescription-only, it's really carved a niche there. We acquired this from Reckitt Benckiser in 2009. We acquired 2 assets in that deal. One was a product called Buccastem, which was of equal size to Timodine. It's still going strong today, in fact growing. And we acquired Timodine. So we acquired both of those brands for just over GBP 7.5 million. Timodine sales did cumulative sales over the period of time, GBP 14.4 million with gross margin of GBP 10 million, and that brand should continue on. There's no reason why it shouldn't continue on. So great return on investment on what we bring in and don't promote.

When we do choose to promote, we can do some quite special things with some of the brands that we bring in. So if you look at Ashton & Parsons, we paid just over GBP 2.4 million for Ashton & Parsons and Anbesol from Reckitt Benckiser in 2011, I think, it was. Ashton & Parsons had no sales at that time, and we reinvigorated the brand. We invested in a little bit of machinery. I think it's the only bit of machinery we have any investment in any business. That brand has been around for 150 years, but it really struggled in terms of manufacturing. We saw real opportunity to get behind that brand. That brand's done GBP 10.2 million cumulative sales in -- up to 2018 and gross margin of GBP 7.3 million. So where we do decide to promote, they do really well. So that brand is over GBP 2 million this year and will continue growing very, very strongly.

So within the Local brands, there is a lot going on. We have a lot of focus on these brands as well in the portfolio, and they're a mainstay of what we do and will continue to be so.

That's a count around the brands. So I want to take you through our acquisition strategy as well and just talk you to a little bit about how that's worked over 2018. Clearly, we did 1 deal. We actually completed 3 deals in 6 months, if you include Ametop and Vamousse, which we've done at the back end of 2017. We looked at around 90 deals. And when I say 90 deals, I mean, the deals that you sifted through and actually look like they might make some kind of commercial sense and get put on your desk. Got nonbinding offer on 4 of those and then we completed on one. And that's about the sort of level that we see. We've done -- in other years, we've had 110, 120. We're seeing, in terms of the environment, there are a lot of deals around at the moment. We're seeing our pipeline probably fuller than it's been for quite some time. However, we want to make sure that we're now taking advantage of those deals in the right way. And if you look at our deal capability, we certainly got good access to funds. We've got a great team. We've got a very good group of people coming to us with all sorts of deals out of both big pharma and also on the smaller side as well. And we're continually improving our sort of sifting process to making sure we get to the right targets at the end of the day. What I will say though is, we're now very much targeted on those 3 channels. So we don't want to branch out into cosmetics or generics, that's not where we play, never have done. So we're focusing very much on Rx, OTX and OTC.

We really want to now start aligning our acquisitions to that footprint that we've worked so hard to build over the last 3 years in terms of the U.S., our pan-European business and also Asia Pacific as well because we want to start getting some operational leverage out of that footprint, whilst maintaining a good portfolio balance. We've always had very good financial discipline within the company and that will remain the same. So if we found a good deal on some established products, we'll look at that. Similarly, if there was a good deal on a growth asset that made sense to us and was economically viable to do so, we'll look at that too. So that's in terms of -- that's our acquisition strategy, just to give you an idea of how we're looking at things now.

A final few slides. Firstly, I just -- that's where we're up to today. I thought it might be useful just to paint a picture of where we're going as a business in the medium term. And by the medium term, I mean, within 3 to 5 years. So in terms of key characteristics of our business, clearly, we have got this ability to drive organic growth with carefully targeted investments. We've a lot of heritage in that now, so we've got Kelo-cote, MacuShield, Hydromol. I could point to many local brands, ImmuCyst as well, back in the day Gelclair. So there's a nice growth engine that we've managed to nurture over the years. That's supported by a real proven ability to buy well and exploit a strong return on investment on the assets that we brought in post-acquisition, whether we're running them for cash or we're running them for growth.

Our operational capabilities are also great as well, and that's not something that we focus on in our presentations up here too much, but we've got a very strong supply chain. We've got very good regulatory people who are all in-house, we don't outsource any of our regulatory or our medical capability. And we also span a wide range of geography. So we're able to deal with those 3 different product types. Dealing with an OTC asset is very different to dealing with an Rx asset. There are certain things that tied in together in terms of regulatory capability.

We got great market positioning. So we're established in inherently strong growth markets, both in terms of channel and in terms of products itself. And we have this diversification within the business, which helps reduce risk for our shareholders and for our business as well, both in terms of products and also geographies as well. That's where we are, and those are the key characteristics of the business. I think in themselves, not particularly special, but when you start joining them all together, that becomes quite an interesting proposition.

And then we move through to our vision. So where we do want to be in 3 to 5 years? Well, we've grown very strongly over the last 3 years. We want to continue growing, but not at any cost. I think, as I said, we always have very good financial discipline within the business. When we generate organic growth, we want to bolster those and support them through targeted acquisitions, but keep that financial discipline running right through the business to make sure that our metrics are right, we can afford what we're bringing in and that we grow in a very measured way, but we are still going to continue that growth moving forward. The balanced portfolio is very, very important to us. That cash generative aspect provides all the cash and cash flow for helping support some of the promotion that we do.

Geographical reach. As I've said, we're now focusing on 3 buckets. So we got the U.S., U.K. -- U.S., EU and Asia Pacific. And then the route to market's really important. We've no aspirations to build massive sales teams in any of those areas right now. We have distributors who can do that a lot better than we can in many different markets and have the relevant market expertise as well. So we will continue to use a blended mix of affiliate and distributor operations. That's worked very, very well for us. We have a reach into now around 100 territories through about 90 different distributors within the business. And some of those are very, very high quality and performed very well for us. So we will continue that blended route to market and blended product portfolio. But I think, there's some fundamentals that exist within the business. Today, underpinned those, so strong cash flow, keeping that targeted approach to acquisitions, continue investing in key growth brands, trying to drive the operational leverage with the next acquisition that comes in and also underpinned most importantly by a very, very high performing team. One thing we don't mention on here is the engagement which we have in the business is absolutely first class. We've had our highest ever employee engagement scores even though we've been through all that change and growing the business significantly since we started measuring them in 2011. So very pleased. I'm proud to be able to say that.

So hopefully, that gives you an idea, it gives you a bit of a steer about where we're heading. And just to close off and summarize. So clearly, we've made significant progress in continuing to grow the business in 2018. As I said earlier, Nizoral, Vamousse, Xonvea, good growth within the business, increasing dividend and strong cash generation and that leaves us very well placed in 2019 to continue on strategy. So increasing that -- leveraging that increased scale and geographic presence. As we get bigger, we see bigger deals coming to us as well which is quite interesting. Maintaining and harvesting those Local bands. I don't like the word harvesting, but it is what we do with some of them that aren't necessarily there to grow, but very much a focus on those as well. Continue to invest in this International Star brands and pursuing growth through targeted acquisition whilst delivering on the vision that we have outlined.

So hopefully, that gives you a good overview of where we stand as a business, the results and also where we're looking to move forward in the next 3 to 5 years.

So I think, I'll hold it there and happy to take any questions. Thank you.

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Questions and Answers

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [1]

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Hi, Andrew.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [2]

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Yes. It's Andrew from Investec.

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [3]

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Yes. Oh, you might need to use the microphone just for those online.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [4]

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It's Andrew from Investec. Just 3 little bit bitty questions, if I may just across the product portfolio. On MacuShield, the supply agreement that you've terminated, I just wondered, how did -- that was intangible in the balance sheet. Was that part of the acquisition process?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [5]

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Yes. Do you want to -- I'll hand to Andrew to talk about the financial trade. I can talk about the [why it's so].

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [6]

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Yes. That's fine. So it was when we -- after we acquired it, we then entered into a 10-year supply agreement with the U.S. partner, Macuhealth. And that was to allow us to then share with -- the benefits of the -- of that buying portfolio. But actually, we looked -- we could see we actually better cost of goods elsewhere. And so then we went through in terminating it.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [7]

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Yes. And are there other similar intangibles on the balance sheet? Or was that...

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [8]

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Not of that type, no.

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [9]

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No. MacuShield was an interesting deal. Where we're now are as Andrew says, we got better cost of goods. We also got a more innovative supplier as well. So there's some interesting things happening with MacuShield. So very pleased to be in that position.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [10]

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Perfect. And then, just on Xonvea. Is there like a cycle at the CCGs that you have to conform to or there is a process and there's timing bids to consider...

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [11]

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I know as analyst, you'll be sitting there thinking what are the key indicators for this brand moving forward. That's probably what's on the question and what can we look out for. They all run on a -- there's about 220 of them, they all run on a different schedule. I think the things you need to look for externally are things like SMC, who are looking at the product right now. So the Scottish Medicine Consortium that will give a good indication as to whether they approve that or not. They all -- all CCGs go through a cycle there and they approach it slightly differently, but there is a set process that you need to go through. So -- and we have some very experienced key account managers out there working with them all right now. And yes, so does that answer your question?

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [12]

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That's very helpful, yes, yes. And then just the last one. On Nizoral coming in-house, is there -- do we -- we probably don't need extra visibility, but I assume some -- because the see-through accounting looks through it. I assume some come in-house in '19 some territories and then it...

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [13]

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Yes, a couple -- we're anticipating a couple of small territories coming in towards the back end of this year and then -- it will then roll on to 2020.

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Andrew Mark Whitney, Investec Bank plc, Research Division - Analyst [14]

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Okay, fine. And it is done by the end of 2020?

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [15]

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The idea is that within the 2-year period, there will be -- I mean, we've got between 15 and 18 licenses, territories to transfer. Some will go quicker, some won't, and the TSA agreement with J&J is for 2-year, but with extensions when we're both working together, you can find that one of the regulatory authorities is just a little bit late in doing it and then we'll just transfer. We'll just keep that -- extend that agreement until that transfers across, but substantially, it should be done within a 2-year period.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [16]

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Sally from Numis. You mentioned that you'll see more deals than you have done for some time. Is that -- do you think that's something to do with sort of the MDR process? Do you think some of these larger companies are having a sort out from that perspective? And what sort of prices that you're seeing in terms of what's...

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [17]

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Yes. I'll take the second one first because that's the easier one to answer, Sally. So in terms of pricing, there's -- we did a -- we've just completing an analysis actually of the last 10 years. There's a slow drift up in terms of pricing, but fundamentally, nothing really different over that 10-year period from what we pay historically. In terms of the M&A, there is a lot of M&A at the front end, right? So if you look at what's happened with Shire, Takeda, GSK, Novartis, Pfizer, everybody is rationalizing. We are part of that ecosystem and we see that filtering through. We're seeing a lot of product portfolios of declining assets. And whilst attempting for sort of scale, they just don't do anything for us in the long term and we can't compete on that, so we tend to discount those unless there is a real chance to turn things around. We're seeing larger companies move away from having single assets in single territories, so what we call a local brand, they're liking a more pan-European or global brand. The reason J&J divested Nizoral, for example, was they've a stated intent of -- and that's -- it's very public of getting behind 6 of their key brands that will turn over GBP 1 billion plus. And Nizoral whilst it’s great, and I love it to be that, that great, it won't reach that kind of height. So there is definitely strategic rationalization going on. In terms of the MDR, the Medical Devices Regulation, I don't think we're seeing that bite just yet. But I think for certain companies who struggle with regulation and keeping up with that, that's going to offer opportunities as we move into 2020 and beyond. So it is a complex ecosystem, but I do think it starts at the top. I think -- yes, there's a lot of M&A activity, which we're seeing quite a lot have come to us.

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Sally Anne Taylor, Numis Securities Limited, Research Division - Director & Healthcare Analyst [18]

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That's helpful. And then, I think you just talked around sort of maintaining financial discipline. Are there 4 more metrics that you could share with us?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [19]

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Yes. I think we've stated a couple, which -- if there are any more let me know, but there are lots in there. I mean, EBITDA-to-sales ratio, we like to keep between 25% and 30% as a business. Leverage is a key topic for us as well, often gets mentioned rightly so by investors, which we -- when we do an acquisition, we want to keep under 2.5% if we can, but if the acquisition is great, we may go a little bit north of that. But there has to be that real sort of visual being able to see the cash generation of that asset coming through in order to get those down to under 2, which is where we're comfortable with. Those are the 2 at the moment we'd be considering.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [20]

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Julie Simmonds, Panmure Gordon. Just wondering in terms of sort of pricing in M&A, where is the sort of market as far as that's concerned at the moment?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [21]

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Yes. As I mentioned, just a slight drift upwards at the moment. You can see what we've paid for assets in the past. I think, the -- we stretched on Sinclair, but that gave us a great platform, it also gave us Kelo-cote as well, which is undoubtedly the jewel in the crown of that acquisition, but we are seeing a slow drift up in terms of EBITDA, but it's minimal. That's based on our...

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [22]

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It's not...

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [23]

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That's based on our deals as well. So you have to look across the market.

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Julie Simmonds, Panmure Gordon (UK) Limited, Research Division - Equity Research Analyst of Healthcare [24]

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I was just wondering whether there's any geographic differentiation you're seeing?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [25]

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Well, I'll point you to Nizoral. So you can see what STADA paid for that in Europe. And you can see -- I don't think you can see what it went for in the U.S., and you can see what we paid for it in Asia Pacific. So there was a much higher multiple for the EU business than we paid in the Asia Pacific region, but there are different reasons behind that. I think, also, we're running a distributor-based business where it'll probably go direct in the other markets as well. So it's quite hard to generalize, but we're seeing a lot of activity in the U.S. right now. I'd like a couple of assets to slipstream Vamousse, that footprint that would be great, but they have to be the right ones at the right price. That's something we'll continue to look at.

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Martin David Hall, Hardman & Co. - Head of Research [26]

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Martin Hall from Hardman. Just a quick one on the J&J longer term. Are they going to continue to supply you with the active? Once all that licenses are transferred, are you going to able to get that made externally?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [27]

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Yes. Don't want to touch on the ins and outs of the supply agreement with J&J, but there's an agreement, I think, for 5 years from our -- the Belgium plant, where it's procured from the Belgium plant, which is several of the key markets. And others, we procure it locally, and we'll continue to do so.

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Martin David Hall, Hardman & Co. - Head of Research [28]

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But I can understand you might wanting to say finish the product locally, but long term, are they going to be your -- is it -- are they your preferred supplier of the raw material, the active ingredient?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [29]

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Martin, I'm not going to go there because we got commercial relationships with many different suppliers. What I will say is it's Ketoconazole. It's reasonably freely available, but we'll pick the right supplier for us at the right time. You'll understand why I can't go too much further with that.

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Martin David Hall, Hardman & Co. - Head of Research [30]

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Yes, yes, sure.

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [31]

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But a good question.

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Martin David Hall, Hardman & Co. - Head of Research [32]

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Andrew, you gave tremendous amount of reconciliations today. But the one I was really looking for was your leverage reconciliation. I'm really struggling with the 2.33 because the implied, if you use that against your debt, the implied EBITDA is much higher than either the underlying or the statutory. And obviously, the answer to that, what's the implications for the lower than 2.33 in the...

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [33]

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So the calculations is consistent, and it's in line with our banking covenant, so that's exactly what we're doing. So we haven't adjusted EBITDA. There is a couple of pluses and minuses with that and also within that debt as well, so it's entirely consistent year-on-year. So you'll see actually we were at 2.46 at the end of 2017, at 2.33 now. So that's where we are. It also brings in the -- just from an EBITDA perspective, it's a trailing 12 months EBITDA, so it also brings in acquisitions as we go through too.

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Martin David Hall, Hardman & Co. - Head of Research [34]

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So does it include Nizoral as if you had that profit for the whole year?

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [35]

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Yes, it does, which is entirely consistent with the actual covenant itself, and that is how it's been reported as we've gone through since -- well, since we have acquired Sinclair.

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Martin David Hall, Hardman & Co. - Head of Research [36]

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Okay. And I was also looking for the underlying amortization charge, and I thought oh, the easy way to do that is to take the add back from the cash flow and subtract the write-downs in the P&L account, but actually you end up with a negative number, and I wasn't quite sure how you arrived with that.

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [37]

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Well, perhaps I'll capture that detail one off because I think that'd be best.

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Edward Thomason, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [38]

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Edward Thomason, Nplus1 Singer. Quick question on your interest rates. What were they for 2018?

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [39]

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So with regards to our banking covenants, we -- it depends on where the leverage are. So they are -- at this point, they're around the 2%, 2.5% mark, and it just depends where we are from the leverage...

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Edward Thomason, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [40]

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Okay. And any commentary on how that would be looking forward?

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [41]

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Not at this stage, no.

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Edward Thomason, Nplus1 Singer Capital Markets Limited, Research Division - Research Analyst [42]

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And a quick question also on Nizoral as well. Any impact on the gross margin since the agreement's been announced? Has J&J -- I haven't looked at J&J's sales itself, but have you seen any decrease in margin?

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [43]

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No, not that we've seen.

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [44]

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No, it's going along as we expect it to do.

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Peter Jonathan Butterfield, Alliance Pharma plc - CEO & Executive Director [45]

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Okay. Okay, well, I think -- thank you very much. Great to see a full room and nice to see so many online as well. Thank you very much indeed for attending, and I'll leave you to end with the day. Thank you.

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Andrew Timothy Franklin, Alliance Pharma plc - CFO & Executive Director [46]

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Thanks so much.