M E D I V I R A N N U A L R E P O R T To develop pharmaceuticals is a bit like doing jigsaw puzzles.

Transcription

1 M E D I V I R A N N U A L R E P O R T To develop pharmaceuticals is a bit like doing jigsaw puzzles.

2 Contents Business highlights in Medivir in review Key facts about the company, its business concept and strategies... 2 Medivir s professionals a strategic strength... 3 CEO s letter Operations maintaining a brisk pace... 4 Lipsovir the past year Phase III program completed, a total of five studies conducted... 6 The Medivir share Share price performance in The art of managing risk and creating opportunities CFO Rein Piir reports on operational and financial risks Patents and patent filings...19 Hepatitis C the anticipation for new pharmaceuticals There is a pressing need for new pharmaceuticals...20 HCV research making advances Plenty of new pharmaceuticals in the pipeline, with major potential predicted for protease inhibitors...22 Medivir at the leading edge TMC has made the most progress of the second generation of HCV protease inhibitors...23 A market on the verge of robust growth Market forecast to double over the next five years...24 Operations Markets, product portfolio and priority indications...14 Project review A review of each project including its therapy area and competitive edges...16 Report of the directors Income statement Balance sheet Change in shareholders equity.. 34 Cash flow statement Accounting principles Notes Report of the auditors Six-year summary key figures Definitions The board and auditors Management glossary TO gain A QUICk OVERVIEW Medivir in review... 2 CEO s letter... 4 Operations Project description table... 16

3 4 Jan 18 Jan 5 Feb 7 Feb Medivir files an application to start clinical phase I studies with MIV-701 against osteoporosis, osteoarthritis and rheumatoid arthritis. Two sub-studies start in Lipsovir s phase III program, testing the preparation against cold sores in children and immuno-deficient patients. Associate Professor Börje Darpö appointed as Vice President of Medivir s Development function. Medivir s new share issue fully subscribed. 8 Feb Phase I studies start on Medivir s and Tibotec s project relating to the treatment of chronic hepatitis C virus (HCV) infection with protease inhibitor TMC Business highlights in Feb 6 Mar 19 Mar 3 May 6 Jul 21 Aug 30 Aug 4 Sep 6 Sep 10 Sep 13 Sep 20 Sep 1 Oct 8 Nov 21 Nov 22 Nov 10 Dec 14 Dec 21 Dec Medivir outlicenses antiviral compound MIV-160 to Guangdong Lantai Viewland Pharmaceutical Co. Ltd. Medivir starts clinical phase I studies on cathepsin K inhibitor MIV-701 against osteoporosis. Epiphany Biosciences, Medivir s licensing partner for shingles project MIV-606 (EPB-348), completes a new share issue. As a result, Medivir receives a milestone payment of usd 0.5 m and shares in the company. Medivir s partner presents preclinical data on its anti-hiv compound MIV-410 (PPI-801) at a symposium in the US. The Bristol-Myers Squibb Company returns MIV-170 against HIV. Medivir will not continue development of this project in-house. Medivir transfers the licensing rights on MIV-160 to a subsidiary of one of China s largest condom producers, Beijing Mefuvir Medicinal Technology Co. Ltd. Medivir receives shares from licensing partner Presidio s new share issue. Tibotec returns the licensing rights for MIV-210 against hepatitis B virus and Medivir signs a new deal with Hainan Noken Pharmaceutical Industry Ltd. of China. Stefan Mårtensson, hired as Vice President of Sales & Marketing, will be responsible for building and leading future sales and marketing resources. Mr. Mårtensson joins Medivir in October. Preclinical data on hepatitis C compound TMC presented at a symposium in Scotland. Phase III trial on cold sore pharmaceutical Lipsovir includes all patients in the pivotal study (pharmaceuticals adm.). Positive efficacy data for MIV-701 in preclinical test models against osteoporosis presented at a research meeting in the US. Data from a clinical phase Ia study demonstrates that hepatitis C inhibitor TMC is well tolerated and absorbed by the body in a manner that probably enables a single daily tablet dose. These results are presented at a liver disease conference in the US on 6 November. Epiphany Biosciences starts clinical phase IIb studies on valomaciclovir (MIV-606, EBP-348) licensed from Medivir on shingles patients. After the successful conclusion of a phase I study on hepatitis C protease inhibitor TMC with promising results, Medivir s licensing partner Tibotec decides to start a European phase IIa study involving 130 patients. The final patient in the pivotal study on the phase III program on Lipsovir starts therapy. Interim results from the phase I study on MIV-701 demonstrate the compound s efficacy on bone degradation in a clinically relevant manner proof of concept and are presented at a capital markets day. Epiphany Biosciences starts additional clinical phase II studies on valomaciclovir, now targeted against glandular fever (mononucleosis) caused by the Epstein-Barr virus (EBV). Medivir receives two milestone payments linked to the HCV collaboration with Tibotec. License revenues total eur 17 m, the largest Medivir has ever received. Medivir transfers the license for MIV-310 from Presidio to Chinese company Mefuvir, which previously also licensed MIV-160.

4 Medivir in review The group consists of Medivir AB (publ), the subsidiaries Medivir HIV Franchise AB, Medivir Personal AB and Medivir UK Ltd., whose operating activities were transferred to Medivir AB in Huddinge, Sweden in early Phase III studies on Medivir s Lipsovir project completed at yearend results will be published at the end of the first quarter Apart from Lipsovir, Medivir has four projects in phase II and two projects in phase I. Medivir has several collaborations with established pharmaceutical companies as well as smaller biotech enterprises. At year-end 2007, the group had 97 employees. Medivir has been quoted on the Stockholm Stock Exchange since Medivir s net sales in 2007 was sek m. Competitive edge The capacity to produce candidate drugs (CDs) cost-efficiently and repeatedly, based on selective inhibition of protease enzymes, which play a vital role in a number of disorders. A broad and well-balanced project portfolio with one project in clinical phase III, four projects in phase II and two projects in phase I, as well as a range of preclinical research programs. Objectives Medivir is endeavoring to attain sustainable profitability from: Revenues from current and future licensing agreements on its preclinical and clinical pharmaceutical development projects. Revenues from regional sales, primarily of specialist pharmaceuticals. These may be proprietary products either developed in-house, received as remuneration in licensing agreements or acquired, as well as the co-promotion of products belonging to other companies. Revenues from proprietary projects that Medivir brings to market registration. 2

5 Medivir s professionals a strategic strength The high level of qualifications and specialist know-how of its professionals is Medivir s strength and also a key criteria for a successful drug development process with many projects in different phases. Qualifications and experience Medivir s professionals have extensive, broadbased knowledge and experience of running projects right from early discovery phases, in preclinical research through extensive clinical development all the way to the registration process. The knowledge base represented by Medivir s employees is highly competitive; all employees are offered the opportunity of continuous skills enhancement. Some 51% of its scientists are PhDs, and three of them are Professors. These professionals have an average of 15 years professional experience in the pharma ceutical sector. Equality initiatives are a natural part of day-today business. The company also endeavors to help its employees reconcile their work and parenting, and ensure that women and men have the same opportunities for parental leave. The company has considerable ethnic diversity, which creates a positive, progressive dynamic, and creates opportunities to establish contacts with companies and organizations in other countries quickly. Working environment and safety philosophy Research environments have very stringent working environment standards, thus safety-consciousness is an important part of laboratory work. Working environment practices are an integrated part of day-to-day operations. A risk assessment is conducted before laboratory work, and predeter- mined routines govern work that involves increased risk. The company works continually on reducing its working environment risks. Medivir also conducts safety inspections, as well as ongoing monitoring of air-conditioning systems, safety ventilation and other technical equipment. Ergonomics are important, and the company is investing in more standing-desks as well as ergonomic seated office environments. Workplace lighting is also being reviewed. Medivir s working environment policy stipulates that the working environment should make a positive contribution to business development, create physical and psychological well-being and commitment, and enhance the quality of life and personal development of each employee. Overall environmental efforts are an integrated part of Medivir s operations, and the company prioritizes protecting its employees and the surrounding environment, as well as individuals outside the company. Medivir s employees are regularly informed and trained on environmental issues. The company has detailed written standard operating procedures (SOPs). Another objective of Medivir s environmental policy is to reduce its waste volumes and increase the recycling of waste generated by its operations. Keep-fit and health The company offers an hour s keep-fit each week, and provides its employees with subsidies for visits to masseurs, chiropractors or naprapaths, for example. The company also funds regular health-checks. Fresh fruit is offered every day, and all employees can eat lunch and take breaks in shared spaces. The company follows all aspects of the National Tax Board s recommendations on taxable benefits. EMPLOYEE DATA, 2007 Division between sexes Average no. of women: 43 Average no. of men: 54 Qualifications PhDs: 51% Graduates: 35% Other: 14% Sickness absence Total sickness absence: 1.3% Long-term sickness absence: 0.9% Other Average period of employment: 7 years Average age: 44 No. of nationalities: 12 Staff turnover: 13.4% 3

6 CEO s letter Three of our projects progressed to clinical trials in the year, and we were able to conclude one phase III program in-house. The positive financial effects of having focused the research operations to Sweden are starting to appear, and we concluded the year with the highest revenue volumes in Medivir s history. Simply put, our operations moved forward briskly in In the year, we took two projects to clinical studies, one of which, against hepatitis C, has already entered phase II. In the other, the cathepsin K program addressing bone disorders, the first CD MIV-701 has undergone phase I clinical trials with good results. The integration of our two research units, in the UK and Sweden, to a single facility in Huddinge, Sweden, also went very well. We were able to maintain our productivity and for a lower cost. Our phase III study on Lipsovir was a very exciting activity in the year. We now look forward to being able to unblind the code for the pivotal study and thereby access the results. This is expected to occur at the end of March It feels satisfying that we ve succeeded in running this program in-house. So far, Medivir s and Tibotec s collaboration on hepatitis C, and the compound TMC435350, has gone really well. During the year, we saw what an extremely effective and potent inhibitor it is, and have been able to take it into phase II studies rapidly. The phase Ia study Tibotec conducted demonstrates that this pharmaceutical is absorbed so effectively in the body that we can probably keep dosage to a single daily tablet. A low dose and few tablets are a big advantage for patients. may be sufficient. Further biomarker studies also demonstrated that this compound has the expected efficacy against bone degradation. Cathepsin K (MIV-701) can be used against osteoporosis, osteoarthritis and skeletal metastases. Owning a research project that addresses such widespread diseases is attractive, although Medivir s size, will make it difficult for us to take it further in-house. We now feel in a good position to start discussions with feasible partners. Medivir s ambition is to form a partnership with a large company that can utilize the phase I product, and develop other follow-ons. A project portfolio with breadth Medivir also brought one wholly owned program, MIV-701 (cathepsin K) into phase I studies. MIV-701 targets skeletal disorders, and here too, we ve been able to conclude that the compound is well absorbed by the body, so a single daily dose 4

7 Our collaboration partner Epiphany has also taken MIV-606 into phase II studies against shingles and glandular fever. Selling specialist pharmaceuticals A small portion of our cash reserves will be used to develop in-house sales and marketing resources. Our type of business operations necessitate us maintaining good margins, because scheduling our next source of revenue precisely, and its scale, is problematic. Going into 2008 with a secure financial position gives us room to maneuver for our future. For several years now, we have been careful to retain Nordic market rights when outlicensing projects. Our idea was that one day, we would have the possibility of selling pharmaceuticals with healthy margins on the Nordic market ourselves. This year, we hired a professional with broad experience of the pharmaceutical market, and we are currently examining our prospects of assisting large pharmaceutical companies in selling pharmaceuticals to a limited circle of physicians, namely specialists. By starting to sell specialist pharmaceuticals, we could build a platform for inhouse sales resources, which would then prepared, if and when our outlicensed projects become registered pharmaceuticals. Going into 2008 with a secure financial position gives us room to maneuver for our future. Costs cut finances strengthened Bringing all our research operations to Huddinge, Sweden, has made us more efficient. In the year, we started to see this pay off in the costs of our preclinical research activities. On the revenue side, 2007 was a new record for Medivir our net sales was sek m (126.0). The increase in net sales was some 98% year on year, mainly thanks to two contracted payments in December totaling eur 17 m from Tibotec on the anti-hiv compound TMC A portion of this turnover was a milestone payment for the project entering phase II studies. We also received eur 12 m in exchange for us declining our option to potentially receive rights to sales of one pharmaceutical on the Nordic market in the future. A review of our immediate future If the results from the studies on Lipsovir are favorable, this will open a wealth of new opportunities in 2008, including partnerships on marketing and extensive NDAs to the US and European authorities. We will be designating another CD in our broad cathepsin K research program, which addresses a range of chronic diseases. With our preclinical program and the phase I compound MIV-701 in our locker, we are now looking for broad partnerships with established companies worldwide. In late-2007, our collaboration partner Tibotec started phase IIa studies on TMC and we look forward to receiving the data in These results will be a valuable foundation for designing the phase IIb studies. We are also looking forward to the results from the phase II trials Epiphany started on shingles and glandular fever patients. Our ambition is to secure collaborations on specialist pharmaceuticals in 2008, get smallerscale sales resources in place and start to generate revenues. Moreover, we hope to be able to designate at least one new CD from our preclinical research portfolio in the year. Our cost level in 2008 will be significantly lower than 2007, mainly because of reducing costs for the Lipsovir program, and that our preclinical research has been concentrated on our Swedish facility. Lars Adlersson Chief Executive Officer Huddinge, Sweden, February

8 Lipsovir progress in the past year In 2007, Medivir took the final step in its phase III program for Lipsovir against cold sores caused by the herpes virus. This is the first time in the company s history that all research phases of a clinical pharmaceutical development program have been conducted in-house. Intensive work will now follow until the end of the first quarter 2008 when the code to all data can be unblinded and Lipsovir s efficacy can be evaluated. Lipsovir s phase III program complete In 2007, work on Medivir s phase III program for a new topical cold sore therapy entered its final phase. A total of five clinical studies were conducted. Most of the activities in the year can be summarized in just a few words: implementation, completion, documentation, logistics, analysis and preparations. It s unusual for a company of Medivir s type and size to conduct all the clinical development phases, including phase III, itself, comments Eva Arlander, it consumed a lot of resources and drained our energies, but it s fair to say we ve coped, and as Lipsovir s Project Manager, I m very pleased and proud of the way we did it. The pivotal study of the phase III program started in summer 2006, and as always when studies are to form the basis for a new drug application, was double-blind. This means that patients received their products in coded tubes, and that no one the patients, physicians or Medivir knows who received placebo and who received the active compound before the study is complete. Completion and documentation It takes just over three months after the last patient completes therapy before Medivir, with the help of CROs, receives and records all data. In this time, the final patients complete treatment and make repeat visits. All data and pharmaceuticals from the patients that have not started therapy must also be collected. The routine after each study is fairly similar. When we ve got all the data, it s entered in a database what therapy each patient received is still completely unknown at this time. All data must be verified, and any questions on the information go to the study clinics. Their responses are also entered into the database. When this is complete, quality control is conducted on the database, which is then locked, and then no data can be amended. When the database is completely locked, the study is unblinded so that every patient s therapy becomes known. It s not until then we know which tubes contained Lipsovir. Only then can we conduct the statistical analysis that tells us about the efficacy the pharmaceutical compound really has against cold sores, concludes Eva Arlander. 6 A total of five studies were conducted in phase III A study on young people was conducted in Sweden and Russia. This was completed ahead of schedule, with the final patients treated in the autumn. A study on immuno-deficient patients was completed in September, also ahead of schedule. The study was conducted in Russia and the Ukraine. The pivotal study, covering a total of 2,500 patients, was conducted in the US and Canada. Two different phototoxicity studies examined whether sunlight exposure after applying Lipsovir has any effect on the skin. These studies are complete. Logistics and preparations Given the results in the pivotal study are positive it s important to file an NDA (new drug application) for Lipsovir quickly in the US and Europe. During the year, Medivir had a series of contacts and meetings with pharmaceutical regulators and a number of discussions with feasible marketing partners. Preparations are also in hand for regulator inspection of the facility in Canada that will produce Lipsovir. These processes must be conducted in a tight timescale so the process proceeds to pharmaceutical registration without delay. For example, pharmaceutical regulators have differing examination periods, which our planning must factor in. We collaborate with a lot of consultants around the world. The closer we get to the results, the more important it gets to gather our strength. We need a lot of analysis and good coordination to integrate all the constituent parts of an NDA. It s a challenge but we re going to make it. Compilation of results underway The results from the clinical program are being compiled and processed in the first quarter The schedule for final reporting is determined by data compilation and evaluating results from the pivotal study. At present, all five studies are scheduled to be published late March/early April. E VA A R L A N D E R, PROJECT MANAGER OF LIPSOVIR S PHASE III PROGRAM AT MEDIVIR

9 The Medivir share B-Share General Index Biotech Index Number of shares traded, thousands (incl. adjustments) (C) SIX 2007 B-Share Number of shares traded, thousands (incl. adjustments) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 (C) SIX. Medivir files an application to start clinical phase I studies with MIV-701 against osteoporosis, osteoarthritis and rheumatoid arthritis. 2. Two sub-studies start in Lipsovir s phase III program, testing the preparation against cold sores in children and immuno-deficient patients. 3. Phase I studies start on Medivir s and Tibotec s project relating to the treatment of chronic hepatitis C virus (HCV) infection with protease inhibitor TMC Financial Statemet. 5. Medivir starts clinical phase I studies on cathepsin K inhibitor MIV-701 against osteoporosis. 6. Q1 report. 7. The Bristol-Myers Squibb Company returns MIV-170 against HIV. Medivir will not continue development of this project in-house. 8. Q2 report. 9. Preclinical data on hepatitis C compound TMC presented at a symposium in Scotland. 0. Data from a clinical phase Ia study demonstrates that hepatitis C inhibitor TMC is well tolerated and absorbed by the body in a manner that probably enables a single daily tablet dose. These results are presented at a liver disease conference in the US on 6 November.. Q3 report. 2. Epiphany Biosciences starts clinical phase IIb studies on valomaciclovir (MIV-606, EBP-348) licensed from Medivir on shingles patients. 3. After the successful conclusion of a phase I study on hepatitis C protease inhibitor TMC with promising results, Medivir s licensing partner Tibotec decides to start a European phase IIa study involving 130 patients. 4. Medivir receives two milestone payments linked to the HCV collaboration with Tibotec. License revenues total eur 17 m, the largest Medivir has ever received. 7

10 T h e M e d i v i r s h a r e The Medivir share Medivir s class B share was floated on the Stockholm Stock Exchange on 14 November 1996; the high-vote class A share is not listed. Share structure Medivir has 20,843,547 shares divided between 660,000 class A and 20,183,547 class B shares. All shares confer equal rights to participation in Medivir s assets and profits. Class A shares have ten votes and class B shares one vote. The share capital is sek 104,217,735. Share structure, 28 December 2007 Share class No. of shares No. of votes % of capital % of votes Shares after full exercise of options A 10 votes 660,000 6,600, ,000 B 1 vote 20,183,547 20,183, ,285,847 Total 20,843,547 26,783, ,945,847 Share price performance and turnover in 2007 Medivir s share price rose 12.9%, from sek 44.3 to sek 50, in In the same period, the Stockholm Small Cap Index (OMXSSCPI) fell 15.3% and the biotechnology index fell 38.1%. At year-end 2007, Medivir s market capitalization was sek 1,042 m, based on the closing price for the year of sek ,840,160 Medivir shares were turned over on OMX Stockholm Exchange in 2007, equivalent to a turnover rate of 64% against 139% for OMX Stockholm Exchange as a whole. As of 29 February 2008, the share price was sek 53, equivalent to a market capitalization of sek 1,104 m. Beta value As of 31 December 2007, Medivir s class B share had a beta value of This value is based on historical closing prices on the last trading day of each of the preceding 24 months. The same measure is applied on the Stockholm All-share Index, and provides an indication of the extent to which a share price fluctuates against an index. If a share has the same price variation as the index, its beta value is 1.0; if it has been more volatile, its value is greater than 1.0, and vice versa. Dividend policy A proposal on dividends will not be raised until long-term profitability can be expected through new product launches on the market. Accordingly, no dividends are anticipated during the coming years. Warrants and stock options Medivir had three outstanding stock option plans at year-end (see table on page 9). At 1 January, there were 676,995 outstanding options, with 142,408 options converted to class B shares in the year, 44,587 options expiring and 480,000 options added through the new stock option plan designated At year-end there were 970,000 stock options, corresponding to 1,102,300 class B shares. The number of outstanding options could increase shareholders equity by sek 82.9 m, and upon full conversion, the total number of shares would be 21,945,847. As a result of the new issue completed at the beginning of 2007, the stock option plans launched in 2004 and 2006 have been restated, whereupon the stock options confer rights to the conversion of 1.27 shares per option and the exercise price has been restated, see the table on page 9. The plan This plan, encompassing 200,000 staff stock options at a subscription price of sek 46.40, matured on 31 December ,408 options were converted to class B shares in the year, while 44,587 options matured without any conversion occurring. Due to the new issue completed in 2007, this plan has been restated, whereupon one option conferred the right to 1.4 shares at the exercise price of sek The plan The Annual General Meeting on 22 April 2004 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 210,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 210,000 options, 156,000 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Medivir s hedge for its various staff stock option plans do not mean that Medivir is utilizing what is termed hedge accounting according to IAS 39. For a review of Medivir s hedge, please refer to the section on accounting policies under staff stock option plans on page 37, and the section rights to acquire shares on page 10. The stock options are only to be utilized to the extent that total profit upon conversion does not exceed an amount corresponding to the product of the number of stock options and 500% of the stock options exercise price. Subscription for class B shares is possible from 1 May June 2009 inclusive, at a price of sek 126. The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock 8

11 T h e M e d i v i r s h a r e option plan Each stock option is exercisable to acquire one share in Medivir AB through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 130% of the closing price of the Medivir class B share quoted on OMX Stockholm Exchange s Small Cap-list at the grant date (albeit subject to a minimum of sek 126) for each share. These stock options have been issued to staff of the Medivir group, free of charge. The theoretical market value according to the Black & Scholes equation was sek per option at the grant date, and sek 0.15 as of year-end 31 December Upon full conversion of the detachable warrants, Medivir s liquid assets and shareholders equity would increase by approximately sek 26.5 m, whereupon the company s share capital would increase by sek 1.33 m. The number of class B shares would increase by 266,700. As a result of the new issue completed in 2007, the plan has been restated, whereupon one option confers the right to conversion to 1.27 shares at an exercise price of sek The plan The Annual General Meeting of 21 April 2005 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 280,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 280,000 options, 183,600 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Subscription for class B shares is possible from 1 July 2005 to 31 December 2010, at a price of sek 87. The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock option plan Each stock option is exercisable to acquire one Medivir AB share through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 130% of the closing price of the Medivir class B share quoted on OMX Stockholm Exchange s Small Cap-list at the grant date (albeit subject to a minimum of sek 87.00). These stock options have been issued to staff of the Medivir group, free of charge. The theoretical market value according to the Black & Scholes equation was sek per option at the grant date, and sek 4.93 as of year-end 31 December Upon full conversion of the detachable warrants, Medivir s liquid assets and shareholders equity would increase by approximately sek 24.4 m, whereupon the company s share capital would increase by sek 1.78 m. The number of class B shares would increase by 355,600. As a result of the new issue completed in 2007, the plan has been restated whereupon one option confers the right to conversion to 1.27 shares at an exercise price of sek Outstanding option plans, 28 December 2007 Type Duration Number Rights to no. shares Exercise price sek Outstanding shares today and at conv. 20,843,547 Stock opt , , ,110,247 Stock opt , , ,465,847 Stock opt , , ,945,847 Total 970,000 1,102,300 Medivir s 15 largest shareholders, 28 December 2007* Descending order of vote Shareholder categories, 28 December 2007* Shareholder statistics as of 28 December 2007, by size of holding* Size of holdings No. of shareholders % of Votes % of Capital No. of shares % of capital No. of shareholders Swedish institutions Foreign institutions Swedish private individuals ,317 Foreign private individuals Totalt ,858 * Source: VPC Analys Class A shares Class B shares % of votes % of capital Bo Öberg 284, , Nils-Gunnar Johansson 284, , Staffan Rasjö 2 872, DNB Nor Bank AB 1,316, Christer Sahlberg 92,000 41, Länsförsäkringar 946, Handelsbanken 934, Awake Swedish Equity Fund 818, Nordea Bank Finland 796, Tredje AP-fonden 765, Skandia Liv 756, INTER 676, Unionen 563, Bear Sterns & Co 393, Reabourne Melin Life Science 358, Others 8,361, Total 660,000 20,183, * Source: VPC Analys, register of shareholders. The table may include composites from multiple entries in VPC s statistics. These composite entries are intended to indicate an institution or private individual s total holdings in Medivir. Such composite entries are not utilized in other tables relating to the Medivir share. % of votes ,293 58, ,671 1,080, ,590, ,267, ,524, ,660, Total 4,858 20,183, * Source: VPC Analys 9

12 T h e M e d i v i r s h a r e The plan The Annual General Meeting of 24 April 2007 resolved to raise a subordinated debenture of sek 1,000 through the issuance of debt instruments with 480,000 detachable warrants. The debenture was subject to 5% interest and has been repaid. Of the 480,000 options, 360,000 were granted to staff, with the remainder held by Medivir Personal AB to cover social security costs. Subscription for class B shares is possible from 18 June 2007 to 30 April 2012, at a price of sek The subsidiary Medivir Personal AB controls these detachable warrants in order to fulfill undertakings relating to stock options issued within the framework of the stock option plan Each stock option is exercisable to acquire 1.0 Medivir AB share through the agency of the subsidiary, against the payment of a redemption fee equivalent to at least 115% of the closing price of the Medivir class B share quoted on OMX Stockholm Exchange s Small Cap-list at the grant date (albeit subject to a minimum of sek 64.64) for each share. These stock options have been issued to staff of the Medivir group, free of charge. The theoretical market value according to the Black & Scholes equation was sek per option at the grant date, and sek 9.28 as of year-end 31 December Upon full conversion of the detachable warrants, Medivir s liquid assets and shareholders equity would increase by approximately sek 32.0 m, whereupon the company s share capital would increase by sek 2.4 m. The number of class B shares would increase by 480,000. Rights to acquire shares For the stock options issued in 2004, each holder possesses the right to exercise one third of the total number of granted stock options from a date one year after granting onwards, with another one third on the corresponding date in each of the ensuing two years, providing the stock option holder remains an employee of the Medivir group. The plan issued in 2005 is subject to the above terms, apart from the first one third not being exercisable until two years have passed, with a further one third in the subsequent two years. The plan issued in 2007 confers the right to acquire new shares at 30% of the whole number of granted options from the date occurring one year after granting onwards, another 30% on the second anniversary and 40% on the third anniversary. Upon exercise, a taxable benefit arises, and to cover future social security costs, the subsidiary controls a number of options for subscription for new Medivir AB stock (as a hedge). Share capital history Year Transaction Nominal amount, sek Change in share capital, sek Total share capital, sek Total no. of class A shares Total no. of class B shares Total no. of shares 1988/89 Incorporation 10 50,000 5,000 5,000 New share issue 1: , ,000 10,000 10,000 New share issue 3: , ,000 10,000 30,000 40, /92 Bonus issue 1: , ,000 20,000 60,000 80,000 New share issue 1: , ,000 22,500 67,500 90, /93 Bonus issue 4:1 10 3,600,000 4,500, , , , /95 Non-cash issue 1:7 10 2,250,000 6,750, , , , Bonus issue 3: ,250,000 27,000, ,000 2,250,000 2,700,000 Split 2:1 5 27,000, ,000 4,500,000 5,400,000 Reclassification to class B shares 5 27,000, ,000 4,660,000 5,400,000 New share issue 598:2700 at a subscription price of sek ,980,000 32,980, ,000 5,856,000 6,596, Reclassification to class B shares 5 32,980, ,000 5,936,000 6,596, Non-cash issue 5 295,110 33,275, ,000 5,995,022 6,655, Private placement 5 7,025,000 40,300, ,000 7,400,022 8,060, Non-cash issue 5 475,000 40,775, ,000 7,495,022 8,155, Options conversion, ,000 41,440, ,000 7,628,022 8,288, Options conversion, ,440, ,000 7,628,122 8,288, Private placement 5 1,507,390 42,948, ,000 7,929,600 8,589, New share issue 2:1 5 21,498,410 64,446, ,000 12,229,282 12,889, Options conversion, ,645 64,513, ,000 12,242,611 12,902, New share issue 5:3 5 38,707,830 51,610, ,000 19,984,177 20,644, Options conversion, ,850 52,607, ,000 20,183,547 20,843,547 10

13 T h e M e d i v i r s h a r e The hedge functions by those options assigned to the hedge held by Medivir Personal AB being converted to shares, which are sold on the market to generate a commensurate cash flow for the group to cover the payment of social security costs. However, the personnel costs arising in the Income Statement are not offset by a cost reduction (revenue), but rather the effect arises in cash flow terms exclusively. This is because the income from such share sales from a group perspective is considered as an issue from shareholders equity. More information under Accounting principles, Social security costs on stock options, on page 37. Cash consideration The Board resolved in November to introduce the possibility of cash consideration in respect of all staff share option schemes. This will facilitate the issuing of shares. Outstanding options Upon full subscription, the total number of outstanding detachable Warrants as of 31 December 2007, 970,000, confer rights to 1,102,300 new class B shares, corresponding to some 5.3% of the share capital and 4.1% of the vote upon full exercise. 142,408 (0) stock options were exercised in the year, converted to 199,370 (0) new class B shares. As of 1 January, the total number of outstanding detachable warrants was 676,995, and 970,000 at 31 December. The difference comprises the 480,000 newly issued options, 142,408 new subscriptions and 44,587 expired options relating to the plan. The Income Statement includes a provision of some sek 0.8 (0.2) m for accrued social security costs that would arise on the taxable benefit coincident with exercise of the stock options. The value of the outstanding options for the purposes of calculation of accruals is in accordance with URA 46, IFRS 2 and social security costs, which were initiated in Information on accounting principles is available in the Stock option plans section on page 37. Valuation of staff benefits via stock option plans Medivir utilizes the Black & Scholes model for calculating the theoretical value of the stock options its employees receive. This model is used both at the grant date and at each quarterly financial statement. Medivir utilizes this value, determined by the Black & Scholes model at the grant date, to account a personnel cost pursuant to IFRS 2, which is allocated over the accrual period. For a review of accounting pursuant to IFRS 2, please refer to Stock option plans in the Accounting principles section on page 38. The market value of the option is also calculated quarterly, and utilized to determine the provision for social security costs to be accounted pursuant to URA 46. Calculations consider share price, exercise price, the option term, expected volatility, risk-free interest and expected dividends. During the financial year, expected volatility of 30% has been applied in accordance with a valuation by Carnegie Investment Bank AB in the preceding year. Adoption of IFRS 2 and related effects Medivir accounts its stock option plans pursuant to IFRS 2. As applicable, this has also been applied retroactively to those plans within the time interval of the transference rules of IFRS 2. The recommendation implies that Medivir values the relevant plans (currently the three plans , and ) at market value at issuance, then allocates the value over the accrual period as a personnel cost. This remuneration to staff means that Medivir issues its own financial instruments (warrants possessed by the staff providing entitlements pursuant to the agreements in the plans). In consequence the costs for each period are reflected by the corresponding increase in other paid-up capital (premium fund in the parent company). The parent company Medivir AB has adopted IFRS 2 for its accounting of stock option plans from 1 January 2005 onwards. This has meant retroactive adoption of IFRS 2 for the same periods as the group. The adoption of IFRS 2 results in personnel costs of sek 2.1 (1.5) m in the group, and the capital reserve other paid-up capital increasing by the same amount. Shareholder agreement and pre-emption An agreement exists between holders of class A shares in Medivir, stipulating that the parties will behave in accordance with decisions reached on relevant issues by the parties prior to shareholders meetings. If, during their preparatory deliberation, the parties are unable to agree on a particular issue, the resulting decision is that opinion represented by the majority of class A share votes represented during the deliberation process. Furthermore, the agreement implies that if holders of class A shares wish to transfer their class A shares in the company to another holder of class A shares or a third party, the shares will be converted into class B shares. The same applies if a party acquires class A shares in the company in any other way. If a majority of the holders of class A shares so decide, the class A shares will have the facility for transfer to a new owner without conversion, at which point the new owner will become party to the current shareholders agreement for holders of class A shares. For class A shares, pre-emptive rights apply pursuant to the Articles of Association. 11

14 The art of managing risk and creating opportunities Medivir s existing and potential shareholders are aware that investing in a research and pharmaceutical company implies high risk. Generally, some 85% of all candidate drugs (CDs) are unsuccessful in the clinical development phases on the route to market registration. This fact demonstrates the complexity and risk levels inherent in pharmaceutical development. From an operational perspective We have two types of risk to address operational and financial. Medivir has worked strategically and on a goal-oriented basis for many years to lay the most stable foundation possible, but nevertheless, there are still always factors we cannot influence. Each development phase generates new results that can affect the company and our projects. Our strength is that rather than focusing our business on specific therapy areas, we ve opted to focus on a single approach to an array of disorders we develop protease inhibitors and we do so efficiently, with good results, comments Rein Piir, Medivir s Chief Financial Officer. Proteases are a type of enzyme involved in many diseases, and in the wrong circumstances, can create a lot of problems for the body. With Medivir s know-how and capacity in preclinical and clinical development, we can run several projects in different development phases simultaneously. This enables us to diversify and reduce operational risk we ve always got a pipeline of projects to top up from if one should fail. From a financial perspective Pharmaceutical development projects consume a lot of time and resources; the further a project is taken through clinical development, the more resources are needed. To achieve success, Medivir enters partnerships with pharmaceutical companies in various phases of the development process. At this point, Medivir considers its own needs and those of the project. Medivir has several partnerships with established pharmaceutical companies and smaller biotech enterprises. These collaborations strengthen us, and create stability and opportunities. Our partners assume responsibility for project funding, and Medivir receives revenue through milestone payments when projects progress towards the market. This revenue helps us fund other parts of our business. The key thing is to maintain a good mix of partnership structures, both in early research collaborations and on projects in later-phase clinical development. The financial paradigm shift occurs on the day our own compound becomes a pharmaceutical on the market, continues Rein Piir. Forward integration Medivir is consciously moving its position slowly but surely forward, from being a pure research enterprise into becoming a research-based pharmaceutical company with an in-house sales function. We took our first step when we decided to conduct a clinical phase III study on Lipsovir inhouse, which is the final phase before a compound can be approved as a pharmaceutical. This project was a good experience, and clearly demonstrated that we have the know-how and capacity to lead a phase III program, but it s also taken time, money and resources. Our objective is to enter partnerships after we ve seen the results from this program. A partnership agreement for a project with strong phase III results is a commercial marketing agreement rather than a research collaboration. In tandem with this process, Medivir has started work on seeking collaborations with established pharmaceutical companies to help them sell their products. This is how we hope to pave the way for our own smaller-scale, fast-moving Nordic sales function that can focus on selling pharmaceuticals to specialists and clinics. The revenues this generates will consolidate our cash reserves and reduce our financial risk. Risk management is an ongoing process that creates the best prospects for the company s projects. 12

15 Freedom of choice for investors Investors in research and pharmaceuticals companies have plenty of characteristics to study: therapy focus, platform focus, geographical exposure and the breadth and maturity of project portfolios to name but a few. The majority of Medivir s shareholders are in the Nordic region, and many probably see advantages in investing in a company from their own region, listed on a Nordic exchange. For example, many Nordic investors have exhibited acute interest in the potential of the Lipsovir project. However, our foreign investor share has increased. US investors especially joined Medivir as shareholders in Their primary interest is in the hepatitis C program Medivir is running in collaboration with Tibotec, which is now in phase IIa. Medivir has to explain how we work on our projects, and how these projects are doing compared to competitors. It s also important that we re unequivocal about what the company is doing to reduce the various risks associated with our operations, and highlighting the opportunities inherent in our projects, adds Rein Piir, we do this by regularly meeting potential and current shareholders. We re also committed to meeting Nordic and multinational investment banks that show an interest in our work. Awareness of Medivir outside the Nordic region has grown significantly over the past two years. Capital markets activities In 2007, Medivir participated in about 10 investor conferences, conducted over 50 investor presentations and held a capital markets day for institutional investors and investment banks. Medivir was actively monitored by eight Nordic investment banks and their analysts in Certain Medivir projects are also monitored actively by several international investment banks. R E I N P I I R CHIEF FINANCIAL OFFICER What s most important to Medivir in the coming years? In the short term, the forthcoming phase III results on Lipsovir are important, and clearly, we hope they fulfill our expectations. It is also important that the recently started process to seek collaborations with established pharma - ceuticals companies turns out well. Continued success with our hepatitis C project, TMC435350, is also highly significant to Medivir. In the long-term, it s essential that we continue to produce products that are very likely to achieve market launch. Obviously, we also hope that our licensees will continue to take projects forward at least as effectively as they did in

16 Operations Business orientation Medivir s current focus is on research and development projects involving proteases (a class of enzyme) and protease inhibitors. These are targeted at major therapy areas including hepatitis C, HIV, osteoporosis, osteoarthritis, bone metastases, chronic obstructive pulmonary disease (COPD) and hypertension. Medivir was formerly also active on compounds whose purpose was to block polymerases, another enzyme class. Apart from the projects reviewed on pages 16-17, early phase activities in the protease inhibitor segment are also conducted in collaboration with partners, or in networks with various universities. These early activities are intended to create a continuous flow of new ideas, thus ensuring the long-term supply of new projects for Medivir. Medivir s project portfolio is reviewed on page 18. Focus Taking pharmaceutical development from original idea to clinical studies requires focus and high efficiency. Thanks to its specialization on a single enzyme class, Medivir can take a relatively high number of parallel early projects into preclinical research, despite the company s limited size. Here, in these preclinical phases, Medivir enjoys its greatest competitive edge the ability to produce candidate drugs in a very time-efficient manner. For onward development after projects reach late preclinical or early clinical phases, the company s chosen strategy is to enter partnerships with other companies. Clinical development is far more resource intensive, both financially and in terms of know-how. The need for resources and know-how in various therapeutic areas means that often, it is more appropriate to allow established pharmaceutical companies to take projects onwards to market registration. Partnerships Medivir enters partnerships in various development phases. One example of an early-phase collaboration is the protease inhibitor TMC against hepatitis C, which was outlicensed in early preclinical research. This project is being conducted in collaboration with Tibotec, and after just three years after outlicensing, is already in phase IIa studies. The cathepsin K inhibitor MIV-701 against bone degradation diseases is an example of a project Medivir has opted to take onto early clinical development itself. In 2007, Medivir took the project into clinical development until phase Ib, where measurement of biomarkers for bone degradation demonstrated the desired good efficacy. Some unique opportunities to take projects towards market registration in-house may constitute exceptions to the principle of entering partnerships. Lipsovir against cold sores caused by labial herpes may be an example of a project where Medivir enters partnerships after phase III in the near future. Entering partnerships at the right time on each project is decisive to creating the greatest commercial returns over time. Selling pharmaceuticals step-by-step Medivir s ambition is to create a sales function, first and foremost for the Nordic market. A first step towards generating sales revenues will be to seek collaboration agreements with established pharmaceutical companies to sell specialist pharmaceuticals. More opportunities to generate sales volumes appear when future partnerships transform into rights to sales of selected products or smaller acquisitions. In its current partnerships, Medivir has retained the rights to sales and markets in the Nordic region, and in some cases, to other world regions (see also page 18). Looking further ahead, sales of these products will add sales revenues in Medivir s sales regions. However, the big revenue step-up occurs on the day one of the products Medivir has developed itself starts to generate royalty revenues via partners an active year In 2007, Medivir conducted seven clinical studies itself or alongside partners involving over 3,100 people, and started three clinical studies that are still proceeding. Lipsovir phase III program A total of five clinical studies concluded in the year; 2,450 patients were recruited to the pivotal study, 1,450 of which were treated with Lipsovir, acyclovir or placebo. Two supportive phase III studies were started and concluded in the year, involving 430 recruited and 240 treated patients. 80 patients were treated in two smaller-scale studies. The phase III program is now complete, and the results being compiled. These results are scheduled to be complete late March Assuming positive results, work on negotiating a partner or partners and structure for future sales of Lipsovir will be conducted in TMC hepatitis C project in collaboration with Tibotec Phase I studies began and were conducted in 2007 with very positive results. These results prove that TMC can be administered in low doses and once daily, a big competitive edge on other development programs in this segment. Based on the positive outcome of these studies, phase IIa studies started late in the year, which will involve 130 patients, 34 of whom have not responded to therapy with extant pharmaceuticals. 14

17 MIV-701 phase I study started and completed in 2007 In this phase I program, now completed, Medivir examined how an oral preparation of MIV-701 is absorbed and tolerated by the body. By studying what are termed biomarkers, Medivir also gained its first impression of the compound s efficacy against osteoporosis. The final part of the study involved a group of post-menopausal women (a group often affected by osteoporosis, which studied the effect of MIV-701 on biomarkers for osteoporosis. At a single daily dose of MIV-701 for 14 days, the effect on biomarkers proved that bone degradation reduced by approximately 50%. These results are consistent with Medivir s hopes and constitute proof of principle. Valomaciclovir (MIV-606) run by US company Epiphany Biosciences. Two clinical phase IIb studies were started in the late-autumn, the first against shingles, comparing MIV-606 against current market-leading pharmaceutical Valtrex. The second study is against glandular fever, a disease that currently has no effective pharmaceuticals. More potential CDs in preclinical research Resources for early preclinical research in the year were mainly assigned to conducting the cathepsin K protease projects (follow-ons to MIV-701), hepatitis C (follow-ons to TMC435350), HIV protease inhibitors in collaboration with Tibotec and the COPD project. Additionally, some early activities against hypertension (renin) and Alzheimer s disease (BACE) made advances. As more mature preclinical projects achieve successes in 2008, these early activities will be assigned additional resources and be taken to optimization. New partnerships for polymerase-based HIV/hepatitis B projects Three of the polymerase-based projects changed partners in the year: MIV-310, MIV-210 and MIV-160 all secured more suitable partners in the context of their prospects. Beijing Mefuvir Medicinal Technology Co. Ltd. of China will be responsible for and fund the clinical development and commercialization of MIV-310 and MIV-160 against HIV in Asia. Medivir has retained the market rights to these compounds outside Asia. Noken Pharmaceutical Industry Ltd. in China will be responsible for the funding and clinical development of the compound MIV-210 (in the hepatitis B segment). Medivir has retained market rights to the compound outside Asia. Project portfolio Medivir s project portfolio consists of 17 projects, seven of which are in clinical development, three in the regulated preclinical development phase and seven in the earlier preclinical phase. At present, nine of Medivir s projects are being conducted with partners, five of which are in the clinical development phase. 15

18 Project review Polymerase inhibition/hydrocortisone Protease inhibitor Polymerase inhibitor Medivir AB Lipsovir Therapy area Topical combination therapy for recurrent labial herpes. TMC435350, HCV protease inhibitor Therapy area Treatment of hepatitis C virus (HCV) infection. MIV-701, cathepsin K inhibitor Therapy area Bone degradation diseases including osteoporosis, osteoarthritis and skeletal metastases. Phase Phase III studies completed in 2007; results will be reported in March Phase Phase II studies initiated in November Phase Phase I studies completed (single and multi-dose and proof of concept). Competitive edge The first treatment with substantial efficacy against recurrent labial herpes expected to prevent occurrence of cold sores with early treatment onset. Competitive edge HCV NS3/4A protease inhibitor with excellent antiviral activity in the replicon cell-based assay. Phase I studies proved that the CD, TMC435350, is well tolerated and demonstrated very good oral bioavailability, enabling a single daily dose. Competitive edge Cathepsin K inhibitors markedly decrease degradation of bone without effecting bone formation, which is expected to lead to improved strength of the skeleton. Rapid onset and offset of inhibitory activity on bone resorption is a marked advantage over current commonly prescribed pharmaceuticals. Project data First treatment of recurrent labial herpes with potential to prevent lesion development. Low risk for adverse events. Genital herpes is a potential second indication. Project data Collaboration with Tibotec Pharmaceuticals Ltd. since late TMC is a highly potent HCV NS3/4A protease inhibitor. Phase I study (healthy volunteers Ia and patients Ib) conducted in TMC now being evaluated in a phase IIa study. Project data Phase I study provides proof of concept for MIV-701 and thus the cathepsin K program. Goal of entering a collaboration to develop MIV-701 for osteoporosis and other indications. Three main products in 2007 usd m* Valtrex GlaxoSmithKline 1,762 Zovirax GSK/Biovail 350 Famvir Novartis 272 Three main products in 2007 usd m* Pegasys Roche 1,290 Pegintron Schering-Plough 880 Rebetol Schering-Plough 280 Three main products in 2007 usd m* Fosamax Merck 3,042 Actonel Procter & Gamble Not available Evista Eli Lilly 1,075 Renin BACE Cathepsin S Therapy area High blood pressure, organ protection. Therapy area Protease inhibitor for treating Alzheimer s disease. Therapy area Autoimmune diseases e.g. rheumatoid arthritis, multiple sclerosis and chronic pain. Phase Heading towards preclinical optimization phase. Phase Heading towards preclinical optimization phase. Phase Heading towards preclinical optimization phase. Competitive edge Blood pressure reduction combined with a potential positive effect on end-organs, e.g. heart and kidneys. Competitive edge Potent and selective BACE inhibitors with promising pharmacokinetics have been identified. BACE inhibitors have the potential to become the primary therapy to block the development of Alzheimer s disease. Competitive edge Cathepsin S inhibitors have the potential for improved efficacy, fewer side-effects and better cost-effectiveness than current autoimmune therapies. 16

19 Cathepsin K inhibitor (follow-on) Therapy area Bone degradation diseases including osteoporosis, osteoarthritis and skeletal metastases. COPD Therapy area Chronic obstructive pulmonary disease (COPD). HIV-PI Therapy area HIV. Phase Designating clinical CD. Phase Preclinical optimization phase. Phase Preclinical optimization. Competitive edge Cathepsin K inhibitors markedly decrease degradation of bone without affecting bone formation, which is expected to lead to improved strength of the skeleton. Rapid onset and offset of inhibitory activity on bone resorption is a marked advantage over current commonly prescribed pharmaceuticals. Competitive edge Potent protease inhibitor with good selectivity. There is currently no satisfactory treatment against COPD. Competitive edge HIV protease inhibitors with highly potent antiviral effect against both wild-type and multiresistant virus has been identified. Very positive pharmacokinetics may enable single daily dose. Project data Highly potent and selective cathepsin K inhibitor. Long effect duration in preclinical models. Two patented new compound classes. Project data Highly effective and selective inhibitor compounds. High and significant efficacy in a preclinical test model of COPD. Good oral bioavailability. Project data Collaboration with Tibotec Pharmaceuticals Ltd since 30 June Several series of potent compounds against wild-type HIV and resistant virus. Three main products in 2007 usd m* Fosamax Merck 3,042 Actonel Procter & Gamble Not available Evista Eli Lilly 1,075 Three main products in 2007 usd m* Seretide/Advair GlaxoSmithKline 6,725 Symbicort AstraZeneca 1,462 Pulmicort AstraZeneca 1,407 Three main products in 2007 usd m* Truvada Gilead Sciences 1,477 Kaletra Abbot 1,250 Reyataz Bristol-Myers Squibb 1,045 HCV POL Therapy area Treatment of hepatitis C virus infection. *The sales figures are for Q Q Phase Preclinical optimization. Competitive edge HCV polymerase inhibitors. Clinical studies have shown that efficient inhibition of virus duplication can be obtained. 17

20 P r o j e c t r e v i e w Prioritized projects Project Indication(s) Partners/ Date of agreement Terms Medivir s markets Explorative phase tion dev. 1 Phase I Phase II Phase III Optimiza- Preclinical NDA Lipsovir (ME-609) Labial herpes In-house TMC (HCV-PI) Hepatitis C Tibotec / meur+royalties FTE funding Nordic region MIV-701 (Cath K) Osteoporosis, osteoarthritis, bone metastases In-house Cathepsin K Osteoporosis, osteoarthritis, bone metastases In-house HCV POL Hepatitis C Roche / 2003 / In-house Undisclosed Nordic region HIV PI HIV Tibotec / 2006 COPD PI COPD In-house (Hengrui) Renin Hypertension In-house 64 meur + royalties and FTE funding Nordic region World exc. China BACE Alzheimer s In-house Cathepsin S Rheumatoid arthritis, multiple sclerosis In-house Polymerase inhibitor projects Project Valomaciclovir (MIV-606) Alovudine (MIV-310) MIV-210 MIV-150 Indication(s) Shingles, herpes virus Partners/ Date of agreement Epiphany Biosciences / 2006 Terms 24.5 musd + royalties. Epiphany shares Medivir s markets Nordic region HIV Mefuvir/2007 Royalties World excl. Asia Hepatitis B, HIV HIV Hainan Noken/2007 Population Council / 2003 MIV-160 HIV Mefuvir/2007 MIV-410 HIV, CMV Presidio / musd + royalties Mefuvir shares and royalties musd + royalties. Presidio shares World excl. China, Taiwan and Macao Option on 50% of Western world World excl. China, Taiwan and Macao Nordic region and UK. Option on Europe Explorative phase tion dev. 1 Phase I Phase II Phase III Optimiza- Preclinical NDA MIV-170 HIV Polymerase inhibition/hydrocortisone Protease inhibitor Polymerase inhibitor 1) The regulated preclinical development phase. Preclinical research phases Explorative phase identifying active hit compounds. Lead identification identifying feasible compounds with drugable potential. Optimization phase this stage is focused on producing the optimal compound/ compound class possessing pharmaceutical potential. Towards the end of this phase, CDs (candidate drugs) are designated. IND-late preclinical development the final working phase before designated CDs enter clinical studies. This phase is authority regulated and includes extensive safety studies, pharmacokinetics, metabolism studies and is when the first kilogram-scale amounts of the active compound are produced. Applications for regulatory approval for clinical trials of designated CDs are also filed. Clinical development phases Phase I trials of the CD on healthy volunteers, usually involving 20 to 50 individuals. Phase I is divided into two parts. In phase Ia, a single dose of increasing strength, then repeat doses, are administered to healthy volunteers. Sometimes, phase Ib studies are conducted, on a small group of patients for a short period. Phase II the first trials on patients suffering from the target disorder. Studies usually encompass 100 to 500 patients, with efficacy and safety assessed. Phase II is also divided into two parts. Phase IIa is intended to demonstrate that the course of the disease can genuinely be influenced. Phase IIb demonstrates the efficacy of various doses on the course of the disease. Phase III comparative trials on a large sample of patients to measure efficacy in relation to other treatments, if any exist, as well as safety. NDA New Drug Application, which often requires Phase III trials as documentation. 18

21 Patents and patent filings At the close of 2007, Medivir had 78 patent families, including those filed by collaboration partners and that may generate royalties for Medivir. A patent family is the collection of national or regional patents and patent applications that cover a single invention or group of related inventions. In 23 of 78 of these families, the official examination process has progressed to the point that at least one US or EU patent has been granted. Including these approved US/EU patents, Medivir had 433 granted patents in force at year-end. Of the patent families that are in the early stages of the official examination process, 21 patent families are in the international stage, which applies in more than 130 countries worldwide; 6 of these PCT applications were filed in the year. The 25 patent families, for which priority applications were filed in 2007, i.e. the official global documentation that present the initial unique aspect of an innovation, are even earlier in the patent process. Project Patent number Normal expiry AU BR CA CN EU IL IN KR JP MX MY RU TH TW US ZA Lipsovir WO96/ /2016 G G G 19 G P G P G P G G G 2019 MIV-701 WO05/ /2025 P P P P all U P P P P P U P P P U 2028 HCV-PI WO05/ /2025 P P P P all P P P P P P P P P P P 2028 HIV-PI W006/ /2026 P P P P all P P P P P P P P P P P 2026 MMP12 W007/ /2026 P P P P all P P P P P P P P P P P Cathepsin S WO07/ /2027 P P P P all P P P P P P P P BACE Alzheimers Unpublished 3/2028 P P P P all P P P P P P P P P P P Renin Unpublished 4/2028 P P P P all P P P P P P P P P P P HCV polymerase Unpublished 10/2027 P P P P all P P P P P P P P P P v 2028 RAPiD WO97/ /2017 G P 9 P G 2018 Additional families (expiry) MIV-606 WO97/ /2017 G G G G 25 G G P G G G P G G G 2026 MIV-210 WO99/ /2018 G G G 20 P G G G G G G P G G G MIV-150 WO99/ /2019 G P P G 23 G G G P G G G P G G G MIV-160 WO02/ /2022 G P P G 19 P P P P G P A P G G MIV-170 WO05/ /2024 P P P P all P P P P P P P P MIV-410 W007/ /2025 P P P P all P P P P P P P MIV-310 US /2019 G 2023 G A P Patent granted Patent allowed by patent examiner, but grant formalities not completed Patent pending: awaiting examination at the Patent Office Normal expiry Since 1995, almost all countries specify a patent life of 20 years from the international application date. Older US patents have a life of 17 years from grant, which could lead to substantially different lives in different countries. An example is MIV-310, which has an exceptionally long patent life in the world s biggest pharmaceutical market, the US. Europe additionally allows up to five year s extension of pharmaceutical patents, where the European marketing authorization was granted more than 5 years from the patent application date. The projects where European extension is relevant (extended expiry in brackets) are: MIV-606 (2/2022), Lipsovir (2/2021), MIV-210 (12/2022) and MIV-150 (1/2020). Many countries have an additional form of market exclusivity for pharmaceuticals, called data exclusivity. This prevents generic pharmaceutical applications ANDA being approved based on an original product for a defined number of years, namely 10 years in Europe, years in the US and 6 years in China. This exclusivity is independent of patents and as it is based on the launch date, the exclusivity may extend longer than the patent life. For example in Europe, MIV-310 will gain 10 years protection from generic pharmaceutical applications even after the European patent expires. Country codes AU Australia, BR Brazil, CA Canada, CN China/Hong Kong, IL Israel, IN India, KR South Korea, JP Japan, MX Mexico, MY Malaysia, RU Russia, TH Thailand, TW Taiwan, US USA, ZA South Africa. WO is an international (PCT) patent application. EU At present, a European patent can cover all countries in the EU and a number of other European countries such as Switzerland, Iceland, Croatia, Turkey, and soon, Norway. Medivir always validates granted European patents, at least in the key pharmaceutical markets of Germany, the UK, France, Italy, Spain, Switzerland and Sweden. The figure in this column is the total number of European countries where the patent is pending or has been validated. Additional patent families With the exception of MIV-310, all Medivir s patent families have product claims (also known as composition of matter ) and therapeutic method claims. Product claims are preferred in pharmaceutical contexts as they give control over product pricing, notwithstanding that further uses for a product may be discovered in the future. Medivir practices patent portfolio management and files successive generations of patents to in-house and CRO developments such as formulations, synthesis methods and synergistic combinations. Although such patent families can seldom totally prevent generic competition after the basic product patent has expired, they do serve a role in ensuring continued royalty income from Medivir s partners even after the introduction of generic competition. This extended royalty period is indicated in this column. 19

22 Hepatitis C the anticipation for new pharmaceuticals Just a few percent of all the carriers of HCV, the hepatitis C virus, get treatment against their infection. Current pharmaceuticals for treating the most severe, and in the Western world most common, type of hepatitis C, genotype 1, have severe sideeffects. In these cases, medication has no effect on more than one in every two patients. Accordingly, there is a pressing need for new pharmaceuticals. Transmission and infection Chronic hepatitis C virus infection is serious. The illness progresses slowly, and many years can pass before symptoms become apparent. It is very hard to treat, and in many cases, leads to compromised liver function, and in the worst cases, death. According to the WHO, some 3% of the global population is infected with the virus, equating to some 200 million people worldwide. In Europe, an estimated 4 million people are infected, but only 300,000 of them are receiving treatment. Hepatitis C infection is caused by a virus primarily transmitted via the blood, usually via contaminated blood products or intravenous abuse. In global terms, the virus is very widespread and common, and despite fairly low incidence in Sweden, 40,000 people are still infected. Hepatitis C causes chronic liver inflammation. Many patients do not notice much before liver function starts to diminish, which occurs after several years infection. Of all the people infected by the virus, as many as 80% develop chronic infection, and accordingly, only an estimated 20% heal spontaneously. The first treatment onset is usually when the patient detects signs of compromised liver function. The treatment is long term, taking nearly a year, and associated with severe side-effects, and moreover, cures only about half of patients with genotype 1 virus infection. The disease can develop unnoticed, without symptoms, for decades, and is sometimes known as the silent epidemic. During this term, hepatitis liver inflammation develops and liver cells are destroyed. In many patients, chronic inflammation results in cirrhosis of the liver that will require a liver transplantation. Hepatitis C patients also exhibit a marked increase in the frequency of liver cancer. In many parts of the West, such as the US, chronic hepatitis caused by HCV infection is the most common cause of liver transplantation. This procedure is costly, sometimes involving long waiting times for organ donors, which puts a strain on patients. Because in many cases, hepatitis C infection is silent until liver function starts to diminish, patients do not make contact with their doctor until the disease is already in a late stage. Estimated HCV prevalence* 1.0% 1.7% 2.2% 3.9% 4.6% 5.3% *Source: WHO (1999) The hepatitis C virus is divided between six different genotypes, with genotype 1 being most common in the US, Europe, Japan and some other regions. Some 75% of all Western patients carry genotype 1, while other genotypes also occur, although are less widespread. In the US alone, 1.8% of the population is estimated to carry HCV genotype 1, equating to 3.9 million people. Increased expected HCV was hard to discover, and was first identified in Many people were already infected during the 1970s and 1980s, via infected blood products. Because the virus can take years to cause noticeable symptoms, an increasing number of patients with complications caused by chronic HCV infection are expected to seek care in the next years. The share of HCV patients to be treated is also expected to rise as new, better and more effective pharmaceuticals are developed. People infected with both HCV and HIV are a patient group that is expected to expand. As more effective HIV antiretroviral pharmaceuticals are introduced, patient survival increases and thus, patients have more time to develop other diseases during their lifetimes. Nowadays, with effective screening of blood products for HCV, the number of newly infected patients is expected to reduce. However, fewer new infections are not expected to result in a reduction of the total number of HCV patients until after Thus there will be a very sizeable and growing need for improved HCV medicines for the foreseeable future. 20

23 Few patients cured with current medication There is no vaccine against hepatitis C, and unfortunately, the virus characteristics make it highly complex, and thus unlikely that any vaccine will be produced at least during the next 20 years. Although hepatitis C can be treated, less than half of people treated today are cured. Rather than choosing from current therapies, which entail long treatment times, a lot of side-effects and difficulties, many patients are opting to wait for new pharmaceuticals. In most countries, prevailing treatment recommendations imply that infected patients are not treated until chronic liver inflammation gives rise to compromised liver function. The most common and hardest-to-treat HCV in the West, genotype 1, is treated by a combination of interferon and ribavirin. The treatment time of genotype 1 HCV is very long, 48 weeks. Interferon is administered by injection. The most common type, PEG-interferon, is administered once a week, with patients learning to self-inject. Ribavirin is administered in tablet form, up to five tablets twice daily. Side-effects such as tiredness, influenza symptoms, depression and anemia are very common, and patients must be highly motivated to cope with a year s treatment. More than 75% of all Western HCV patients are infected with genotype 1, which is the hardest to treat. Less than half of patients are cured with a 48-week treatment. Many physicians and patients consciously delay therapy in anticipation of better, more effective pharmaceuticals emerging. They have high hopes that new medicines, like protease inhibitors, will be able to reduce treatment times to, for example 24 weeks, enabling treatment without ribavirin. Only a minority of the total patient population has been diagnosed because many people carry the disease without symptoms, and without knowing they are infected. Because current therapy is fairly ineffective and implies severe side-effects, generally, infected patients are not treated until signs of compromised liver function emerge. Of the small group of patients treated, about half can be cured. Thus, easily the largest group of HCV patients are those that have not received treatment, or those where treatment has been unsuccessful. Accordingly, the need for more and better medicines is substantial. 21

24 Research is making advances... Major improvements in the treatment of chronic hepatitis caused by the hepatitis C virus are expected. New types of therapy with powerful pharmaceuticals based on small molecules will complement or replace current medicines in a few years. At present, over 30 compounds against chronic HCV infection are in development in one of the clinical phases I-III. The largest group over 40% of these compounds are based on small molecules like protease and polymerase inhibitors. Compounds based on interferon, the first pharmaceutical approved for treating HCV, are the second-largest group. Of the large pharmaceutical companies currently developing HCV pharmaceuticals, Roche and Schering-Plough dominate the market. The majority of these companies sales in the HCV segment are from interferon-based pharmaceuticals. The estimated value of the HCV market in 2007 is usd 3.9 bn. New antiviral pharmaceuticals and improved efficacy are expected to result in the market expanding sharply to some usd 8 bn by A large group of new pharmaceuticals are scheduled for launch between 2010 and Compounds that directly inhibit HCV s capacity to replicate are expected to enjoy the greatest potential to cure infection, with NS3 protease inhibitors (like TMC435350) and NS5B polymerase inhibitors being in these groups. Other compound classes also in development are types of interferon, immunomodulators and therapeutic vaccines. Two protease inhibitors, telaprevir (Vertex Pharmaceuticals) and boceprevir (Schering-Plough Co.) have reached phase IIb, and the decisive phase III studies are being planned. Those compounds are administered three times daily at high doses, and have fairly low potency. Until now, clinical studies have demonstrated that by adding telaprevir or boceprevir separately to current therapy (interferon + ribavirin) the share of cured patients grows to some percent after a treatment time of at least 24 weeks (protease inhibitors as a supplement in the first 12 weeks). Based on clinical results, it is doubtful whether it will be possible to administer either of these compounds without interferon to HCV genotype 1 patients. Telaprevir and boceprevir represent the first generation of protease inhibitors, and it is likely that follow-ups in the same class, but with greater potency and improved pharmacokinetics, will be more effective and easier for patients to take, and thus result in more patients being cured. 22

25 ...and Medivir is at the leading edge In November 2004, Medivir announced that it had entered a licensing and collaboration agreement in the hepatitis C virus segment with Tibotec Pharmaceuticals. In three years, this project, which was in the early research phase in 2004, has reached clinical phase IIa. The purpose of the research collaboration between Medivir and Tibotec was to develop orally active inhibitors of the HCV protease NS3/4A. Back in 2004, Medivir demonstrated in a cellbased assay that several of its own early compounds could inhibit the HCV protease effectively, and prevent virus replication. The first collaboration quickly resulted in the designation of a candidate drug (CD). Then, Tibotec took over responsibility for the non-clinical safety evaluation, and continued clinical development of the CD. In February 2007, Medivir and Tibotec announced that a clinical phase I study on a potent (in vitro) and selective HCV NS3/4A protease inhibitor for treating chronic hepatitis C virus infection had begun. This compound is designated TMC We re very satisfied with this type of collaboration, which enables us to combine Medivir s preclinical expertise in the protease segment with Tibotec s research and know-how associated with the clinical development of antiviral compounds, says Professor Bertil Samuelsson, Medivir s Vice President of Discovery Research, the HCV collaboration with Tibotec is an excellent example of the type of future agreement we d like to establish with larger partners, and that can bring us vital expertise and experience that s hard to establish in a small-scale, streamlined research organization. Preclinical data and results from the clinical phase I study on TMC were presented in November at the major annual AASLD (American Association for the Study of Liver Diseases) conference in Boston, US. Data from a phase Ia study demonstrated that healthy volunteers that received single doses of TMC of up to 600 mg, or doses of up to 400 mg once a day for five days tolerated the compound without notable side-effects. The body absorbed the compound well, and demonstrated the pharmacokinetic characteristics that would enable treatment with only a single daily dose. A follow-up phase Ib study on chronic HCV genotype 1- infected patients demonstrated that a single daily dose of 200 mg over five days dramatically reduced virus levels, and satisfied the predetermined pharmacokinetic and efficacy standards. It s just this combination of high potency and favorable pharmacokinetics that makes TMC so promising. We ve seen that with only a single daily dose, we can achieve concentrations in patient bloodstreams (plasma levels) that easily exceed the values necessary to effectively and sustainably combat the virus. These are very important qualities TMC has, which mean major benefits over those protease inhibitors that must be administered three times daily, and still don t achieve the same plasma levels in patients. A forgiving compound The favorable pharmacokinetics mean that 24 hours after the final dose, after five daily doses of 200 mg, plasma levels were more than 250 times higher than the concentration necessary to halve virus levels in a cell-based system. This may mean substantial patient benefits. Results from the phase Ib study on TMC in HCV-infected patients indicate that the reduction of virus levels achieved, the target set for the trial. The compound also demonstrated a very positive pharmacokinetic profile, enabling a single daily dose in the phase IIa study that is now underway. We ve seen from clinical studies on other protease inhibitors that have progressed further (telaprevir and boceprevir), that by adding these compounds to current therapy (pegylated interferon and ribavirin), the share of cured patients can increase from some 50 percent to percent, which is probably achievable with far shorter treatment times than those at present. Against the background of the compound s very high potency and high plasma levels achieved, we ve got every reason for optimism regarding onward clinical development. We think these characteristics mean that TMC may result in an even higher share of cured patients with reduced treatment times. TMC has now entered clinical phase IIa, and thus gone furthest of the second generation of HCV protease inhibitors. It will be really exciting to watch the continued clinical development activities, added Bertil Samuelsson. In the fourth quarter, Medivir announced that Tibotec had started a phase IIa study, TMC C201. The study is being conducted at over 20 clinics around Europe to examine efficacy, 23

26 M e d i v i r a t t h e l e a d i n g e d g e tolerability and how the body absorbs the compound after dosing for one month. The compound is administered in capsule form once daily in 25 mg, 75 mg, 200 mg and 400 mg dosage groups. The study will involve 96 naive patients and 34 patients that previously did not respond to conventional treatment, all carrying HCV genotype 1. HCV protease inhibitors The interest in developing pharmaceuticals based on small molecules, which directly block or inhibit the enzymes are important for the hepatitis C virus to be able to spread through the body, is acute and increasing. The enzymes NS3/4A protease and NS5B RNA polymerase are desirable pharmaceutical targets because they play a key role in virus replication. Direct antiviral pharmaceuticals, particularly protease inhibitors, are expected to play a key role in future HCV therapy. Preclinical and clinical studies on Medivir s and Tibotec s protease inhibitor TMC demonstrate that a very powerful inhibitor of HCV protease has been identified. Both cell-based assays and tests on HCV-infected patients (phase Ib study) show a pronounced effect at 200 mg once daily. For the individual patient, the possibility of a cure is central, and is the key for more people opting to undergo treatment. A market on the verge of robust growth Sales of hepatitis C drugs in 2007 are estimated to total some usd 3.9 bn. The value of the HCV drugs market is estimated to double in the next five years; forecasts for 2012 indicate total sales of usd 8 bn. With only two existing product classes for therapy interferon alpha and antiviral compound ribavirin the market for HCV pharmaceuticals is regarded as fairly immature. Side-effects resembling influenza symptoms and anemia mean motivating patients for the necessary long-term treatment is problematic. But as new medicines are developed, forecasts indicate high growth for HCV pharmaceuticals. The new compounds are expected to be more effective, with a sharp increase in the number of cured patients and shorter treatment times. If, additionally, a potent protease inhibitor enables treatment without ribavirin, the side-effect profile will probably improve significantly. Thus, the overall assessment is that far more patients will want to undergo treatment early in the course of their illness. Over 200 million people worldwide are infected, and very few currently receive treatment. Even if the number of newly infected patients has reduced since new blood screening methods were introduced in 1990, some 150,000 new cases are still reported in the US and Western Europe each year. Thus the need for new pharmaceuticals against chronic HCV infection is substantial. The prospects for a company that can produce a pharmaceutical compound that is potent against the virus and offers shorter simpler medication, with fewer side-effects are very positive. 24

27 REPORT OF THE DIRECTORS Report of the Directors Income Statement Balance Sheet Change in Shareholders Equity Cash Flow Statement Accounting principles Notes Report of the Auditors Six-year summary Key figures Definitions The Board and Auditors Management Glossary Operations Medivir develops pharmaceuticals against major, widespread diseases, with proteases as their target enzyme. Its objective is to be a sustainable and profitable research-based pharmaceutical company with products on the market that it has developed in-house. Financial year, ownership and group structure The group s financial year is the calendar year. The group comprises the parent company Medivir AB (publ), wholly owned subsidiaries Medivir UK Ltd., Medivir HIV Franchise AB and Medivir Personal AB. Medivir AB has its registered office in the Municipality of Huddinge, County of Stockholm, Sweden. The address is Medivir AB, P.O. Box 1086, Huddinge, Sweden. The visiting address is Lunastigen 7. The corporate identity number is Significant events in the financial year In 2007, Medivir conducted seven clinical studies in-house or in partnerships, and started three clinical studies that are now underway. Lipsovir, Medivir s compound against cold sores caused by herpes virus, was examined in five clinical studies in the year, and thus, the final stage of the phase III program has been completed. This is the first time in the company s history that all research phases of the clinical development of a pharmaceutical have been conducted in-house. The final patient completed treatment in December The results from the clinical program are being compiled and processed in the first quarter 2008, to enable Lipsovir s efficacy to be evaluated. Phase I studies on TMC435350, Medivir s hepatitis C project run in collaboration with Tibotec, started and concluded in The start of phase I studies entitled Medivir to a EUR 2.5 m milestone payment. Based on the positive outcome of the studies, phase IIa studies started late in the year. The start of the phase II study entitled Medivir to a EUR 5 m milestone payment. In December 2007, Medivir declined its option to receive market and sales rights on an approved Johnson & Johnson pharmaceutical in the Nordic region. In return, Medivir received a one-off EUR 12 m payment. All these payments have been recognized as revenue. Medivir also brought a fully proprietary program, MIV-701, through phase I studies. This compound targets bone degradation diseases. Phase I studies demonstrated that this compound is absorbed and tolerated by the body. A single daily dose of MIV-701 over 14 days reduced skeletal resorption by 50%. Additionally, Medivir s collaboration partner Epiphany started phase II studies on MIV-606 against shingles and glandular fever. In the year, Medivir s early preclinical resources were largely focused on taking the following projects forward: cathepsin K (follow-up to MIV-701) hepatitis C (follow-up to TMC435350), HIV protease inhibitors in collaboration with Tibotec and the COPD (chronic obstructive pulmonary disease) project. Some early activities in hypertension (Renin) and Alzheimer s disease (BACE) also made progress. Three of the polymerase-based projects changed licensing partner in the year. In February, Medivir outlicensed MIV-160 (HIV) to Guangdong Lantai Viewland Pharmaceutical Co. Ltd. The licensing rights for MIV-160 were transferred to Beijing Mefuvir Medicinal Technology Co. Ltd. in August, who will be responsible for, and finance, the clinical development and commercialization of this anti-hiv pharmaceutical in Asia. In September, Tibotec returned the licensing rights on MIV-210 (hepatitis B and HIV), and Medivir signed a new agreement with Hainan Noken Pharmaceutical Industry Ltd. in China, who will be responsible for the funding and clinical development of this pharmaceutical compound. In December, the licensing rights for MIV-310 (HIV) were transferred from Presidio to Mefuvir, who also holds the licensing rights on MIV-160. In December 2007, Bristol-Myers Squibb returned MIV-170 (HIV). Coincident with project outlicensing, Medivir has been careful to retain rights for the Nordic markets. In the year, Medivir created a new position to head the buildup and management of its future regional sales and marketing resources. New issue and focusing of operations The Extraordinary General Meeting of Medivir AB (publ) on 22 December 2006 passed a resolution to adopt the Board decision from 5 December 2006 relating to the new issue of a maximum of 7,741,566 class B shares, implying a share capital increase of a maximum of SEK 38,707,830. The right to subscribe for new shares in the period 15 January - 2 February 2007 applied to the company s shareholders, whereupon 5 existing shares, irrespective of share class, conferred the holder with the right to subscribe for 3 new class B shares. The subscription price per share was SEK 29. The new issue was fully subscribed, raising SEK m for the company in February 2007 after deductions for issue costs of SEK 9.6 m. By safeguarding its access to capital, Medivir has been able to focus and intensify the development of its preferred projects. In December 2006, Medivir decided to focus the company s resources and concentrate research on the unit at Huddinge, Sweden. In the first quarter of 2007, the research operations were relocated from the previous unit at Chesterford, UK. Medivir s research facility in Chesterford Research Park has been sublet by BioFocus Ltd. since July 2007, which runs until 2015 with an extension option to 2025 when Medivir s rental agreement expires. Medivir does not consider any provisioning for future rental expenditure necessary. Thus focusing the operations on the unit at Huddinge CHRISTINA KASSBERG Vice President, Business Control Phone +46 (0) [email protected]

28 R E P O R T O F T H E D I R E C T O R S is complete, and the full effect of cost savings on a rolling 12-month basis were realized from the third quarter 2007 onwards. The entity Medivir UK Ltd. retains only the rental contract for the research facility in Chesterford Research Park and a number of patents on non-preferred projects. Non-recurring restructuring costs amounted to approximately SEK 9.0 m, and non-cash impairment losses on tangible fixed assets of SEK 12.9 m. Provisions in the financial statement 2006 for non-recurring restructuring costs were SEK 9.2 m and non-cash impairment losses on intangible and tangible fixed assets were SEK 29.7 m, which were utilized in the year. No further expenditure or impairment losses related to the restructuring are anticipated. Turnover and costs Group Net sales for the year were SEK (126.0) m. The revenue was attributable to sources including three milestone payments totaling SEK (EUR 19.5) m relating to HCV protease inhibitors from Tibotec Pharmaceuticals Ltd. and a milestone payment of SEK 3.5 (USD 0.5) m relating to the MIV-606 project from Epiphany Bioscience. The revenue includes remuneration for research collaboration totaling SEK 34.1 m, for HCV and HIV protease inhibitors from Tibotec Pharmaceuticals Ltd. In July 2006, Medivir received SEK 18.4 m (EUR 2 m) from Tibotec Pharmaceuticals Ltd, linked to a collaboration agreement relating to HIV protease inhibitors. The amount was allocated over the term of the research collaboration agreement and SEK 9.2 m was recognized as revenue in the period. Revenue also includes share-based remuneration totaling SEK 18.8 m, of which SEK 14.2 m was on the MIV-606 project from Epiphany Biosciences, and SEK 4.6 m related to the antiviral compounds alovudine (MIV-310) and MIV-410 from Presidio Pharmaceuticals Inc. In December, Presidio Pharmaceuticals returned the licensing rights on the compound MIV-310, in order for Medivir to transfer them to Beijing Mefuvir Medicinal Technology Co. Ltd. Medivir s shareholding in Presidio is unchanged, and this project return did not generate any costs. Beijing Mefuvir Medicinal Technology Co. Ltd. s licensing rights for the HIV compound MIV-160 include the obligation to make a share-based payment on demand from Medivir. Receiving shares in the company is dependent on the approval of the Chinese authorities. Due to this restriction, no revenue has been recognized yet. The substantial increase in net sales on the previous year is primarily due to three milestone payments in the year on the HCV product protease inhibitors from Tibotec Pharmaceuticals Ltd. Operating costs were SEK (-330.9) m, divided between external costs of SEK (-173.5) m, personnel costs of SEK (-110.3) m, depreciation and amortization of SEK (-17.5) m and impairment losses of SEK (-29.5) m. The lower operating costs in the year are mainly due to lower costs resulting from the concentration of research on the unit in Huddinge, Sweden. Impairment losses for the year relate the balance sheet item non-current assets held for sale in Medivir UK Ltd., which have not been saleable. The previous year s impairment losses were on the fixed assets resulting from the concentration of research on the unit in Huddinge. During the year, the cost of the Lipsovir phase III studies amounted to approximately SEK 72 m. Operating costs were SEK (-201.6) m. The profit gain is mainly explained by higher net sales, but also lower operating costs. Profit from financial investments was SEK 8.5 (1.1) m. The increase in the profit from financial investments is mainly due to rising interest rates. The net loss was SEK (-195.6) m. Medivir AB, corporate identity no , Parent Company The operations of Medivir AB are research and administrative functions. The parent company s net sales were SEK (135.1) m. Operating costs were SEK (-266.2) m, divided between external costs of SEK (-184.9) m, personnel costs of SEK (-72.4) m and depreciation and amortization of SEK (-8.9) m. The operating costs were SEK (-127.8) m and profit after financial items was SEK (-219.0) m. Profit after financial items includes costs for covering losses in Medivir UK Ltd. of SEK (-65.7) m, issued by Medivir AB to consolidate the subsidiary s shareholders equity. In the previous year, an additional SEK m write-down of shares in the subsidiary was also included, due to the relocation of significant parts of operations from Medivir UK Ltd. to Medivir AB. The net loss is SEK (-219.0) m. Comments on profits of operating activities are provided in the section on turnover and costs for the group. Gross investments in tangible and intangible fixed assets were SEK 16.9 (4.1) m. Liquid assets including short-term investments with a term of a maximum of three months amounted to SEK (194.4) m. Medivir s research operations Medivir s research and development projects are now focused on proteases (a class of enzyme) and protease inhibitors. These target indications like hepatitis C, HIV, osteoporosis, osteoarthritis, metastasing skeletal cancer, COPD and hypertension. Previously, Medivir worked actively on compounds whose purpose was to inhibit polymerases, another type of enzyme, mainly targeting HIV. Thanks to its specialization on a single enzyme class, Medivir can run relatively many projects in parallel in preclinical research, despite its limited size. It is in these preclinical phases that Medivir enjoys its biggest competitive edge, producing CDs (candidate drugs) on a highly time-efficient basis. After projects have reached late preclinical or early clinical phases, the company s chosen strategy for onward development is to enter partnerships with other companies, because clinical development is far more resource intensive. Medivir s project portfolio consists of 17 projects, eight of which are in clinical development, three in the regulated preclinical development phase and six in early preclinical development. At present, nine of Medivir s projects are being conducted in collaboration with partners, five of which are in clinical development phases. Summarized progress by project: Preferred projects The preferred projects managed in-house are mainly protease-based projects, conducted and administered by Medivir AB. Lipsovir is a project against labial herpes conducted by Medivir in-house. In July 2006, Medivir started an in-house phase III study with the aim of demonstrating that Lipsovir prevents the incidence of cold sores and lesions. The project features low development risk, and has the potential to offer patients treatment that, for the first time, prevents the incidence of herpes cold sores. Five clinical studies were completed in The pivotal study recruited 2,450 patients, of which 1,450 received treatment with either Lipsovir, acyclovir or placebo. Two additional supporting phase III studies were initiated and concluded during the year, involving 430 recruited and 240 treated patients. Another 80 patients were treated in two small-scale studies. Thus the phase III program is now complete and being compiled. Assuming positive results, work on securing a partnership structure for future sales of Lipsovir will be conducted in Medivir s patent protection for Lipsovir runs until 2016/2019. HCV (TMC435350) Protease inhibitor for treating hepatitis C virus (HCV) infection, which has been in collaboration with Tibotec Pharmaceuticals since late Phase I studies started and were conducted in 2007 with very positive results. The results of this study showed that TMC was well tolerated, with very good oral bioavailability, enabling a single daily dose. Based on the positive outcome of these studies, a phase IIa study started late in the year, which will cover 130 patients, 34 of whom had not responded to treatment with extant pharmaceuticals. 26

29 R E P O R T O F T H E D I R E C T O R S Medivir s and Tibotec s research collaboration continued throughout 2007 and Tibotec financed a considerable number of researchers for Medivir, who are active on the project. In addition to this project finance, the agreement may raise a maximum of another EUR 68.5 m for Medivir in various milestone payments, of which EUR 22.0 m has been received. Additionally, Medivir will receive royalties on global sales except for those in the Nordic region, where it has retained rights and intends to conduct sales in-house. Cathepsin K inhibitor (MIV-701) Protease inhibitor for the treatment of bone degradation diseases including osteoporosis, osteoarthritis and skeletal metastases. Phase I studies were initiated and concluded in Cathepsin K inhibitors provide a distinct reduction in bone degradation without affecting bone formation, which is expected to result in increased skeletal strength. The fast onset and offset of skeletal resorption is a major competitive edge on pharmaceuticals currently prescribed. The phase I study provided proof of concept for MIV-701, and thus the cathepsin K program. The objective is to enter a partnership agreement to develop MIV-701 for osteoporosis and other indications. HIV PI - Protease inhibitor for treating HIV patients, in preclinical optimization and in collaboration with Tibotec since 30 June HIV protease inhibitors with highly potent antiviral efficacy against wild type and multiresistant virus. Very positive pharmacokinetics may enable a single daily dose. Alongside Tibotec, Medivir will continue to develop compounds on this project ahead of a future CD designation. Tibotec is paying pre-determined research support for Medivir s continued involvement on the project. This agreement implies that Tibotec paid EUR 2 m on signing, followed subsequently by up to EUR 62 m subject to the successful achievement of specific predetermined milestones within preclinical research, clinical development and regulator processing. Medivir possesses the right to royalties on global sales of future products, apart from the Nordic market, where Medivir is retaining the market rights. COPD protease inhibitor against chronic obstructive pulmonary disease (COPD) is now in preclinical optimization. COPD is a potent protease inhibitor with good selectivity. There is currently no satisfactory treatment for COPD. Renin Protease inhibitor for treating hypertension (high blood pressure) and organ protection, heading for preclinical optimization. Blood pressure reduction combined with a potential positive effect on end-organs like the heart and kidneys. BACE - Protease inhibitor for treating Alzheimer s disease, heading for preclinical optimization. Potent and selective BACE inhibitors with promising pharmacokinetics have been identified. BACE inhibitors have the potential to become first-line therapy alternatives to block the development of Alzheimer s disease. Cathepsin S Project Protease inhibitor for the treatment of auto-immune disorders such as rheumatoid arthritis, multiple sclerosis and chronic pain. The project is heading for the preclinical optimization phase. Cathepsin S inhibitors have the potential to improve efficacy, reduce side-effects and increase cost-efficiency above existing autoimmune therapy principles. HCV POL Polymerase inhibitor for the treatment of Hepatitis C viral infection, now in the preclinical optimization phase in collaboration with Roche since Roche owns the project where work is focused on developing pharmaceuticals against chronic hepatitis C (HCV), based on the development of nucleoside analogues, which inhibit hepatitis C virus polymerase, and thereby prevent virus replication. Explorative operations in the protease segment The explorative operations, which are run in-house, in collaboration with partners or through the network of university partnerships, include activities focused on proteases. These early activities are intended to create a continuous flow of new ideas, and thus safeguard Medivir s long-term access to new projects. Polymerase-based projects In late-december 2005, Medivir decided that its projects against HIV, hepatitis B (HBV) and shingles based on the older research platform of polymerase inhibition would be outlicensed/divested. The process of outlicensing and/or divesting these projects has been administrated by Medivir HIV Franchise and has resulted in a number of licensing agreements. Medivir HIV Franchise administers the outlicensed projects and monitors them through its membership of joint steering committees. Valomaciklovir (MIV-606) In phase IIa studies, the polymerase inhibitor valomaciclovir has demonstrated efficacy and safety on patients in the treatment of shingles caused by VZV. Valomaciclovir is also an effective inhibitor of other herpes viruses, which are increasingly associated with various disorders such as Chronic Fatigue Syndrome (ME), MS and the accelerated development of HIV/AIDS. In 2006, the project was outlicensed to Epiphany Biosciences. Epiphany Biosciences began clinical phase IIb studies in shingles patients and phase II studies on glandular fever (mononucleosis) in the third quarter According to the agreement with Epiphany Biosciences, Medivir will obtain milestone payments of a maximum of USD 24.5 m and royalties on sales globally with the exception of the Nordic region where Medivir retains the market rights for all indications. Alovudine (MIV-310) Polymerase inhibitor that has demonstrated efficacy against multiresistant HIV in phase II studies. In preclinical test models, MIV- 310 in combination with AZT (zidovundine) demonstrated synergetic effect against HIV virus, with simultaneous antagonistic toxicological effect. In December 2006, Medivir entered a licensing agreement on alovudine (MIV- 310) with Presidio Pharmaceuticals. In December 2007, Presidio returned the licensing rights to alovudine (MIV-310) whereupon Medivir transferred these rights to Beijing Mefuvir Medicinal Technology Co. Ltd. of China, which will develop MIV-310 for future HIV therapy. MIV-410, (HIV, CMV) is an NRTI demonstrating good efficacy against SIV (simian immunodeficiency virus) and HIV-2 infections in preclinical models. The compound has also demonstrated efficacy against cytomegalovirus (CMV) in vitro. This compound is in preclinical development. In December 2006, Medivir AB entered a licensing agreement on MIV-410 with Presidio Pharmaceuticals. The contract value includes milestone payments of USD m. MIV-210 Polymerase inhibitor for hepatitis B and HIV therapy. In previously conducted preclinical studies, MIV-210 has achieved good efficacy against hepatitis B virus (HBV) and good pharmacokinetic qualities in phase I. MIV-210 was outlicensed to Tibotec in In the third quarter 2007, Tibotec returned the licensing rights, whereupon Medivir transferred them to Chinese pharmaceuticals company Hainan Noken Pharmaceutical Industry Ltd. Noken intends to develop MIV-210 into a pharmaceutical for treating hepatitis B, and will be responsible for, and fund, the studies necessary to register a future pharmaceutical. Noken possesses the rights to sell MIV-210 in Asia, and Medivir has retained rights to the rest of the world market. During the development term, Medivir may receive milestone payments of USD 7 m and double-digit royalties on Noken s future sales revenues. 27

30 R E P O R T O F T H E D I R E C T O R S MIV-150 Preclinical data demonstrate that MIV-150 has good efficacy against HIV. Medivir has voluntarily donated the rights for topical use of MIV-150 in a vaginal microbicide in developing countries to the Population Council, a New York-based non-profit organization. The Population Council will be responsible for the development and funding of forthcoming clinical studies. Medivir has rights to sales in other markets, and Medivir has an option on exclusive rights on the Nordic markets. Medivir and the Population Council have been given a grant from NIH (the National Institutes for Health) for activities relating to the project. MIV-160 Polymerase inhibitor in preclinical development for HIV therapy. Medivir outlicensed the project in February 2007 to Chinese company Guangdong Lantai Viewland Pharmaceutical Co. Ltd. However, in the third quarter of 2007, the licensing rights were transferred to Beijing Mefuvir Medicinal technology Co. Ltd. In China, which will assume responsibility for, and fund, the clinical development and commercialization of the pharmaceutical against HIV in Asia. Medivir has retained the rights to MIV-160 in other countries. The agreement with Mefuvir stipulates the liability to make a share-based payment (participating interest 5%) on demand from Medivir. The royalties will also be payable on sales of per oral and topical use of MIV-160. MIV Polymerase inhibitor for treating HIV, outlicensed to Bristol-Myers Squibb in In the third quarter 2007, Bristol-Myers Squibb concluded development because the project did not correspond to its desired profile. Medivir has decided against the continued development of MIV-170 in-house. 15 years. Equality initiatives are a natural part of day-to-day business. The company offers keep-fit activities, and funds regular health-checks. Sickness absence in the year was 1.3 (0.9)%. For more information on Medivir s employees, refer to Medivir s professionals on page 3. The number of employees of the group as of 31 December 2007 was 97 (133) and the average number of employees in the year was 97 (125). The reduction in employee headcount is due to focusing the company s resources and the concentration of research on the unit at Huddinge, Sweden. More information on the average number of employees, salary, other benefits and social security costs, and the latest adopted guidelines governing remuneration to the CEO and senior executives is in Note 3 on page 41. The Board s proposed guidelines for remuneration to senior executives for the period until the next AGM is that the company will offer overall compensation on market terms that enables skilled senior executives to be hired and retained. Remuneration to senior executives will consist of fixed salary, potential performance-related pay, pension and other benefits. Fixed salary will consider individual areas of responsibility and experience. Performancerelated pay which at present, and where applicable, is payable in the form of a discretionary individual bonus will be a maximum of 50% of fixed salary. The President s pension scheme conforms to the ITP (supplementary pensions for salaried employees) scheme, and 15% of fixed salary excluding bonus and benefits. The pension plans of other senior executives conform to the ITP scheme, and the relevant individual plan in the UK corresponds to legislated contributions, plus 6% of fixed salary excluding bonus and benefits. These guidelines are essentially consistent with the principles applied until the present. Financial position Consolidated cash flow from operating activities in the year was SEK (-90.0) m. Cash flow from operating activities was positively affected by higher net sales and improved operating profit. Consolidated cash flow from financing activity in the year was SEK (-11.4) m, with this increase mainly explained by a new share issue in the year, which raised SEK m. At year-end, Medivir had SEK 0.0 (6.9) m of interestbearing liabilities, because a bank loan was amortized in the year. The consolidated equity ratio at year-end was 83.7 (65.0)%. Liquid assets including short-term investments with a maximum maturity of three months were SEK (195.1) m at year-end. For a review of the Medivir share, warrant and stock option plans, refer to the Medivir share on page 8. For a report on Medivir s financial risks and the principles applied to financial risk management, see Note 8 Financial risks. For more information on the progress of operations over the past six years, refer to Medivir s six-year summary on page 52. Investments Gross investments in tangible and intangible assets for the year amounted to SEK 12.9 (5.5) m, largely comprising research equipment and the extension of existing research premises. Investments in equipment, tools, fixtures and fittings were SEK 12.9 (5.4) m, and current investments were SEK 0.0 (0.1) m. Medivir s planned future investments primarily comprise the acquisition of more research equipment and adaptation of extended premises in Huddinge. Sales of fixed assets were SEK 0.1 (0.2) m in Human resources Medivir s staff possess broad-based knowledge and experience of conducting projects from really early discovery phases in preclinical research, extensive clinical development and right the way through a registration process. The knowledge base represented by Medivir s employees is highly competitive. Some 50% of its researchers hold PhDs, and its employees have average professional experience of the pharmaceutical sector of approximately IT security IT security is a high priority for Medivir because it is important to safeguard the company s internal information. Medivir s IT security policy includes guidelines for its resources, responsibilities and authorization, the administration of rights, virus protection, traceability, classifying information, plus operational and communications security. All data is replicated and processed pursuant to well-defined security and back-up routines. External communication is safeguarded with encrypted data traffic. PCs and software are secured by applying local hardware encryption. The focus in the year has included the updating of IT security policies and catastrophe plans to enhance security further. Medivir s ambition is continually to enhance staff security-consciousness when handling hardware and software. Environment In Huddinge, Medivir (parent company) has declared its usage of class II biological substances to the Swedish Work Environment Authority inspectorate and holds permits from the Swedish Work Environment Authority to use class III and III** (normally not airborne infection) biological substances (reference AFS 1997:12). Additionally, Medivir has permits from the Municipality of Huddinge to process inflammable solvents. The Swedish Work Environment Authority has previously inspected the Swedish operation including the new laboratories. Medivir also possesses research approval from the Swedish Ministry of Agriculture. Medivir also pursues a far-reaching program for sorting waste at source and for the processing and destruction of hazardous waste. Medivir constantly strives to minimize the usage of environmentally hazardous materials and is not party to any environmental disputes. Medivir conducts systematic activities in order to continually enhance safety and the working environment. Safety procedures are in place and Medivir s staff are subject to ongoing training on safety issues. The biggest health risk arises when handling chemicals. Chemicals are handled in Medivir s laboratories and some substances are flammable. Conducting risk assessments before 28

31 R E P O R T O F T H E D I R E C T O R S all laboratory experimentation and handling all chemicals correctly minimizes the health risks. Protective equipment and clothing are used. All work with chemicals is conducted in ventilated space. All fume cupboards and clean benches are equipped with alarms and are regularly monitored. No incidents were reported in Amendment of Articles of Association The AGM in April resolved to approve the Board s proposal to revise the Articles of Association, implying an increase to the limits for share capital and the number of shares. The share capital will be a minimum of SEK 100,000,000 and a maximum of SEK 400,000,000. The number of shares will be a minimum of 20,000,000 and a maximum of 80,000,000. Events after the financial year-end In early January, Medivir reported that it had extended its collaboration agreement with Tibotec on HIV protease inhibitors by one year. This implies that Medivir will receive continued research support in This project is currently in preclinical optimization. The above factors have not influenced the profit or financial position for the year. The company s future progress including significant risks and uncertainty factors Prospects The ability to develop new candidate drugs, enter into partnerships for its projects and to bring its development projects to market launch and sale are crucial to Medivir s future. The progress of existing partnerships, and the addition of new partnerships, will exert a significant influence on Medivir s revenue and cash balance, although it is not possible to specify the exact timing of revenue flows. Risks and uncertainty factors Investing in a research and pharmaceuticals company involves high risk. Generally, 85% of all CDs are unsuccessful during clinical development phases on the route to market registration, which illustrates the complexity and risk level of pharmaceuticals development. Medivir works systematically and on a goal-oriented basis on its risk factors during the research and development process by addressing, reducing, and ideally, eliminating operational and financial risks, but there will always be factors the company cannot influence. Medivir has a number of projects in or near clinical phases and several collaboration partners in order to develop compounds and conduct clinical studies. Medivir s strength is rather than focusing on specific therapy areas, the company concentrates on a single approach to a variety of diseases. Medivir s knowledge and capacity in preclinical research and clinical development means it can conduct several projects simultaneously in different development phases. This enables Medivir to diversify and reduce risks, both financial and operational. Developing pharmaceuticals projects consume time and resources, and the further a project is taken into clinical development, the more resources it requires. Financial risk means not having the financial capacity to develop projects further. Medivir has several partnership agreements with established pharmaceuticals companies and smaller biotechnology enterprises. These partnerships strengthen Medivir, creating stability and opportunities. Medivir s partners are responsible for project funding, and Medivir obtains revenues through milestone payments as projects progress towards the market. These revenues help Medivir fund other parts of its activities. Financial risks are also managed by new issues and continually reviewing cost structure. Examples include consolidating the operations to a single facility in Huddinge, Sweden, which was completed during the year and the new issue in February Profit forecast If the studies on Lipsovir provide positive results, this will open new opportunities for 2008, including partnerships on marketing and extensive NDAs with regulators in the US and Europe. Medivir also has the ambition to secure a collaboration on specialist pharmaceuticals in 2008, get smaller-scale sales resources in place and start generating revenues. Cost levels in 2008 will be significantly lower than in 2007, mainly due to the cost of the Lipsovir program reducing, and preclinical research having been concentrated on the Huddinge facility. Entering partnerships with the right timing for individual projects is decisive for creating the greatest commercial returns. Because of difficulties in foreseeing the timing of new partnerships and outlicensing, Medivir will not be publishing any profit forecasts. Board activities Medivir s Board has seven members (two women and five men). The Board members possess substantial knowledge of pharmaceutical development, finance and strategy. The CEO of Medivir made the majority of presentations at Board meetings, although other staff also contributed on specific subjects. The Board s procedural rules formalize factors including the composition of the Board of Directors, the decision-making process, the role of the Chairman of the Board, guidelines for Board meetings, the obligation of loyalty, disqualification, non-disclosure, the Board s tasks and the division of responsibilities within the Board, and vis à vis Medivir s Chief Executive Officer, as well as Board members expenses coincident with Board assignments. Furthermore, the procedural rules regulate the relationships with OMX Stockholm Exchange including ordinances on insider trading, accounting material and public disclosures. The Board of Directors held ten meetings in the financial year. In those cases where it was known that a member could not participate, the view of this member in the matter in question was collected before the meeting. The Board meetings primarily dealt with interim reports, annual financial statements, press releases and questions relating to strategy, outlicensing, research and development, collaboration, investment and financing. Medivir s Board activities are affected by the high dynamism of the pharmaceutical sector. Moreover, the Board is active through Audit, Remuneration and Research Program Committees and various groups that are convened as required. Key tasks in the year were conducting a new share issue, focusing operations on the unit at Huddinge, taking Lipsovir through phase III and starting the implementation of smaller-scale sales resources to sell pharmaceuticals in the Nordic region. An overview of the Board s composition, main activities etc. is on page 54. Audit Committee The Audit Committee s members in the financial year were Magnus Falk (Chairman), Anna Malm Bernsten and Alf Lindberg (up until the AGM in April). Ron Long replaced Alf Lindberg after the AGM in April. The Committee s prime focuses are risk, internal controlling, external auditing and auditing and evaluating auditors. The Committee met the auditors on two occasions in the year, dealing with questions consistent with its prime focus. The Board s procedural rules stipulate that the Audit Committee is appointed by the Board with the task of dealing with audit-related issues. Remuneration Committee The Remuneration Committee, appointed by the Board, is intended to examine, propose and decide on remuneration to the CEO, and to counsel the CEO regarding remuneration to the management team. In 2007, the Committee members were Lars-Göran Andrén (Chairman), Anders Vedin and Donna Janson (after the AGM in April). The Committee held four meetings in the year. 29

32 R E P O R T O F T H E D I R E C T O R S R&D Committee The Board has appointed an internal R&D Committee whose task is to develop the principles for the management, prioritization and monitoring of Medivir s research and development operations alongside the management and to present their findings to the Board. The Committee also regularly reviews the research portfolio and participates in the preparation of proposals for overall prioritization ahead of budget decisions and major opportunities for review. When required, the Committee assists the management in the resolution of problems and taking advantage of new opportunities. In 2007, the R&D Committee comprised Alf Lindberg (Chairman up until the AGM in April), Donna Janson (Chairman after the AGM in April), Anders Vedin and Ron Long (after the AGM in April). The Committee had two meetings in the financial year. Nomination Committee An AGM resolution stipulates that the Nomination Committee will comprise representatives of at least three of the largest shareholders at the end of the third quarter, and the Chairman of the Board. The Chairman contacts the three largest shareholders, requesting they appoint a representative, and if any shareholder declines, this right reverts to the next shareholder in terms of size of holding. The Nomination Committee prepares proposals for election and remuneration of the Board, Chairman of the Board, and where applicable, auditors, and methods for appointing the Nomination Committee and its Chairman, to be submitted to the AGM for resolution. Until 30 September 2007, the Nomination Committee members were Joachim Spetz (Handelsbanken Fonder), Roger Johanson (Skandia) and Bo Öberg as well as Chairman of the Board Anders Vedin. Nomination proposals for new Board members should be submitted to the new Nomination Committee, whose members from 1 October onwards are Eva Gottfridsdotter-Nilsson (representative of Länsförsäkringar Fonder), Joachim Spetz (representative of Handelsbanken fonder), Bo Öberg (representative of class A shareholders) and Chairman of the Board Anders Vedin. The Committee had five meetings in the year. The Swedish Corporate Governance Code All quoted companies with a market capitalization of over SEK 3 bn must observe the Swedish Corporate Governance Code and prepare corporate governance reports and reports on internal controls. Because Medivir s market capitalization is less than SEK 3 bn it is not required to observe the Code at present, Medivir has chosen not to publish a corporate governance report or a report on internal controls. Nevertheless, to a reasonable extent, Medivir intends to satisfy the requirements the Code stipulates for quoted companies and the company already satisfies most of the standards of the Code. Medivir has completed a self-critical internal review of the areas in internal controls of financial reporting where the company satisfies existing requirements, and where there is potential for improvement, as well as proposed measures aimed at improving internal controls. Medivir has worked on the basis of the COSO model when evaluating and compiling internal controls. Priorities include updating and reporting on risk management, research projects, documentation of all audit controls conducted, information and communication and that the ERP system satisfies all the standards that are applicable. Proposed appropriation of losses The Board and the Chief Executive Officer propose that the accumulated deficit, SEK -548,004,819 be carried forward. Dividends The Board of Directors proposes that no dividends are paid for the financial year

33 INCOME STATEMENT Medivir Group Medivir AB SEK 000 Note Turnover, etc. Net sales 249, , , ,154 Other turnover 3,840 3,287 2,422 3,193 Total 1 253, , , ,347 Operating costs Other external costs 1, 2, , , , ,928 Personnel costs 3, 23-98, ,338-94,710-72,382 Depreciation 4-10,753-17,528-10,753-8,856 Write-downs 5-12,923-29, Total operating costs 6-290, , , ,166 Operating profit/loss - 37, ,596-17, ,819 Profit from financial investments Profit from participations in group companies ,840-94,089 Profit from other securities and receivables Other interest income, etc. 1, 7, 8, 9 10,325 5,467 10,194 7,071 Interest costs, etc. 7, 8, 10-1,836-4,323-1,828-4,182 Total profit from financial investments 8,489 1,140-10,114-91,204 Profit after financial items - 28, ,455-27, ,023 Tax on profit for the year , Net profit - 29, ,580-27, ,023 Earnings per share before and after dilution Average number of shares at year-end, ,873 12,903 Number of shares at year-end, ,844 12,903 Proposed dividend per share, SEK 0 0 = not applicable 31

34 BALANCE SHEET SEK 000 Note Dec. Medivir Group Medivir AB Dec Dec Dec. ASSETS Fixed Assets Intangible fixed assets Other intangible assets , ,390 Total intangible fixed assets 936 1, ,390 Tangible fixed assets Buildings and land 14 2,561 2,774 2,561 2,774 Equipment, tools, fixtures and fittings 14 33,317 30,505 33,317 26,640 Construction in progress and advances relating to tangible fixed assets Total tangible fixed assets 35,878 33,361 35,878 29,496 Financial fixed assets Participations in group companies Receivables, group companies 10 0 Financial assets held for sale 16 18, ,793 0 Total financial fixed assets 18, , Total fixed assets 55,607 34,751 55,817 31,086 Non-current assets held for sale ,510 Current assets Current receivables Customer receivables 64,685 22,672 61,922 22,672 Income tax receivables , Other receivables 1,052 2,441 1,052 1,032 Prepaid costs and accrued income 19 8,191 12,765 6,589 9,768 Total current receivables 73,928 43,432 69,563 33,472 Short-term investments Other short-term investments , , , ,117 Cash and bank balances 20 17,829 22,949 14,463 22,292 Total current assets 403, , , ,881 TOTAL ASSETS 458, , , ,967 = not applicable 32

35 SEK 000 Note Dec. Medivir Group Medivir AB Dec Dec Dec. LIABILITIES AND SHAREHOLDERS EQUITY Shareholders equity, Medivir group Share capital 104,218 64,513 Other paid-up capital 844, ,181 Exchange rate differences 3,724 3,065 Deficit brought forward - 568, ,455 Total shareholders equity, Medivir group 383, ,306 Shareholders equity, Medivir AB Restricted equity Share capital 104,218 64,513 Statutory reserve 827, ,971 Total restricted equity 932, ,484 Accumulated deficit Share premium reserve 187,717 1,088 Deficit brought forward - 708, ,489 Net profit - 27, ,023 Accumulated deficit - 548, ,424 Total shareholders equity, Medivir AB 384, ,060 Long-term liabilities Liabilities to group companies Total long-term liabilities Current liabilities Current liabilities, interest-bearing 21, , ,875 Accounts payable 11,254 22,886 11,254 14,451 Other liabilities 2,757 3,303 2,743 1,695 Accrued costs and deferred income 22 60,876 58,250 52,542 50,097 Restructuring reserve , Total current liabilities 74, ,452 66,539 73,118 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 458, , , ,967 Assets pledged ,433 = not applicable 33

36 CHANGE IN SHAREHOLDERS EQUITY Group, SEK 000 Share capital Other paid-up capital Exchange rate differences Deficit brought forward Total shareholders equity No. of shares Opening balance, 1 January , , , , ,902,611 Exchange rate differences for the period 2,376 2,376 Total revenues and costs posted directly to shareholders equity 0 0 2, ,376 0 Net profit , ,580 Total revenues and costs 0 0 2, , ,204 0 Stock option plans: value of staff service 1,547 1,547 Closing balance, 31 Dec , ,181 3, , , ,902,611 Opening balance, 1 January , ,181 3, , , ,902,611 Exchange rate differences for the period Total revenues and costs posted directly to shareholders equity Net profit ,318-29,318 Total revenues and costs ,318-28,659 0 New issue 38, , ,935 7,741,566 Option quotation 997 8,254 9, ,370 Stock option plans: value of staff service 2,148 2,148 Closing balance, 31 Dec , ,810 3, , , ,843,547 1) Number of shares, opening and closing balance 2006: 660,000 class A shares and 12,242,611 class B shares with a quotient value of SEK 5. 2) Opening number of shares in 2007: 660,000 class A shares and 12,242,611 class B shares, quotient value: SEK 5 3) Closing number of shares in 2007: 660,000 class A shares and 20,183,547 class B shares, quotient value: SEK 5 Quotient value is calculated as share capital divided by total number of shares. Proposed dividend for 2007: SEK 0 per share. Parent company, SEK 000 Share capital Statutory reserve Premium reserve Deficit brought forward Net profit Total shareholders equity No. of shares Opening balance, 1 Jan , , , , , ,902,611 Appropriation of profits, AGM 2006: Previous year s profit brought forward - 104, ,316 0 Net profit , ,023 Total revenues and costs , , ,023 0 Stock option plans: value of staff service 1,088 1,088 Closing balance, 31 Dec , ,971 1, , , ,060 12,902,611 1 Opening balance, 1 Jan , ,971 1, , , ,060 12,902,611 2 Appropriation of profits, AGM 2007: Previous year s profit brought forward - 219, ,023 0 Net profit ,210-27,210 Total revenues and costs , ,813-27,210 0 New issue 38, , ,935 7,741,566 Option conversion 997 8,254 9, ,370 Stock option plans: value of staff service 2,148 2,148 Closing balance, 31 Dec , , , ,512-27, ,184 20,843, ) Opening and closing balance of the number of shares 2006: 660,000 class A shares and 12,242,611 class B shares with a quotient value of SEK 5. 2) Opening number of shares in 2007: 660,000 class A shares and 12,242,611 class B shares, quotient value: SEK 5 3) Closing number of shares in 2007: 660,000 class A shares and 20,183,547 class B shares, quotient value: SEK 5 Quotient value is calculated as total share capital divided by total number of shares. Proposed dividend for 2007: SEK 0 per share. 34

37 CASH FLOW STATEMENT Medivir Group Medivir AB SEK Operating activities Operating profit - 37, ,596-17, ,819 Adjustment for items not included in cash flow etc: Depreciation, amortization and write-downs 23,676 47,071 10,753 8,856 Capital gains (-) / losses (+) on divested fixed assets Exchange rate differences Stock option plans 2,148 1,547 2,148 1,088 Estimated tax credit in subsidiaries 0 2, Other adjustments 1) - 18, ,364 2,117-29, ,794-22, ,708 Interest received 5, , Dividend received 3, , Interest paid Tax received/paid 4, Cash flow from operating activities before change in working capital - 16, ,124-14, ,936 Increase(-) / decrease (+) in current receivables - 35,389 19,873-35,966 19,536 Increase (+) / decrease (-) in current liabilities - 18,691 38, ,304 Cash flow from operating activities - 70,469-90,043-50,218-69,096 Investment activity Acquisitions of intangible fixed assets Acquisitions of tangible fixed assets - 12,914-5,496-16,907-4,017 Sales of tangible fixed assets Liquidation of associated companies Shareholders contribution paid to subsidiaries - 18,880-65,704 Change in inter-company transactions ,931 Cash flow from investment activity - 12,423-5,352-35,536-28,646 Financing activity Conversion of warrants 9, ,251 0 New issue 214, ,935 0 Amortization - 6,875-11,407-6,875-9,168 Cash flow from financing activity 217,311-11, ,311-9,168 Cash flow for the year Liquid assets, opening balance 195, , , ,319 Change in liquid assets 134, , , ,910 Exchange rate difference, liquid assets Liquid assets, closing balance 329, , , ,409 1) Other adjustments in 2007 include share-based remuneration totaling SEK 18.8 m of which SEK 14.2 m relates to the MIV-606 project from Epiphany Biosciences and SEK 4.6 m on the MIV-310 project and MIV-410 project from Presidio Pharmaceuticals Inc. For more information, see Note 16. = not applicable 35

38 ACCOUNTING PRINCIPLES Group Medivir has prepared its Consolidated Financial Statements pursuant to IFRS, International Financial Reporting Standards, as endorsed by the EU. The same principles were applied to the Annual Report for In addition to IFRS, the group also observes RR s (Redovisningsrådet, the Swedish Financial Accounting Standards Council) recommendations RR 30:06 (Supplementary accounting regulations for groups) and applicable Emerging Issues Taskforce statements. The Medivir group presents its Income Statement by cost class, implying that operating costs are divided between other external costs, personnel costs as well as depreciation, amortization and impairment losses. The essential significance of the new IFRS standards is stated in the following headings, where the principles of the Annual Report are reviewed in more detail. Parent company Medivir AB continues to apply those accounting principles relevant to legal entities that prepare Consolidated Financial Statements and are listed on a stock exchange. Briefly, this implies the continued applications of RR s recommendations to the extent they are applicable to a group parent company. Thus Medivir AB observes RR 32:06, Accounting for legal entities. The parent company s accounting principles are consistent with the group unless stated otherwise below. Pursuant to RR 32:06, the parent company will structure its reports pursuant to all applicable IFRS/IAS unless the standards allow an exception from their application. Basis for valuation The group uses acquisition values for balance sheet items unless otherwise stated. Consolidated Financial Statements The group comprises parent company Medivir AB, wholly owned UK subsidiary Medivir UK Ltd., subsidiary Medivir HIV Franchise AB and Medivir Personal AB, which administers the stock options issued by Medivir. The Consolidated Financial Statements have been prepared pursuant to IAS 27 and IFRS 3 on consolidated financial statements and by adopting acquisition accounting, implying that subsidiary shareholders equity is eliminated at the time of acquisition. Moreover, the preparation of Medivir s Consolidated Financial Statements conforms to the stipulations of IAS 27 and IFRS 3 such as elimination of intragroup receivables and liabilities as well as intragroup revenues and costs, implying that the Consolidated Income Statement and Consolidated Balance Sheet are reported without intra-group transactions. Conversion of foreign currency Functional currency and reporting currency Medivir has a foreign subsidiary, Medivir UK Ltd. Items included in the financial reports for this entity within the group are valued in GBP. Swedish krona, the parent company s functional currency and reporting currency, is utilized in the Consolidated Financial Statements. Transactions and balance sheet items Foreign currency transactions are translated to the functional currency at the rates of exchange ruling on the transaction date. The exchange rate gains and losses arising when paying such transactions, and upon translating foreign currency monetary assets and liabilities at the exchange rates on the balance sheet date, are reported in the Income Statement. Profits and losses on trading receivables and liabilities are reported net under other operating income or other operating costs. Group companies Profits and the financial position of all group companies with a functional currency that differs from the reporting currency, are translated to the group s reporting currency as follows: (i) assets and liabilities for each balance sheet are translated at the exchange rate on the balance sheet date; (ii) income and costs for each of the Income Statements are translated at average exchange rates. If average exchange rates are not a reasonable estimate of total exchange rate effects for the year from each transaction date, income and costs are translated at the transaction date, and (iii) all exchange rate differences arising are reported as a separate portion of shareholders equity. Financial instruments, reporting, disclosure and classification Medivir pursues a prudent and conservative investment policy. The group s liquid assets are invested in liquid instruments with low credit risk, primarily certificates of deposit, fixed-income and bond funds. Medivir manages and evaluates its investments based on actual value and reports them at actual value in the Income Statement. No futures were utilized in the year. More information on financial risks and investments is in Note 8, financial risks. Financial assets valued at actual value via the Income Statement Medivir has chosen to account all the actual value changes of its short-term investments in its Income Statement. Medivir s short-term investments are managed as a group of financial assets and the result is evaluated based on actual value, in accordance with the documented risk management and investment strategy. Financial assets held for sale In the year, Medivir received shares after US company Epiphany Biosciences, Medivir s licensing partner on the shingles project MIV-606, conducted a new issue. Medivir was also granted shares when San Francisco-based company Presidio Pharmaceuticals Inc., Medivir s licensing partner on the antiviral compounds alovudine (MIV-310) and MIV-410 conducted a new issue in the third quarter of the year. Because none of these shares are listed, and are not registered on a recognized marketplace, no ongoing value changes of the balance sheet item will be recognized unless a reliable judgment of the changed fair value through an official valuation conducted gives reason to recognize a value change. Accounts receivable and other receivables Accounts receivable are non-derivative financial assets, with determined or determinable payments that are not listed on an active market. Their distinguishing feature is that they arise when the group provides funds, goods or services direct to a customer without any intention to trade in the arising receivable. They form part of current assets, apart from items with maturities more than 12 months from the balance sheet date, which are classified as fixed assets. Initially, accounts receivable are reported at actual value, and subsequently, at accrued acquisition value, by applying the effective interest method, less potential provisioning for value reductions. Other receivables, and where applicable interim receivables, are reported pursuant to the same principles. Provisioning for the depreciation of accounts receivable is effected when there is objective evidence that the group will not be able to receive all the amounts due pursuant to the original terms of such receivables. The provisioning amount is the difference between asset carrying amounts and the present value of estimated future cash flows, discounted by effective interest. The provision amount is reported in the Income Statement. Other receivables are reported in the same manner. 36

39 Borrowing Initially, borrowing is reported at actual value, net of transaction costs. Subsequently, borrowing is reported at accrued acquisition value, and any potential difference between amounts received (net of transaction costs) and the amount repaid, is reported in the Income Statement over the loan term, applying the effective interest method. Medivir s profits are reduced by borrowing costs in the period pursuant to IAS 23. Purchases and sales of financial instruments Purchases and sales of financial instruments are reported on the transaction date - the date Medivir undertakes to buy or sell the asset. Financial instruments are removed from the Balance Sheet when the right to receive cash flows from such instruments expires, or transfers, and the group has transferred basically all the risks and benefits associated with rights of ownership. Stock option plans Scope As of the balance sheet date, Medivir has three outstanding stock option plans. Upon conversion/exercise, liquid funds would increase by the exercise/ conversion price and the share capital by a nominal SEK 5 per share, with the remaining deposited amount increasing shareholders equity. For more details on the various effects of each plan and the number of outstanding stock options, please refer to page 8, Warrants and stock options. Accounting principle for stock option plans From 2005, Medivir reports its stock option plans in accordance with IFRS 2 and IFRIC 11. This has also applied retroactively for those plans that lie within the interval specified in the transition rules of IFRS 2. The recommendation implies that Medivir values current plans (at present the three plans for 2004/2009, 2005/2010 and 2007/2012) at the time of issuance at actual value and then allocates the value over the earnings period as a personnel cost. This remuneration to personnel implies that Medivir issues equity instruments (warrants that personnel are entitled to pursuant to the plans agreements) and thus, for the cost associated with each period, achieves the corresponding increase in other contributed capital (share premium reserve in the parent company). The stock options that are attributable to personnel in the subsidiary Medivir UK Ltd., are reported in accordance with IFRIC 11. Here, Medivir s issue of equity instruments is defined as a shareholder contribution to the subsidiary from the parent company, implying that it is reported as investment in a subsidiary. Like other contributions, the investment is then evaluated for impairment. If there is value impairment in a subsidiary, the effect is that a financial cost is reported in Medivir AB s Income Statement. Social security costs on stock option plans For each outstanding plan, Medivir makes provisions for social security costs at the end of each accounting year. The provision for social security costs is calculated according to URA 46 with the application of the same valuation model used when the options were written. The provision is revalued on each reporting date on the basis of a calculation of the charges that may be payable when exercise takes place. Medivir effects the valuation according to the Black & Scholes model which takes into account factors including the share price, remaining time until exercise, volatility and risk-free interest rate. Payments of social security expenses in connection with employees exercising options is offset against the provision made according to the above. To cover the social security costs inherent in its stock option plans, Medivir disposes over a number of options intended for conversion into shares, which are then sold to finance payment of the associated social security costs. Because a taxable benefit (the difference between the redemption/exercise price and market value of shares) arises when stock options are exercised, Medivir can cover the social security costs on the taxable benefit by converting a portion of its options to shares, and then divesting them. However, the personnel cost arising in the Income Statement, which is provisioned progressively pursuant to URA 46, will not be offset by a cost reduction (income), but the effect arises in cash flow terms exclusively. Intangible assets and research costs Proprietary patent rights, technology rights, know-how, brands and other similar assets are not assigned any value; expenditure for research is written off as it arises. Pursuant to IAS 38 Intangible assets, development costs should be capitalized and reported in the Balance Sheet if certain criteria are satisfied, while research costs should be expensed. One important criterion for capitalizing development costs relates to the future financial benefits of such costs. The research activities Medivir conducts are associated with sufficient uncertainty that IAS 38 s capitalization criteria cannot be considered satisfied. Accordingly, all research and development costs are expensed as they arise. Other intangible fixed assets Acquired research and development was identified in the acquisition of Medivir UK Ltd. in The amortization plan was determined at the acquisition date, with an useful life estimated at that time of 10 years. Acquired research and development comprised items including patent-pending technologies, which significantly reduce the time taken in preclinical pharmaceutical development, promising research projects in late preclinical phases, closeness to pharmaceutical and research companies on the European market, a number of important university collaborations and strengthened preclinical pharmaceutical research for developing compounds including protease inhibitors. The acquisition of research and development also resulted in a deferred tax effect. This implied that a deferred tax revenue was recognized, and a reduction in the deferred tax liability by the same amount each year. As a result of the decision to relocate a significant portion of the operations in Medivir UK Ltd. to Sweden and Medivir AB at the end of December 2006, and the fact that the parts attributable to acquired R&D are not prioritized in connection with the relocation, the full remaining acquired research and development intangible Balance Sheet item has been written down, and the deferred tax liability was fully dissolved. Medivir also implemented a new ERP (enterprise resource planning) system. Its estimate is useful life is five years, whereupon the reported asset will be depreciated over this term. Shareholders equity The change in shareholders equity, with comparative years, in the group and Medivir AB in the context of reported profits, accumulated deficit, appropriation of accumulated deficit, exchange rate differences and share capital, is reported on page 34. Consolidated shareholders equity is reported in accordance with the Swedish Financial Accounting Standards Council s instruction URA 47 on accounting shareholders equity in groups. Revenues According to Medivir s interpretation of IAS 18, the payment received in connection with an upfront payment, and where there is an outstanding undertaking to provide services from the licensor s side, is to be considered as an advance payment for a right acquired by the buyer to utilize patented technology in the future. The licensor has not completed the earning of revenue as a result of this until the estimated or appointed agreement period expires. In cases where an agreement implies that Medivir has outstanding commitments and/or is to provide services for the counterparty, the remuneration 37

40 A C C O U N T I N G P R I N C I P L E S received at the beginning of agreements is allocated over the estimated or appointed agreement period. Down-payment revenue is recognized when the agreement is made providing there is no reservation or other impediment to receiving the remuneration and this is not related to future performance on Medivir s part. Contracted milestone payments from a counterparty are reported when the remuneration criteria of the relevant outlicensing agreement have been satisfied and verified with the counterparty. Medivir does not apply the percentage of completion method on those research projects that have potential future milestone payments from a collabo ration partner. This is because: It is impossible to determine the degree of completion with sufficient reliabi lity as IAS 18 stipulates as a requirement for the percentage of completion method; It is impossible to determine the expenditure that will be due to secure the corresponding milestone revenue with sufficient accuracy, the number of researchers and other direct expenditure may vary over time; No remuneration is due unless the criteria contracted with the collaboration partner are achieved. Medivir AB and Medivir UK Ltd. have no products on the market yet, implying that only outlicensed, and milestone payments on, pharmaceutical projects are reported as revenue pursuant to the above. Research services Research services that Medivir conducts pursuant to collaboration agreement and that generate remuneration from counterparties is recognized on an ongoing basis as Medivir provides such services. Central government support (EU and other subsidies) Medivir received EU subsidies on two research projects in the year. This is reported pursuant to IAS 20 under other income and deferred income with revenue recognized as the project progresses. Subsequent to the EU authority approving cost accounting, there is no risk of re-payment. Revenue recognition considers the time and costs on the project and is reconciled annually. Pension liability and pension cost Medivir applies IAS 19, Employee benefits Medivir AB s ITP (supplementary pensions for salaried employees) scheme is insured with Alecta and should be considered as a defined-benefit pension scheme pursuant to statement URA 42 from RR s Emerging issues task force. Because Alecta is unable to provide sufficient information, for the present, this scheme is reported as defined contribution. The group s other pension schemes are defined contribution. Pursuant to URA 42, the company should account its proportional share of defined-benefit commitments, plan assets and costs associated with the scheme. Alecta s surplus can be distributed to policyholders and/or beneficiaries. At year-end 2007, Alecta s surplus in the form of its collective consolidation ratio was (143.1)%. The group considers that current premiums should cover the current commitments. Provisions and restructuring Medivir applied IAS 37 to certain expenses that arose in Medivir UK Ltd. in connection with the relocation of the operations to Medivir AB. Restructuring provisions were made and were posted as costs in the financial year 2006 for expenses in Medivir UK Ltd. that the research operations were not expected to benefit from in the future, and that were directly associated with the restructuring of the company, and where the company had existing commitments, such as redundancy payments and rents. Tangible fixed assets Depreciation Medivir applies the cost method with straight-line depreciation over the estimated useful life. Pursuant to IAS 16 for tangible fixed assets and IAS 38 for intangible fixed assets, depreciation according to plan is calculated on original acquisition values with depreciation rates based on estimates of assets economic useful lives. The group applies the following depreciation terms: buildings, 20 years; equipment, tools, fixtures and fittings, 5-10 years and IT hardware, 3 years. The depreciation term for intangible assets is five years for ERP systems. Segments A segment is an identifiable part of the group in accounting terms, which through its business segment or location in a geographical region, is exposed to risks and opportunities that differ from other segments. Pursuant to IAS 14, Medivir reported its operations in two business segments in 2006, because a new company intended to outlicense/divest those projects based on Medivir s older research platform polymerase inhibition was incorporated in late December Medivir has now outlicensed these polymerase inhibitor projects and consequently the company has no need for accounting separately by business segment as there are no differentiated risks and opportunities for different parts of the operations. After outlicensing the polymerase inhibitor projects, these operations are controlled and monitored as a single business segment subject to similar risks and opportunities. Medivir s management and processing of risks and opportunities were not affected by it being active in two geographical segments the UK and Sweden. Research projects were managed on an integrated, cross-border basis between the subsidiary in the UK and parent company in Sweden. For Medivir s operations, there was no significant difference in economic and political conditions. Nor was any specific risk discrepancy between the two countries in terms of research, etc. identified. Accordingly, Medivir s research projects were conducted jointly in Sweden and the UK, and therefore, there was no separate reporting of geographi cal segments. Reclassification of fixed assets/non-current assets held for sale As a result of Medivir AB s decision to focus and transfer a significant portion of the research operations to Sweden, and to subsequently divest the tangible fixed assets that remained in Medivir UK Ltd. within a year, these assets were reclassified as Non-current assets held for sale in the annual accounts Impairment losses Impairment tests of tangible and intangible fixed assets occurs when internal or external indications of impairment arise pursuant to IAS 36. As a result of the decision to relocate a significant portion of the operations in Medivir UK Ltd. to Sweden and Medivir AB at the end of December 2006, and the fact that the segments attributable to acquired R&D were not prioritized in connection with the relocation, the remaining intangible balance sheet item acquired research and development were written off fully, and the deferred tax liability was dissolved in its entirety. At the balance sheet date 2006, the tangible fixed assets items Buildings and land and Equipment, tools, fixtures and fittings attributable to operations in Medivir UK Ltd. were written down, after estimate and evaluation, at the lower of carrying amount and actual value less sales costs. Assets regarded as available are classified as non-current assets held for sale. Because these assets have not been saleable, the item was written off wholly in Medivir AB s earnings for 2006 include costs relating to the impairment loss of participations in subsidiaries as a result of the relocation of a significant portion of the operations from Medivir UK Ltd. to Medivir AB. 38

41 A C C O U N T I N G P R I N C I P L E S An unconditional shareholders contribution was made to Medivir UK Ltd. in order to consolidate the subsidiary s shareholders equity. This additional investment is reported as an increase in shares in subsidiaries. Investments in subsidiaries are subject to impairment tests at each year-end. The subsidiary s shareholders equity forms a key criteria for this assessment, see Note 15. Income tax Pursuant to IAS 12, deferred tax assets should only be reported to the extent that it is likely that deductions will be utilized. Note 12 accounts items including the estimated deductible deficits accumulated in the group, and the explanation for no income taxes recoverable being reported for the group. The taxable deficits of Medivir AB and Medivir UK Ltd. have no expiry. The treatment of potential deferred tax on temporary differences is reported and explained in Note 11. The various constituent items of consolidated total tax are also explained. The positive tax amount relates to the tax credit for Medivir UK Ltd., as a result of UK legislated research support. The UK tax authority, HM Revenue & Customs, pays claims after a customary review. This amount is reported as revenue since HM Revenue & Customs decision to waive the taxation is definitive. Loss carry-forwards in Medivir UK Ltd. are reduced because of the tax credit. More information is in Note 11, Tax on profit for the year. As a result of the decision to liquidate the majority of the operations in Medivir UK Ltd. at the end of December 2006, the remaining deferred tax liability attributable to acquired R&D that was written down was dissolved in its entirety and a corresponding amount was posted to the Income Statement as revenue under Tax on profit for the year. Closely related parties Medivir reports remuneration and benefits to senior executives pursuant to IAS 19 Employee benefits and IFRS 2 Share-based payment. Other information on closely related parties is reported pursuant to IAS 24. A specification of the various amounts is in Note 3. Leasing Medivir s leasing agreements are operating pursuant to IAS 17, and Medivir does not assume any significant risks or benefit from any leased item in any lease arrangement, see Note 25. The information on significant costs of rental contracts are in Note 25, see page 50. Cash Flow Statement The Cash Flow Statement has been prepared pursuant to IAS 7 and reported by applying the indirect method. Reported cash flow only encompasses those transactions implying payments made or received. Pursuant to IAS 7, liquid funds include cash and bank balances, plus short-term investments such as commercial paper, fixed-income and bond funds with maximum duration of three months. Significant estimates and forecasts The accounting of income and research costs are two important parts of Medivir s accounting. When outlicensing, the revenue from research projects is recognized as initial remuneration when agreements are reached, providing there are no reservations, and milestone payments when contracted criteria have been satisfied. In cases where an agreement implies that Medivir has outstanding commitments and/or will provide services for the counterparty, the remuneration received is allocated over the estimated or agreed contract term when the agreement is signed. Accordingly, Medivir does not utilize the percentage of completion method for forthcoming potential milestone payments, because there is constant uncertainty regarding how far the project has progressed, and the likelihood of it achieving the next goal/milestone. Thus, the income side only states determined and non-repayable income that can be considered to have accrued. Allocation to periods could demonstrate how Medivir progressively receives income from the counterparty s utilization of intellectual property. But the percentage of completion method was applied, there would be a risk of income being reported as uncertain in terms of whether Medivir would ever receive any payment. In such circumstances, an announcement from a counterparty that a project was being discontinued, for example, would imply that Medivir had reported inaccurate profits. Research costs are reported on an ongoing basis because the future financial benefits associated with these costs are uncertain. The research activities Medivir conducts are associated with sufficient uncertainty that IAS 38 s capitalization criteria cannot be considered satisfied. There is the opportunity to offset research costs on projects that are likely to succeed, and usually, this point arises after phase III studies have been conducted. If, instead, Medivir had offset its research and development costs, its reported profits would have been higher. Such amounts are very hard to quantify and Medivir does not want to speculate on the value of the research resources consumed, which would have been the case if they had been capitalized. Given premature capitalization there is a risk that a project will fail and that the costs offset could not be justified, but would have to be expensed directly. In turn, this would imply that previous and current year profits would be misleading because of an excessively optimistic assessment of the likelihood of success. The introduction of new accounting principles At the time of the preparation of the Consolidated Financial Statements as of 31 December 2007, a number of standards and interpretations have been published that have yet to take effect. A preliminary assessment of the impact the introduction of standards and statements may have on Medivir s financial reporting follows: IAS 1 Presentation of Financial Statements: this amendment comes into effect on 1 January 2009 and has stipulations on the presentation and content of financial statements to ensure comparability between the company s previous reports, but also between the company and other companies. The standard has been amended to include more detailed information on items including changes in the company s shareholders equity resulting from transactions with owners, in respect of owners as opposed to all nonowner changes to shareholders equity. This does not affect Medivir s accounts but may require changes to the presentation of the company s financial reports. IFRS 7 Financial instruments (and amendment to IAS 1): The IFRS 7 standard and the amendment to IAS 1 regarding disclosures for evaluating a company s objectives, policies and methods to manage assets, are relevant and apply to Medivir s 2007 Annual Report. The new standards have not had any effect on the accounting of assets and liabilities, but only exert an impact through more stringent standards applying to supplementary disclosures that enable the assessment of Medivir s financial position, the financial risks Medivir is exposed to and how such risks are managed. These supplementary disclosures are reported in Note 8. 39

42 A C C O U N T I N G P R I N C I P L E S IFRS 8 Operating segments: This standard takes effect on 1 January 2009 and applies to financial years that begin from this date. The standard relates to the breakdown of a company s operations into different segments. According to this standard, the company should use this structure as the starting point for its internal reporting structure determining which segments will be included in reporting. Pursuant to IAS 14, in 2007, Medivir is reporting a single segment, and is currently investigating future application of the new standard for segment reporting. IFRIC 10 Interim financial reporting and impairment: The interpretation statement came into force on 1 November 2006 and applies to financial years that begin after this date. The interpretation states that impairment losses in an earlier interim report cannot be reversed in an ensuing interim or full-year report. The group will apply IFRIC 10 from 1 January 2007 although this is not expected to have any impact on the consolidated accounts. IFRIC 11 IFRS 2 Group and treasury share transactions: This interpretation statement came into force on 1 March 2007 and applies to financial years that begin after this date. The interpretation clarifies the classification of share-related remuneration where the company buys back shares to fulfill its commitments as well as disclosing stock option plans in subsidiaries that apply IFRS. The company applied this principle early in relation to the reporting of stock options in subsidiaries, see warrants and staff stock option plans on page 8. IAS 23 Borrowing Costs: This amendment comes into effect on 1 January 2009 and applies to financial years beginning from this date onwards. The amendment stipulates that borrowing costs directly attributable to the purchase, design or production of an asset, which necessarily take a significant time to complete for their intended use or sale should be included in the cost of the asset. This amendment to the standard does not affect Medivir s accounts because at present, the group has no such assets or liabilities. 40

43 NOTES = not applicable Note 1 Intra-group transactions (SEK 000) Parent company Purchases from Medivir UK Ltd. amounted to 9,061 (46,002). Sales to Medivir UK Ltd. amounted to 2,379 (4,745) and internal rate of return of 0 (1,629). Purchases from Medivir HIV Franchise AB amounted to 2,620 (4,313). Sales to Medivir HIV franchise AB amounted to 2,618 (4,333). Note 2 Costs for auditing and audit consulting (SEK 000) Group Parent company Audit costs 1) Consulting cost, auditors 2) Total 1,170 1, ) The group s auditing practice is PricewaterhouseCoopers. 2) The shareholders equity balance sheet item also includes an amount of 287 for consulting services relating to preparations for the new share issue in February Note 3 Average number of employees, salaries, other remuneration and social security costs (SEK 000) Group 1) Parent company Average number of employees Women Men Total ) Of which 3 (46) in the UK Total sickness absence by group 2007 (2006) Parent company Women Men Age < 29 Age Age >50 Total Total sickness absence, % 1.6 (0.9) 1.0 (0.8) 4.8 (2.2) 1.4 (0.9) 0.5 (0.3) 1.3 (0.9) of which > 60 days 1.8 (19.1) 0 (0) 0 (0) 1.3 (12.1) 0 (0) 0.9 (9.6) Salaries and benefits Group Parent company Board and Chief executive Officers 1) 5,093 3,804 5,093 3,804 Lars Adlersson (CEO) 3,353 2,203 3,353 2,203 Anders Vedin (Chairman of the Board) Alf Lindberg (Board member) Lars-Göran Andrén (Board member) Anna Malm Bernsten (Board member) Magnus Falk (Board member) Zsolt Lavotha (Board member) Anders Wiklund (Board member) Bo Öberg (Board member) Donna Janson (Board member) Ron Long (Board member) Senior executives 2) 10,539 8,121 8,877 5,310 Other employees 3) 56,839 62,611 54,767 33,466 Total 72,471 74,536 68,737 42,581 Statutory and contracted social security costs 4) 22,565 20,833 22,378 18,267 Pension costs 5) of which for CEO of the group 669 (591) and parent company SEK 669 (591) 9,063 9,988 8,876 8,183 Total salaries, benefits, social security costs and pension costs 6) 104, ,357 99,991 69,031 1) of which UK 0 (0) 2) of which UK 1,662 (2,811) 3) of which UK 2,072 (29,145) 4) of which UK 187 (2,566) 5) of which UK total 187 (1,805), to CEO SEK 0 (0) 6) of which UK 4,108 (36,326) 41

44 N O T E S Note 3, cont. Average number of employees, salaries, other remuneration and social security costs (SEK 000) Remuneration in the financial year Board During the financial year, 1,740 (1,601) fees were paid to the Board of Directors of Medivir, 553 (526) of which to the Chairman of the Board. In addition, reimbursement of travel expenses to board meetings, etc was paid to the board members. No remuneration was paid for specific consulting assignments, and there is no pension scheme for board members. Remuneration policy The AGM 2007 resolved that the company would offer total compensation on market terms that will enable the hiring and retention of skilled senior executives. Remuneration to senior executives will consist of fixed salary, potential performance-related pay, staff stock options pursuant to the staff stock option plan 2007/2012 resolved by the AGM, pensions and other benefits. Fixed salary would consider the individual areas of responsibility and experience. Performance-related pay which at present, and where applicable, is payable as a discretionary individual bonus will be a maximum of 50% of fixed salary. President Salary of 2,336 (2,188) was paid to the President in 2007, plus a bonus of 734 (15) and other benefits of 282 (0), thus total remuneration was 3,353 (2,203). A resolution at the AGM in 2007 allocated 46,000 staff stock options from the 2007/2012 stock option plan. The theoretically calculated market value of these stock options, pursuant to the Black & Scholes model, was SEK 14.4 (0) per option at the grant date, corresponding to a value of 662 (0). For other holdings, please refer to page 55. The President s pension plan is pursuant to the ITP (supplementary pensions for salaried employees) scheme (see below), plus 15% of the President s fixed monthly salary excluding bonus and benefits. The pension provision for the year was 669 (591). However, the provision never exceeds the fully tax-deductible pension premium payments for the company. The President s pensionable age is 60, and his notice period is six months from either party s side. Coincident with termination initiated by the company, or due to considerable changes to the company s ownership structure, the President possesses the right to severance pay, or remuneration, corresponding to a maximum of 18 months salary. Other senior executives The group of other senior executives comprised 7 people, of which 1 resident in the UK at the end of This group comprises 6 men and 1 woman. Salary of 6,769 (7,887) was paid to other senior executives and a bonus of 3,190 (30,) and other benefits of 581 (204), thus total remuneration was 10,539 (8,121). In the first quarter of the year, 1 of the 2 management team members resident in the UK terminated employment with Medivir as part of the focus of research operations on Huddinge, Sweden. Pursuant to a resolution by the AGM 2007, the team was granted 104,000 staff stock options from the 2007/2012 option plan. The theoretically calculated market value of these options, pursuant to the Black & Scholes model, amounted to SEK 14.4 (0) per option at the grant date, corresponding to a value of 1,498 (0). For other holdings, see page 55. Pension schemes for other senior executives are pursuant to the ITP (supplementary pensions for salaried employees) scheme, and individual pension schemes in the UK (see below). Pension provisions of 1,939 (2,026) were made in the year. None of the other senior executives are subject to notice periods exceeding six months from either party s side. Coincident with termination initiated by the company, or due to considerable changes to the company s ownership structure, other senior executives possess the right to severance pay, or remuneration, corresponding to a maximum of 6 months salary. Other Staff Current stock option plans are reviewed on page 8. Pursuant to a resolution by the AGM 2007, this group was granted 21,000 staff stock options from the 2007/2012 option plan. The theoretical market value of these options, calculated according to the Black & Scholes model, was 302 (0) at the grant date. In addition, a few individuals receive bonuses in accordance with a fixed bonus program. The group has defined-benefit pension schemes via Alecta and defined-contribution pension schemes through alternative solutions. Employees resident in the UK have defined-contribution pension schemes exclusively. Closely Related Parties Among other senior executives there are agreements with Medivir as well as agreements between companies owned by other senior executives and Medivir, that confer rights to royalties on products Medivir may develop based on patent-pending inventions which Medivir has acquired from these senior executives before and during their time as researchers with Medivir. Through the contracts Medivir signed in late November 2004 relating to the HCV PI project and in June 2006 relating to the HIV PI project with Tibotec, one such company received royalties of 1.95% of remuneration received of EUR 19.5 (2.5) m relating to the HCV PI project and royalty of 2% of EUR 0.0 (2.0) m relating to the HIV PI project. Additionally, pursuant to the HCV PI agreement, two companies belonging to other employees will receive royalties totaling 1.3% of the received remuneration of EUR 19.5 (2.5) m. In 2006, SEK 1,031,000 (604,000) was paid out relating to the agreement with a senior executive of Medivir UK Ltd. which was converted to a bonus payment in 2005 that was charged to personnel costs in its entirety in the financial year Note 4 Depreciation and amortization (SEK 000) Group Parent company Amortization of intangible fixed assets 454 2, Depreciation of tangible fixed assets 10,299 15,368 10,299 8,410 Total 10,753 17,528 10,753 8,856 42

45 N O T E S Note 5 Impairment losses (SEK 000) Group Parent company Impairment losses of intangible fixed assets 0 5, Impairment losses of tangible fixed assets 12,923 23, Total 12,923 29, Note 6 Research costs (MSEK) Medivir pursued research operations exclusively in the financial year. The cost of research including depreciation according to plan but less administrative costs, was approximately (-292.8) in Medivir AB and Medivir UK Ltd. Research costs include non-recurring costs associated with the relocation of significant parts of the operations of Medivir UK Ltd. to Medivir AB totaling -8.6 (-7.9). Research costs in the parent company amounted to approximately (-255.9) of which approximately -9.0 (-46.0) related to purchases from Medivir UK Ltd. Operating profit for the research segment, i.e. Medivir AB and Medivir UK Ltd., was (-201.6). Note 7 Profit on participations in group companies (SEK 000) Group Parent company Impairment losses on shares in subsidiary Medivir UK Ltd. (see also note 15, Participations in group companies) 18,880 94,089 Dividends from Medivir Personal AB Total 18,480 94,089 Note 8 Financial risks (SEK 000) The main financial risks that arise as a consequence of managing financial instruments consist of market risk (interest risk, currency risk and share price risk) credit risk, liquidity and cash flow risk. The financial risks are managed pursuant to a policy determined by the Board. This policy means that investments in liquid assets will be conducted in such a manner that the invested assets generate secure and stable returns. The underlying instruments will be subject to low risk, and when investing liquid assets, the diversification of risk will be pursued. To attain the best possible returns for the lowest possible risk level in the parent company or group, the company will invest its liquid assets with recognized bodies, such as banks. The link between IAS 39 categories and Medivir s balance sheet items in the Balance Sheet Group Financial assets recognized at fair value in the Income Statement Accounts receivable Borrowings and accounts payable Financial assets held for sale Total Financial assets held for sale 18, ,793 0 Accounts receivable 64,685 22,672 64,685 22,672 Other short-term investments 311, , , ,117 Cash and bank balances 17,829 22,949 17,829 22,949 Accounts payable - 11,254-22,886-11,254-22,886 Bank loans 0-6, ,875 Total 329, ,066 64,685 22,672-11,254-29,761 18, , ,977 Medivir s financial instruments are recognized at fair value in the Income Statement. When an exact fair value cannot be determined on the balance sheet date, the carrying amount is based on an approximation. For information on leases, see Note 25. Market risks Interest risk Interest risk is their risk of a negative impact on cash flow or financial assets or liabilities resulting from changes in market rates of interest. Medivir s investment policy stipulates the company achieving the best possible returns for the lowest possible risk level by investing its liquid funds with recognized institutions such as banks. Medivir manages and evaluates its short-term investments on the basis of actual value and accounts them at actual value in the Income Statement. Instruments such as bank and corporate commercial paper, fixed-income and bond funds, fixed bank investments and special deposits are used to avoid risking Medivir s capital, see notes 9 and

46 N O T E S Note 8, cont. Financial risks (SEK 000) As of 31 December 2007, the group s liquid assets including short-term investments with maximum maturities of three months were 329,330 (195,066). 177,090 (142,117) of this total was invested in fixed-income funds with discretionary management, and 134,411 (30,000) was invested in certificates of deposit at fixed interest. In 2007, Medivir received interest of approximately %. Based on an average of existing short-term investments in the year, and if interest levels had been 1% higher or lower, this would have had an annualized positive or negative profit impact of some 2,600. In 2008, a 1% change in interest rates would theoretically be able to affect net interest income by some 2,000. At year-end 2007, the company had no interest-bearing liabilities, and accordingly, no other interest risks apply. Currency risk Currency risk is the risk of negative cash flow effects resulting from exchange rate changes. Profit is affected when costs and revenues in foreign currencies are translated into Swedish kronor. The Balance Sheet is effected when assets and liabilities in foreign currencies are translated into Swedish kronor. Medivir did not use currency hedging in 2007; future turnover and cost will be exposed to foreign currency fluctuations. The company s operating profit experienced a 1,615 (-337) net influence in exchange rate gains in the financial year, with the net financial position influenced by -192 (-3,620) in exchange rate losses. Sterling fluctuated between SEK and SEK in the year, with an average of SEK for the year. The funding of Medivir UK Ltd. s operations in the UK was at the best sterling exchange rate possible and Medivir UK Ltd. primarily purchased its goods and equipment on the UK market. In the year, the dollar exchange rate fluctuated between SEK 7.11 and SEK 6.25, with an average of SEK In the same period, the euro exchange rate fluctuated between SEK 9.02 and SEK 9.48 with an average rate of SEK All trading in foreign currency was conducted at the best rate of exchange attainable at the point of exchange. Many of Medivir s contracts involve payments in EUR and USD, implying that accounts payable and accounts receivable have exposure. The table illustrates the currency-exposed operating income and operating costs as net amounts per currency. Group Parent company EUR 261, , , ,109 GBP 20,664 10,365 20,664 10,365 USD 67,620 45,338 67,410 44,941 Total 349, , , ,415 A one percentage point change in the krona against any of the above currencies would affect parent company operating income and operating costs by a total of +/- 3,496 (1,964). The corresponding effect on the group would imply a change of +/- 3,500 (1,968). Share price risk Medivir received shares from a new issue conducted by Epiphany Biosciences, Medivir s licensing partner on the shingles project MIV-606 and received shares from a new issue conducted by Presidio Pharmaceuticals Inc., Medivir s licensing partner on the compound MIV-410. The total value of the shares amounted to 18,793 (0). No net gains or net losses have arisen as a result of these investments in Medivir classifies the shares as financial assets held for sale pursuant to IAS 39, and the shares are reported in the Balance Sheet under the financial fixed assets item. Because there is no active market for the shares on US stock markets, no ongoing value changes of the balance sheet item are reported, unless a reliable estimate of the changed actual value through a valuation conducted gives reason to report a value change. Medivir does not have any investments in listed shares, hence there is no share price risk. Credit risk (counterparty risk) Credit risk is the risk that a counterparty is unable to fulfill its contracted commitment to Medivir, thus causing a financial loss for the company. Medivir invests its liquid assets with Swedish fund managers with high credit ratings, P-1 from Moody s. In the year, these investments did not experience any value changes resulting from changes to asset managers credit risk. The most significant risks to Medivir relate to accounts receivable. As of the balance sheet date, Medivir has only one counterparty for accounts receivable, which is a risk per se, but this is a part of a large and well-recognized group, and accordingly the credit risk is considered limited. Medivir has several partnerships with established pharmaceuticals companies and smaller biotechnology enterprises. This secures Medivir s positioning, creating stability and opportunities. Initially, Medivir s accounts receivable are reported at fair value in the Income Statement, please see the section on accounting principles for more detail. No provision for depreciation is made until there are unequivocal indications that the group will not receive full payment pursuant to the original terms of the receivables, please see the section on accounting principles. This whole item has a single counterparty as of the balance sheet date. Medivir has never had any need to depreciate accounts receivable throughout its history. 44

47 N O T E S Note 8, cont. Financial risks (SEK 000) Group Parent company Not due 53,525 22,671 50,762 22,671 Due for payment days 10,566 10,566 Exchange gain Total 64,685 22,671 61,922 22,671 Other receivables amount to 1,052 (2,441) of which 0 (0) was due on the balance sheet date. The group s liquid assets are invested in liquid assets with low credit risk such as certificates of deposit, fixed income and bond funds subject to low risk (P-1, Moody s) through discretionary management. No credit risks are considered to apply to the above investments. Liquidity and cash flow risk Liquidity risk is the risk of future difficulties for Medivir to fulfill its commitments associated with financial liabilities. A financial liability is each liability in the form of a contracted commitment to submit cash or other financial assets to another company, or to exchange a financial asset or financial liability with another company subject to terms that may be disadvantageous for the company. Maturity analysis Medivir s contracted financial liabilities divided by time remaining to contracted maturity as of the balance sheet date amount to 11,254 (29,761). Amounts maturing within 12 months are 11,254 (29,761) and were wholly accounts payable and other liabilities. Amounts maturing later than 12 months are 0 (0). The amounts maturing within 12 months are consistent with book value, because the discounting effect is insignificant. Equity Consolidated shareholders equity is 383,979 (186,306) and is the company s solid base for financing operating activities. A more detailed specification is on page 34. While Medivir does not have any autonomous long-term earnings capacity with sustainable profitability, the company will retain low debt gearing and a high equity ratio. Proposals regarding dividends will not be made until long-term profitability can be predicted through product launches on the market. Accordingly, no dividends will be considered for the forthcoming years. Medivir s objective is to attain profitability by receiving income from licensing agreements with partners on its own research, receiving income on sales of specialist pharmaceuticals, and by bringing proprietary compounds to market registration. Medivir s research partners are responsible for funding outlicensed projects, and Medivir receives income in the form of upfront and milestone payments as projects progress towards the market. These revenues contribute to funding other parts of operations. Other ways of managing liquidity and cash flow risks are through new share issues and a continuous review of Medivir s cost structure. Medivir s management and Board maintain continuous access to information on the company s liquid assets. Liquidity and cash flow forecasts for a minimum of 12 months are prepared on an ongoing basis to monitor liquidity status. Medivir s current cash reserves and short-term investments totaling SEK 329,330,000 are estimated to more than cover all expected costs, liabilities and investment needs for the forthcoming 12-month period. Medivir has no borrowings at variable interest. Note 9 Other interest income and similar profit/loss items (SEK 000) Group Parent company Interest income, bank Interest income from fixed-income investments 4, , Interest income, group companies 0 0 1,629 Dividends from fixed-income fund 3, , Fair value change on fixed-income fund, unrealized 1,963 4,108 1,963 4,108 Total 10,325 5,467 10,194 7,071 Note 10 Other interest costs and similar profit/loss items (SEK 000) Group Parent company Interest costs Exchange rate differences, intra-group transactions - 1,468-3,137-1,468-3,137 Exchange rate differences, other Total - 1,836-4,323-1,828-4,182 45

48 N O T E S Note 11 Tax on net profit (SEK 000) Group Parent company Tax credit 1) , Deferred tax asset on acquired research and development 2) 0 2, Tax on net profit, according to Income Statement , Applicable tax rates Sweden 28% 28% 28% 28% UK 30% 30% Difference between consolidated tax cost reported in the Income Statement and tax cost based on applicable tax rate Profit before tax - 28, ,455-27, ,023 Tax at applicable tax rates 8,073 56,127 7,619 61,326 Tax effect of non-deductible estimated personnel costs for stock option plans, value of staff service 3) Tax effect of other non-deductible items Tax effect of non-deductible impairment losses ,748-5,697-26,345 Effect of foreign tax rates 410, 1,364 Tax credit received, Medivir UK Ltd ,837 Tax effect of deficits for which income tax receivables are not considered - 7,942-48,167-1,195-34,585 Tax on net profit , ) The tax credits apply to Medivir UK Ltd., ensuing from UK legislated research support, implying the definitive relinquishment of income tax receivables on Medivir s part. The tax credit for the year is an adjustment of the previous year s tax credit. No new tax credits were provisioned in the year. 2) Deferred tax receivables on acquired research and development for 2006 related to the dissolution of a deferred tax liability that arose in connection with the intangible item being impaired. 3) Tax effects on non-deductible personnel costs for stock option plans, pursuant to IFRS 2 have been calculated for 2007 and The group has estimated accumulated deductible deficits amounting to SEK 800 m until 2007 inclusive. No related income tax receivables are reported because the group does not consider that it will account taxable income exceeding costs within the foreseeable future. The deductible deficits of Medivir AB and Medivir UK Ltd. have no expiry. The temporary differences that arise from non-deductible impairment losses (due to impairment losses on Medivir UK Ltd. s equities in 2007 and 2006 in Medivir AB and non-recurring impairment losses of fixed assets in the group) do not give rise to any deferred tax asset in the Balance Sheet because Medivir does not capitalize the total deductible deficits, pursuant to the above. The group also had a temporary difference in the form of the intangible asset acquired research and development, which amounted to SEK 0 (0). There are no other temporary differences in the group. There are no temporary differences in the parent company. Note 12 Earnings per share Group Earnings per share before and after dilution, SEK 1) Net profit for the year - 29, ,580 Average no. of shares, ,873 12,903 The calculation of earnings per share is based on net profit for the year divided by average number of shares for the year. 1) Pursuant to IAS 33, potential ordinary shares do not cause any dilution effect if their conversion to ordinary shares results in increased earnings per share. This would be the case upon the conversion of Medivir s outstanding options. 46

49 N O T E S Note 13 Intangible fixed assets (SEK 000) Group Parent company Other intangible assets 1) Acquisition value, opening balance 2,270 2,201 2,270 2,201 Capitalization Accumulated acquisition value, closing balance 2,270 2,270 2,270 2,270 Amortization, opening balance Amortization for the year Accumulated amortization, closing balance - 1, , Book value at year-end 936 1, ,390 1) Other intangible assets relate to capitalized development costs for ERP systems. The useful life is estimated at 5 years, whereupon the reported asset is amortized in accordance with this estimate. Note 14 Fixed assets (SEK 000) Buildings and land 1) Group Parent company Acquisition value, opening balance 17,719 27,988 4,232 4,232 Purchases Reclassification to non-current assets held for sale 0-9, Exchange rate differences Accumulated acquisition value, closing balance 17,719 17,719 4,232 4,232 Depreciation, opening balance - 14,944-2,728-1,458-1,246 Depreciation for the year , Impairment losses 0-13, Reclassification to non-current assets held for sale 0 2, Exchange rate differences Cumulative depreciation, closing balance - 15,158-14,945-1,670-1,458 Book value at year-end 2,561 2,774 2,561 2,774 1) The value of buildings in the group corresponds to incurred costs of improvement in rental properties. Equipment, tools, fixtures and fittings Group Parent company Acquisition value, opening balance 119, ,814 96,318 92,600 Purchases 12,914 5,418 16,907 3,934 Transfer from work in progress Sales - 4, Reclassification to non-current assets held for sale 0-34, Exchange rate differences 129-1, Cumulative acquisition value, closing balance 127, , ,081 96,318 Depreciation, opening balance - 88,774-93,367-69,678-61,479 Depreciation for the year - 10,087-13,944-10,087-8,198 Impairment losses 0-10, Reclassification to non-current assets held for sale 0 28, Sales in the year 4, Exchange rate differences Cumulative depreciation, closing balance - 94,485-88,774-79,765-69,677 Book value at year-end 33,317 30,505 33,317 26,640 47

50 N O T E S Note 14, cont. Fixed assets (SEK 000) Construction in progress, advance payments on tangible fixed assets Group Parent company Acquisition value, opening balance Purchases Transfer from work in progress Cumulative acquisition value, closing balance Book value at year-end Note 15 Participations in group companies (SEK 000) Subsidiary: Medivir UK Ltd., VAT reg. no registered office: Essex, UK. Group Parent company ,000,006 shares with a nom. value of 1, participating interest: 100% 0 28,385 Shareholders contribution paid to subsidiary 18,880 65,704 New issue of 1 share with a nom. value of Impairment loss on shares in subsidiary - 18,880-94,089 2,000,007 shares with a nom. value of 1, participating interest: 100% 0 0 Subsidiary: Medivir Personal AB Corp. ID no.: , reg. office: Huddinge, Sweden, 1,000 shares with a nom. value of SEK 100, participating interest: 100% Subsidiary: Medivir HIV Franchise AB Corp. ID no.: , reg. office: Huddinge, Sweden 1,000 shares with a nom. value of SEK 100, participating interest: 100% Total Note 16 Financial assets held for sale (SEK 000) Group Parent company Epiphany Biosciences 14, ,165 0 Presidio Pharmaceuticals Inc. 4, ,628 0 Total 18, ,793 0 Note 17 Non-current assets held for sale (SEK 000) Group Parent company Buildings and land to be divested within one year 1) 0 7, Machinery and equipment to be divested within one year 1) 0 6, Total 0 13, ) SEK 0.3 m of tangible non-current assets held for sale were divested in the year, then impaired by SEK 13.2 m because their value was estimated at zero. 48

51 N O T E S Note 18 Income taxes recoverable (SEK 000) Group Parent company Income taxes recoverable 1) 0 5, ) Income taxes recoverable are Medivir UK Ltd. s calculated tax credit. Note 19 Pre-paid costs and accrued income (SEK 000) Group Parent company Pre-paid rents 1,535 2, Accrued income License fees 2,081 1,921 2, Connecting to external databases 2,830 3,518 2,830 2,524 Other items 1,745 4,699 1,677 5,262 Total 8,191 12,765 6,589 9,768 Note 20 Other short-term investments, cash and bank balances (SEK 000) Group Parent company Certificates of deposit and commercial paper 1) 134,411 30, ,411 30,000 Fixed-income and bond funds 2) 177, , , ,117 Cash and bank balances 17,830 22,949 14,463 22,292 Total 329, , , ,409 1) A value of SEK 0 (234,000) of accrued interest can be added to certificates of deposit and commercial paper, see Note 18. 2) Book value is equal to market value. Note 21 Interest-bearing liabilities (SEK 000) Group Parent company Bank loans, maturities less than one year 1) 0 6, ,875 1) There are no loans to credit institutions. The loan that existed at the beginning of the year was settled in the third quarter of the year. Note 22 Accrued costs and deferred income (SEK 000) Group Parent company Accrued holiday pay 10,914 10,099 10,914 10,099 Accrued bonuses 3, ,549 0 Accrued social security costs 1,898 1,357 1,898 1,357 Accrued project costs 18,670 15,150 17,356 14,833 Accrued rent 1) 4,818 5, Deferred research income 10,087 14,777 10,087 14,777 Other items 10,941 11,535 8,738 9,031 Total 60,876 58,250 52,542 50,097 1) For total rent costs see Note

52 N O T E S Note 23 Restructuring reserve (SEK 000) Group Parent company External costs, OB 2, Provisions for rent and transportation 0 2, Rent and transportation paid 1) - 2, External costs, CB 0 2, Personnel costs, OB 6, Provisions for dismissal pay 0 6, Dismissal pay paid 2) - 6, Personnel costs, CB 0 6, Total 0 9, The restructuring reserve related to non-recurring costs in 2006 due to the transfer of significant parts of operations from Medivir UK Ltd. to Medivir AB, regarding property rent, transportation and personnel. 1) Provisioned cost in 2006 for rent and transportation for Medivir UK Ltd. were utilized in the year. From July 2007 onwards, the property at Chesterford Park has been sub-let up until 2015 and accordingly the provision has been fully reversed. 2) Provisioned cost for severance pay relating to employees of Medivir UK Ltd. were utilized and there are no outstanding commitments to former employees. Note 24 Pledged assets (SEK 000) Group Parent company Pledged short-term investments 1) 0 3, ,433 1) Medivir s debt was settled in 2007, and accordingly, there is no remaining pledging. Note 25 Leasing contracts incl. property rent (SEK 000) Group Parent company Costs for the year 1) 8,950 9,506 4,783 3,573 The nominal value of future minimum lease payments on irrevocable leasing contracts including property rents Within one year 2) 10,546 9,439 4,675 3,547 Between one and five years 3) 29,126 32,670 5,641 9,103 Total 48,623 51,615 15,098 16,223 1) Primarily, costs comprise rents on property in Medivir UK Ltd. and Medivir AB. The total consolidated rental cost amounts to 7,633 (8,517), of which rental costs in Medivir AB represents 3,505 (2,647) and rental costs in Medivir UK Ltd. represents 4,128 (5,870). Of rental costs for the year, 3,795 has been recognized due to subletting of the research facility at Chesterford Park. Medivir AB s rental contracts mature between 2009 and 2011, Medivir UK Ltd. s rental contract at Chesterford Park matures in Medivir UK Ltd. is subject to indexation every fifth year. The research facility at Chesterford Park has been sublet until 2015 inclusive. The contract may be extended, and as a result, no provisioning for the period beyond 2015 has been conducted, because the judgment is that Medivir UK Ltd. will not incur these costs. 2) Of which 8,399 will be recognized as revenue due to subletting of the research facility at Chesterford Park. 3) Of which 33,596 will be recognized as revenue due to subletting of the research facility at Chesterford Park. 50

53 The Board of Directors and Chief Executive Officer hereby offer their assurances that the Consolidated Financial Statements have been prepared pursuant to the Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards, provides a true and fair view of the group s financial position and profits and that the group s Report of the Directors provides a true and fair view of the progress of the group s operations, financial position and profits and states the significant risks and uncertainty factors facing the companies included in the Consolidated Financial Statements. Huddinge, Sweden, 13 February 2008 Anders Vedin Chairman of the Board Magnus Falk Board member Bo Öberg Board member Lars-Göran Andrén Board member Donna Janson Board member Anna Malm Bernsten Board member Ron Long Board member Lars Adlersson CEO The Report of the Auditors was presented on 7 March, 2008 Liselott Stenudd Authorized Public Accountant PricewaterhouseCoopers AB Peter Clemedtson Authorized Public Accountant PricewaterhouseCoopers AB REPORT OF THE AUDITORS To Medivir AB s (publ) Annual General Meeting Corporate identity number: We have examined Medivir AB s (publ) Annual Report, Consolidated Financial Statements, accounts and the Board s and Chief Executive Officer s administration for the financial year The company s Annual Report and the Consolidated Financial Statements are included in this document on pages The Board and the Chief Executive Officer assume responsibility for the accounts and management and for the Swedish Annual Accounts Act being observed when preparing the Annual Report, and IFRS (International Financial Reporting Standards) as endorsed by the EU and the Swedish Annual Accounts Act being observed when preparing the Consolidated Financial Statements. Our responsibility is to comment on the Annual Report, the Consolidated Financial Statements and the management on the basis of our audit. The audit has been completed in accordance with generally accepted accounting practice in Sweden. This means that we have planned and completed the audit in order to attain high, but not absolute, assurance that the Annual Report and Consolidated Financial Statements do not contain any material misstatement. An audit comprises the examination of a selection of the documentation relating to amounts and other information contained in the accounts. An audit also includes an examination of the accounting principles and the Board s and Chief Executive Officer s application thereof, as well as evaluating the significant estimates the Board of Directors and Chief Executive Officer have made when preparing the Annual Report and Consolidated Financial Statements and evaluating overall information contained in the Annual Report and the Consolidated Financial Statements. As the basis for our statement regarding discharge from liability, we have examined significant decisions, measures and conditions in the company in order to assess whether any Board member or the Chief Executive Officer is liable for compensation to the company, or has otherwise contravened the Companies Act, the Annual Accounts Act or the Articles of Association. We consider that our audit provides us with a reasonable foundation for the following statements. The Annual Report has been prepared in accordance with the Annual Accounts Act and accordingly provides true and fair view of the company s profit and financial position in accordance with generally accepted accounting practice in Sweden. The Consolidated Financial Statements have been prepared pursuant to IFRS as endorsed by the EU and the Swedish Annual Accounts Act and accordingly provide true and fair view of the group s profit and financial position. The Report of the Directors is consistent with the other parts of the Annual Report and Consolidated Financial Statements. We recommend that the Income Statement and Balance Sheet of the parent company and the group be approved and that the loss in the parent company is dealt with in accordance with the proposal in the Report of the Directors and that the Board members and the Chief Executive Officer be discharged from liability for the financial year. Stockholm, Sweden, 7 March 2008 Liselott Stenudd Authorized Public Accountant PricewaterhouseCoopers AB Peter Clemedtson Authorized Public Accountant PricewaterhouseCoopers AB 51

54 SIX-YEAR SUMMARY Medivir Group 1, SEK (000) INCOME STATEMENT Net sales 2 249, , ,646 82, , ,309 Change in work in progress and finished goods ,330 2,996 Other turnover 3,840 3,287 2,211 2,505 1, Operating costs - 290, , , , , ,998 Operating profit - 37, , , , ,298-70,581 Profit from financial investments 3 8,489 1,140 8,335 12,330 69,575 6,362 Profit after financial items 3-28, , , ,005-42,723-64,219 Full tax ,876 3,229 2,490 2,409 4,420 Profit after full tax - 29, , , ,515-40,314-59,799 BALANCE SHEET 31 Dec. '07 31 Dec. '06 31 Dec. '05 31 Dec. '04 31 Dec. '03 31 Dec. '02 Intangible fixed assets 936 1,390 9,052 10,927 10,712 37,110 Tangible fixed assets 35,878 33,361 81,708 80,732 40, ,420 Financial fixed assets 18, ,130 3,130 Inventories and current receivables 73,928 56,942 63,304 24,323 14,518 76,888 Liquid assets and short-term investments 4 329, , , , , ,856 Shareholders equity 383, , , , , ,028 Deferred tax liability / provisions 0 0 2,039 2, ,672 Long-term liabilities, interest bearing ,194 21,200 3,352 4,503 Current liabilities 74, ,452 66,827 59,702 26,489 42,201 Total assets 458, , , , , ,404 Capital employed 383, , , , , ,531 1) International Financial Reporting Standards (IFRS) apply for the financial years Amounts for are presented pursuant to the accounting principles Medivir applied for the financial year For a review of the accounting principles applied for the years , refer to the Annual Report ) Net sales in 2007 mainly comprised three milestone payments totaling SEK m for HCV protease inhibitors from Tibotec Pharmaceuticals Ltd. 3) Gains from the divestment of the CCS group were included in financial investments in ) The increase in liquid assets in 2007 and 2004 are due to factors including the new share issue effected by Medivir AB in the first quarter of 2007 and the second quarter of

55 KEY FIGURES Medivir group Operating margin, % Profit margin, % Debt gearing, multiple Return on: equity, % capital employed, % total capital, % Equity ratio, % Average number of shares, thousand 16,873 12,903 12,903 10,746 8,590 8,439 Number of shares, closing balance, thousand 20,844 12,903 12,903 12,903 8,590 8,590 Earnings per share, before and after dilution, SEK Shareholders equity per share, before and after dilution, SEK Net worth per share, before and after dilution, SEK Cash flow per share after investments, SEK Cash flow per share after financing activity, SEK Dividend per share, SEK Number of outstanding warrants 970, , , , , ,400 Earnings per share, forecast for 2008, please refer to the Outlook section of the Director s Report on page 29. 1) International Financial Reporting Standards (IFRS) apply for the financial years Amounts for are presented pursuant to the accounting principles Medivir applied for the financial year For a review of the accounting principles applied for the year , refer to the Annual Report ) Pursuant to IAS 33, potential ordinary shares do not give rise to any dilution effects when their conversion to ordinary shares implies an improvement to earnings per share, as would apply coincident with the conversion of Medivir s outstanding options. DEFINITIONS Average number of shares The unweighted average number of shares during the year. Equity ratio Shareholders equity in relation to total assets. Operating margin Operating profit as a percentage of net sales. Shareholders equity Taxed shareholders equity plus 72% of untaxed reserves. Capital employed Total assets less non interest-bearing liabilities including deferred tax liabilities. Cash flow per share Cash flow divided by the average number of shares. Debt gearing Interest-bearing liabilities divided by shareholders equity. Earnings per share Profit after financial items less full tax divided by the average number of shares. Full tax Tax on profit after financial items and deferred tax on change in untaxed reserves. Net worth per share Shareholders equity plus, until 31 Dec 2004, hidden assets in listed equities less deferred tax, i.e. assets not included in ordinary operations, divided by the number of shares at the end of the period. Net worth does not include the value of research projects, patents, real estate, CCS operations (divested 30 June 2003), etc. Profit margin Profit after financial items as a percentage of net sales. Return on equity Profit after financial items less full tax as a percentage of average shareholders equity. Return on capital employed Profit after financial items plus financial costs as a percentage of average capital employed. Return on total capital Profit net of financial items plus financial costs as a percentage of average total assets. Shareholders equity per share Shareholders equity divided by the number of shares at the end of the period. 53

56 BOARD OF DIRECTORS AND AUDITORS Chairman of the Board ANDERS VEDIN, born in 1942, has been a Board member since 2001 and is a member of Medivir s Remuneration, R&D and Nomination Committees. Anders is an MD and adviser to the biotechnology and pharmaceutical industries. He is a Professor of the Management of Medical Technologies from Chalmers University of Technology, previously held senior executive positions in the Astra group and is a Board member of the Royal Swedish Academy of Engineering Sciences. Anders holds several directorships in other companies and is the Chairman of Cellartis AB and Resistentia Pharmaceuticals AB, as well as a Board member of Cewatech AB, Gefrix AB and Santosolve A/S. Medivir shareholding: 1,600 class B. Board member ANNA MALM BERNSTEN is also a member of Medivir s Audit Committee. She was born in 1961, and has been a member of Medivir s Board since Anna holds a B.Sc. (Eng.) and is Sales Director of Aerocrine AB, possessing broad experience of life sciences. She was previously employed by Medivir, and has been a self employed leadership and business development consultant. Apart from experience of senior executive positions at Pharmacia, Assa Abloy, Medivir and Baxter Medical, she was also CEO and President of Carmeda AB. Anna is a Board member of Fagerhult AB, DiaGenic ASA and Artimplant AB. Medivir shareholding: 0 Board member DONNA JANSON is also Chairman of Medivir s R&D Committee and a member of the Remuneration Committee. Donna was born in 1954 and was elected to the Board in She possesses many years experience of the US biotech industry, and is CEO and President of Novalar Pharmaceuticals Inc. of San Diego, US. Donna was previously CEO and President of Biora AB. Apart from being a board member of Medivir, she is also a Board member of Axenic Dental Inc. Medivir shareholding: 0 Board member RON LONG was born in 1947 and was elected to Medivir s Board, its R&D and Audit Committees in Ron is Chairman of Procognia Israel and Managing Director and owner of Scicona Ltd. He was formally CEO of Amersham Pharmacia AB, Deputy Chairman of Amersham Plc, Chairman of Kudos Pharmaceuticals ltd, Deputy Chairman of The Automation Partnership Plc, Senior Independent Director Asterand Plc and Non Executive Director of Gyros AB and Biacore AB. He also held a number of Divisional Director appointment in his earlier career with The Wellcome Foundation Ltd. Medivir shareholding: 0 Board member LARS-GÖRAN ANDRÉN, born in 1943, is also Chairman of Medivir s Remuneration Committee. He has been a member of Medivir s board since 1998 and holds a B.Sc. (Chem. Eng.) from Chalmers University of Technology. Lars Göran was President, CEO and Executive Chairman of Biacore International AB (publ.) in He was also a Board member of Biacore International AB until September Medivir shareholding: 1,200 class B. Board member MAGNUS FALK is also Chairman of Medivir s Audit Committee. He was born in 1942 and elected to Medivir s Board in Magnus holds a B.Sc. (Econ.) and has a background with Nordbanken/Nordea, most recently as CEO of Nordea Bank Sverige AB. His previous Board positions include Chairmanship of Postgirot AB. Magnus is currently a Board member of Koncentra AB. Medivir shareholding: 3,400 class B. Board member BO ÖBERG, born in 1939, is one of Medivir s co founders and has been a Board member since He is currently CEO of Medivir HIV Franchise AB and a member of Medivir s Nomination Committee. Bo holds a Ph.D., is a Professor and holds several directorships including Chairman of Advisory Board Rapid Centre and Board member of Microbial Antagonism against Fungi, Member of the Advisory Board Centre for Infectious Medicine and a Board member of the Royal Society of Sciences in Uppsala. Medivir shareholding (family): 284,000 class A, 358,880 class B. AUDITORS PETER CLEMEDTSON. Authorized Public Accountant, Pricewaterhouse Coopers AB. Born in Medivir s Auditor since LISELOTT STENUDD. Authorized Public Accountant, Pricewaterhouse Coopers AB. Born in Medivir s Auditor since 1999 and Deputy Auditor in Deputy ULF WESTERBERG. Authorized Public Accountant, PricewaterhouseCoopers AB. Born in Board members of Medivir UK Ltd. BERTIL SAMUELSSON and BO ÖBERG. Board members of Medivir HIV Franchise AB LARS ADLERSSON and REIN PIIR. Board members of Medivir Personal AB BO ÖBERG, CHRISTINA KASSBERG and REIN PIIR. Standing: Donna Janson, Ron Long, Bo Öberg, Lars-Göran Andrén, Anders Vedin Sitting: Magnus Falk, Anna Malm Bernsten 54

57 MANAGEMENT From left: Börje Darpö, Christina Kassberg, Bertil Samuelsson, Lars Adlersson, Tom Schlossman, Paul Wallace, Rein Piir and Stefan Mårtensson CEO and President LARS ADLERSSON was born in 1964 and has been a Medivir employee since Lars holds a B.Sc. (Econ.) and was previously Marketing VP, Marketing Director and CEO of GlaxoWellcome (Sweden) and CEO of GSK (Austria). Medivir shareholding: 3,200 class B. Stock options*: : 9,000, : 15,000, : 46,000 Vice President of Clinical Development BÖRJE DARPÖ has held this position since He was born in 1952 and has a background as a cardiologist and internal medicine specialist. Börje possesses experience of executive positions with Clinical Pharmacology Pharmacia/Pfizer, Quintiles and Daiichi Medical Research, UK/USA. Medivir shareholding: 8,900 class B. Vice President of Business Control and Administration CHRISTINA KASSBERG was born in 1968 and has been a Medivir employee since She is an economics graduate, and was previously Controller of Medivir AB, Accounting Manager at Skandia Link Multifond and an Auditor at Öhrlings PricewaterhouseCoopers. Medivir shareholding (family): 8,406 class B. Stock options*: : 2,000, : 2,000, : 20,000 Chief Financial Officer and Vice President of Investor Relations REIN PIIR was born in 1958 and has been a Medivir employee since Rein holds a B.Sc. (Econ.) and previously held senior positions in Healthcare & Research at securities institution D. Carnegie AB and Research & Strategy at SPP. Medivir shareholding: 0 Stock options*: : 4,800, : 7,000, : 20,000 Vice President of Discovery Research BERTIL SAMUELSSON was born in 1950 and has been a Medivir employee since He is a Ph.D. and Professor, and was previously Head of Medicinal Chemistry at AstraZeneca, Mölndal, Sweden. Medivir shareholding (family): 50,460 class B. Stock options*: : 4,800, : 7,500, : 22,000 General Councel TOM SCHLOSSMAN was born in Tom has been a Medivir employee since 2004 and was previously legal counsel and company lawyer at Astra and had assignments for several venture capital companies including HealthCap. Medivir shareholding: 2,200 class B. Stock options*: : 6,800, : 7,000, : 20,000 Vice President of Business Development PAUL WALLACE was born in 1962 and holds a Ph.D. from the University of Cambridge. Paul has been a Medivir employee since 2000 and was previously Business Development Manager at Peptide Therapeutics plc and Director of Research at Eclagen, both in the UK. Medivir shareholding: 0 Stock options*: : 4,800, : 7,500, : 22,000 Vice President of Sales & Marketing STEFAN MÅRTENSSON was born in 1959 and has been a Medivir employee since Stefan holds a B.Sc. (Econ.) and his previous positions include Sales and Marketing Director of Glaxo Wellcome/GSK and Nordic Business Area Manager and Marketing VP for Novartis. Medivir shareholding: 0 * For the conditions applying to the right to acquire shares, see the Medivir share, page

58 GLOSSARY Alzheimers disease A form of dementia named after the German neuropathologist and psychiatrist Alois Alzheimer. Antiviral Antiviral effect. Autoimmune disease Disease condition where one s body reacts against its own tissue. Biomarker A biochemical feature or facet that can be used to measure the progress of disease or the effects of treatment. Bisphosphonate A class of drugs that are used in the treatment of osteoporosis. Bisphosphonates inhibit bone removal (resorption) by osteoclasts. Cell-based assay Biological tests conducted in cells. CD (candidate drug) Compound designated to proceed into clinical studies. Medivir uses the same criteria as the big pharmaceutical companies. Clinical studies Studies of experimental drug on humans. COPD Chronic obstructive pulmonary disease. CRO (Clinical Research Organization) A company that conducts clinical studies on a contract basis. Enzyme A protein molecule, typically a very large one, that catalyses chemical reactions in living cells. These reactions occur rapidly and with great precision without the enzyme itself being consumed. Polymerases and proteases are enzymes. Fibroblast A cell that makes the structural fibers and matrix of connective tissue. Follow-on compound A drug substance having improved therapeutic properties compared to it s predecessor. Genital herpes HSV-2 (or on occasion HSV-1) infection giving rise to sores on the genitals, but remaining latent in the ganglia. Genotype 1 Based on genetic differences between HCV isolates, the virus species is classified into six genotypes, with many subtypes within each genotype. Genotype 1a is the most common in North America, and 1b in Europe. Hepatitis B Jaundice caused by human Hepatitis B virus (HBV). Hepatitis C Jaundice caused by human Hepatitis C virus (HCV). HIV (Human immunodeficiency virus) Causes deficiencies in the immune system and gives rise to AIDS. IAS (International Accounting Standards) See IFRS. IFRS (International Financial Reporting Standards) New accounting rules adopted by the EU. Intended to facilitate comparisons between Annual Reports in different European countries. Listed companies must comply with IFRS since 1 January Interferon Human protein with antiviral effect. Labial herpes/cold sores Caused by herpes simplex virus type 1 (HSV-1) and transmitted via saliva/oral contact. There are two types of herpes simplex virus, type 1 and 2 (HSV-2). HSV-2 is normally a sexually transmitted, but it can also cause labial herpes. The infection becomes latent and the virus can be reactivated. Milestone payments Payments upon attaining contracted achievements. Mononucleosis A human disease caused by Epstein- Barr virus, from the family of herpes virus. The disease is transmitted via saliva, sexually and via blood transfusions. MS (Multiple Sclerosis) Disease of the central nervous system. Option Right to buy shares at some time in the future. Osteoarthritis Chronic degenerative arthritic disease. Osteoporosis Brittle bones. Pharmacokinetics The study of a drug s metabolism in the human body (absorption, distribution, conversion and secretion). Phase I, II and III clinical trials For a detailed description of the various phases, please refer to page 16. PHN See post-herpetic neuralgia. Pivotal study Usually a phase III study which presents the data that the Health authorities uses to decide whether or not to approve a drug. A pivotal study will generally be well-controlled, randomized, of adequate size, and whenever possible, double-blind. Polymerase A type of enzyme that replicates genes, for example, of a virus. Post-herpetic neuralgia Pain coincident with shingles that continues after lesions have healed. Due to virally induced damage to the nerves. Preclinical research Research into a pharmaceutical compound prior to studies on humans (clinical studies). Pre-emption If a holder of class A shares wishes to sell these shares, they must be offered to other holders of class A shares first. Proof-of-principle Preclinical or early stage clinical drug development studies on a compound to examine it s potential to modulate a physiologically relevant mechanism and to detect and monitor a signal or biomarker for it s pharmacodynamic effect. Protease An enzyme able to break proteins down into smaller units. Rheumatoid arthritis Chronic, painful and disabling collagen disease affecting joints. Resistance Reduced efficacy of a compound that normally suppresses a virus or other microorganism. Royalty Payment, often calculated as a percentage of product (drug) sales. Share issue Provision of new shares to raise capital. Shingles Painful disease with vesicles on the skin caused by a herpes virus, the varicella- zoster virus (VZV). This virus remains latent within the body after chickenpox infection, and may re-activate many years later, causing shingles. Therapeutic vaccin Vaccine for the treatment of disease. Production: Medivir, Admarco Editing: Karina Sannefjordh, Med enkla Ord Photography: Joakim Folke* Translation: Turner & Turner Print: Billes *except inside cover, page 3, 4 (ill), 13 (ill) and 24, Getty Images 56

59 Forthcoming reports The Interim Report for the first three months will be published on 23 April The Interim Report for the first six months will be published on 9 July The Interim Report for the first nine months will be published on 20 October These reports will be available at Medivir s website, under the heading Investor/Media, as of these dates. Medivir sends its reports to all the shareholders, except those who when registered a VP account declined all information. For more information, please contact Rein Piir, CFO and VP, Investor Relations. Rein Piir Tel (direct): +46 (0) Switchboard: +46 (0) [email protected] Annual general Meeting Medivir s AGM will be held in Polstjärnan Conference Center, Sveavägen 77, Stockholm, Sweden, on Wednesday 23 April 2008 at 3 p.m. Participation Shareholders intending to participate in the Annual General Meeting should firstly, be recorded in the shareholders register maintained by VPC AB by no later than 17 April 2008 and secondly, notify the company of their name, address and telephone number by mail at Medivir AB, Box 1086, SE Huddinge,Sweden or by telephone: +46 (0) or fax + 46 (0) or [email protected] by no later than 18 April 2008 at 4 p.m. P L E A S E N O T E IMPORTANT NOTICE FOR NOMINEE-REgISTERED For entitlements to participate in the Annual general Meeting, shareholders with nominee-registered holdings should temporarily re-register their shares in their own name with VPC. Shareholders desiring such re-registration must inform their nominee thereof in good time before 17 April 2008.

60 You need a lot of pieces before you can see the whole picture. Medivir AB, Head office PO BOX 1086, SE Huddinge, Sweden Visiting address: Lunastigen 7 Phone +46(0) Fax +46(0) [email protected] United kingdom Chesterford Research Park Little Chesterford Essex CB10 1XL United Kingdom For more information, please contact Head Office.