Statutory financial statements at 31 December 2011

Transcription

1 Statutory financial statements at Approved by the Shareholders Meeting of 23 April 2012 English translation for convenience

2 MolMed S.p.A. is a biotechnology company focused on research, development and clinical validation of novel anticancer therapies. MolMed s pipeline includes two novel anticancer therapeutics in clinical development: TK, a cell-based therapy enabling bone marrow transplants from partially compatible donors, in Phase III for high-risk leukaemia, and NGR-hTNF, a novel vascular targeting agent, in Phase III for malignant pleural mesothelioma and in Phase II for six other different types of solid tumours: colorectal, smallcell lung, non-small-cell lung, liver and ovarian cancers, and soft tissue sarcomas. MolMed is headquartered at the San Raffaele Biomedical Science Park in Milan, Italy. The company s shares (MLM.MI) are listed on the Milan Stock Exchange (Standard segment, class I) of the MTA managed by Borsa Italiana.

3 Table of contents General Company Information... 3 Corporate Bodies... 4 Letter to the Shareholders... 6 Report on operations Corporate Information Fighting cancer A global challenge MolMed s investigational therapeutics address severe oncology indications with high unmet medical need Product pipeline TK - A cell-based therapy for the treatment of leukaemia NGR-hTNF - A biological drug targeting tumour blood vessels for the treatment of solid tumours Vascular/tumour targeting programme Development and GMP production activities Development GMP production IP protection activities Business Development activities Communication and Investor Relations activities Organisation and Human resources Research & development grants and other financial support Corporate Governance Direction and coordination activities Implementing the Model of Organisation, Management and Control, following the Italian Legislative Decree 231/ Transactions with related parties Main risks and uncertainties to which MolMed is exposed Risks associated with external factors Strategic and operating risks Financial risks Other information Own shares Protection of sensitive data and information MolMed and the environment, health and safety in the workplace Shares held by Directors, General Managers, Statutory Auditors and other executives with strategic responsibilities (art. 79 of Consob Regulations, Resolution n of May 14, 1999) Key achievements in year Economic and financial data Income statement data Equity and financial results Outlook Significant events subsequent to the end of fiscal year Business outlook Proposed allocation of the loss for the year Page 1

4 Financial Statements at December 31, Statement of Financial Position Income Statement Statement of Comprehensive Income Statement of Cash Flow Statement of Changes in Shareholders Equity Statement of Financial Position pursuant to Consob resolution no of July 27, Income Statement pursuant to Consob resolution no of July 27, Notes General information Accounting principles and valuation policies Segment reporting notes to the statement of financial position Notes to the Income statement Other notes Certification of the Statutory Financial Statements, pursuant to Article 81-ter of Consob Regulation no of May 14, 1999, and subsequent amendments and integrations Report of the External Auditors Report of the Board of Statutory Auditors Page 2

5 General Company Information Registered office: Via Olgettina, MILANO (Italy) Tax Number: VAT Number: IT Milan Company Register: n REA: Share capital: 43,609, fully paid Borsa Italiana Code: MLM ISIN: IT Ticker Reuters: MLMD.MI Ticker Bloomberg: MLM IM Circulating shares: 210,541,926 (100% ordinary shares with no par value) Disclaimer This financial report may contain certain forward-looking statements. Although the company believes its expectations are based on reasonable assumptions, these forward-looking statements are subject to numerous risks and uncertainties, including scientific, business, economic and financial factors, which could cause actual results to differ materially from those anticipated in the forward-looking statements. The company assumes no responsibility to update forward-looking statements or adapt them to future events or developments. This document does not constitute an offer or invitation to subscribe or purchase any securities of MolMed S.p.A. Page 3

6 Corporate Bodies Board of Directors Chairman and Chief Executive Officer Directors Claudio Bordignon Luigi Berlusconi Silvio Bianchi Martini (independent) Maurizio Carfagna Paolo M. Castelli Riccardo Cortese (independent) Marina Del Bue Alessandro De Nicola (independent) Massimiliano Frank Sabina Grossi Alfredo Messina Maurizia Squinzi Maurizio Tassi The Board of Directors, appointed by the Shareholders Meeting held on April 26, 2010, will remain in charge until the date of the Shareholders Meeting convened to approve the Financial Statements as of December 31, On February 6, 2011, Maurizia Squinzi was appointed as member of the Board, in replacement of Renato Botti who resigned on November 4, Board of Statutory Auditors Chairman Fabio Scoyni Statutory Auditors Substitute Statutory Auditors Antonio Marchesi Enrico Scio Alberto Gallo Francesca Meneghel The Board of Statutory Auditors, appointed by the Shareholders Meeting held on April 26, 2010, will remain in charge until the date of the Shareholders Meeting convened to approve the Financial Statements as of December 31, Internal Control Committee( ) Chairman Members Silvio Bianchi Martini (independent Director) Alessandro De Nicola (independent Director) Maurizio Tassi (Director) ( ) By Board resolution of November 11, 2010, the Internal Control Committee also carries out the functions of Committee for Transactions with Related Parties. Remuneration Committee Chairman Members Alessandro De Nicola (independent Director) Riccardo Cortese (independent Director) Sabina Grossi (Director) External Auditing Firm Deloitte & Touche S.p.A. Page 4

7 Scientific Advisory Board MolMed s Scientific Advisory Board (SAB), chaired by Professor Claudio Bordignon, is an independent advisory body, peculiar of Companies where the quality of projects is determined by the value of their scientific contents. The SAB contributes significantly to MolMed s decisions on its R&D pipeline by providing guidance on novel therapeutic strategies, as well as external assessment of results obtained. MolMed s Scientific Advisory Board combines the knowledge and experience of leading international scientific experts. Its membership includes: Claudio Bordignon, Chairman - Member of the Scientific Council of the European Research Council, and full Professor of haematology at the University Vita-Salute San Raffaele in Milan (Italy) Carl-Henrik Heldin - Branch Director of the Ludwig Institute for Cancer Research in Uppsala (Sweden), and Professor of Molecular and Cell Biology at Uppsala University Robert Kerbel - Senior Scientist in the Molecular and Cellular Biology Research Program at the Sunnybrook Health Sciences Centre in Toronto (Canada), Professor in the Departments of Medical Biophysics and of Laboratory Medicine & Pathobiology at the University of Toronto, and Canada Research Chair in Tumour Biology, Angiogenesis and Antiangiogenic Therapy Alberto Sobrero - Head of the Medical Oncology Unit at the clinical centre Ospedale San Martino in Genova (Italy), and member of the Protocol Review Committee of the European Organisation for Research and Treatment of Cancer (EORTC) Didier Trono - Deputy Director of the Swiss National Science Foundation s Frontiers in Genetics area, and Professor and Dean of the School of Life Sciences at the École Polytechnique Fédérale in Lausanne (Switzerland) The professional profiles of the members of the Scientific Advisory Board are available on the Company website ( Page 5

8 Letter to the Shareholders Dear Shareholders, We are pleased to report the progress made in Regarding clinical development, we presented for NGR-hTNF new Phase II data in three indications, ovarian cancer, small-cell lung cancer and non-small cell lung cancer; altogether, the clinical data obtained provide additional evidence on the antitumour activity of the molecule. For TK, we presented additional data showing restoration of a fully functional immune system in high-risk leukaemia patients treated with our cell-based therapy; the same benefit has been observed also in the first patients enrolled in the ongoing Phase III trial. As planned, we pursued the international expansion of our two ongoing pivotal Phase III trials, with 24 centres in Europe, the US, Canada and Egypt participating in the trial of NGR-hTNF in mesothelioma. In the trial of TK for high-risk leukaemia patients, 7 centres in Italy, Germany, Greece and Spain are participating, and IND clearance was received from the FDA. Unfortunately, additional and higher than expected regulatory requirements in some countries of the European Union have delayed patient enrolment; therefore, MolMed plans to include additional centres besides the 15 centres originally planned. In line with our objective to maintain a constant dialogue with the regulatory authorities, we held three meetings with the FDA - two regarding NGR-hTNF and one regarding TK - and one meeting with the EMA regarding TK. I would also like to highlight the importance of our collaboration with Telethon Foundation and GlaxoSmithKline. These agreements represent a major recognition of our long-standing expertise in the field of gene therapy treatments for different pathologies, leading to a positive impact on our revenues which is expected to continue in The increase in operating costs was expected and is mostly related to the progress of clinical trials of NGR-hTNF and its industrial manufacturing process, as well as to the intensification of our GMP production activities on behalf of third parties. Taking into account a strict control of our costs, we managed to close the year with a positive net financial position of 38.7 million. In 2012, we will maintain our focus on advancing the development of our investigational therapies NGR-hTNF and TK, while we will continue to expand the provision of strategic services in cell and gene therapy. Dear Shareholders, even though important milestones were achieved, we have not yet completed our mission, which is that of bringing our investigational therapeutics to the market and respond to critical patients needs. On behalf of all my collaborators and myself, let me assure you that we will continue our full commitment and devote our energies to achieve this objective, both in the interest of patients and shareholders. Finally, I would like to thank you All for the confidence and support you have granted us so far. [Signed by] Claudio Bordignon Chairman and Chief Executive Officer Page 6

9 Report on operations 1. CORPORATE INFORMATION MolMed is a medical biotechnology company established in 1996, focused on research, development and clinical validation of innovative therapies to cure cancer. Since March 2008, MolMed is a public company listed on the Milan Stock Exchange - Standard segment, class I - of the MTA managed by Borsa Italiana. MolMed was born as a spin-off of the San Raffaele Institute, based on its core knowledge in the field of gene and cell therapy applied to rare genetic diseases and to haematological malignancies, with the first clinical trials on patients suffering from leukaemia. From year 2000, it started its evolution from service to product company, with a primary focus on novel anticancer therapies. Today, MolMed is an established business, with the capability to cover all functions of a biotech product company, from basic research to production, up to the carrying out of proof-of-concept clinical trials of its investigational therapies. MolMed s approach to cancer therapy is characterised by an integrated strategy, aimed on one side at identification and development of bio-pharmaceuticals reducing the tumour mass and slowing down its growth, and on the other side at the development of highly selective therapies to eliminate residual tumour tissue. MolMed has a unique pipeline in terms of novelty, diversification of therapeutic approaches and technological peculiarity. Its investigational therapies are new, completely original, first-in-class candidate products building up new therapeutic classes. MolMed is based in Milan, within the San Raffaele Biomedical Science Park. This location offers important advantages, allowing MolMed to integrate its own R&D capabilities with the cutting-edge scientific, technological and clinical resources of its host institution. In particular, MolMed holds an option right to all IP generated from research projects run by the San Raffaele Scientific Institute in the field of gene and molecular therapy of cancer and AIDS. At international level, since 2003 MolMed has entered into a strategic alliance with Takara Bio, an important Japanese biotechnology company listed on the Tokyo Stock Exchange, through a codevelopment and out-licensing agreement for MolMed s cell-based therapies in major Asian markets. MolMed s mission is to concentrate commitment and resources on the development of new cures for cancer by combining scientific and research excellence with a high effectiveness of business management, focused on a clear industrial project. Page 7

10 2. FIGHTING CANCER 2.1 A global challenge MolMed s activities are focused on medical oncology, the therapeutic area devoted to cancer treatment. Cancer (i.e. tumour or neoplastic disease) is any type of malignant cell growth caused by abnormal and uncontrolled local cell proliferation that can have origin in different tissues, and its spread to other organs through the lymphatic system or the blood stream, giving origin to metastases. In fact, cancer is actually a wide and heterogeneous group of diseases, made up of over 200 different types of tumour, commonly divided into two broad categories: solid tumours, and blood tumours (or haematological malignancies). Conventional treatment options available for solid tumours are surgery, radiotherapy and pharmacotherapy (or chemotherapy). Early surgical removal is potentially curative for some tumour types. But sometimes surgical treatment proves not to be sufficient, and the surgical option is unavailable for patients with advanced and/or metastatic disease. In this case, available options are only radio- and pharmacotherapy, often used in sequential combination. For haematological malignancies (e.g. leukaemia and lymphomas), radio- and pharmacotherapy are often followed by transplants of haematopoietic stem cells. Within pharmacotherapy, the most commonly used regimens are based on cytotoxic agents, known as chemotherapies and characterised by high toxicity, lack of specificity and loss of efficacy over time, leading patients to undergo a particular line of treatment until they become refractory or reach the maximum tolerated cumulative toxicity, and then having to switch to another line of treatment (when available). Clinical benefits limited over time and high levels of toxicity of current standard treatments translate into a significant level of unmet medical need in oncology, making it an area of high intensity in terms of research and development investments, with high potential for new therapies based on a better understanding of the mechanisms implied in tumour genesis and growth, and thus able to provide increased selectivity, reduced toxicity, enhanced therapeutic efficacy and improved survival of patients. Currently, oncology is the largest segment of the global pharmaceutical market, and it is also the one with the fastest growth 1. In Europe, the United States and Japan, cancer is the second most common cause of death, and recently a rise in incidence has been observed. This phenomenon is due to a combination of several factors, first of all to the ageing of the population worldwide: this leads per se to an increased incidence of cancer, as the risk of all tumours increases with age. Moreover, as treatments for cancer become more effective at prolonging patient survival, the number of patients living with the disease expands. The very high level of unmet medical need in oncology has driven the emergence of the so-called innovative therapies, either biologics or anyway biotechnology-derived. Such innovative therapies have as a common trait the fact of being specific and/or targeted, i.e. directed at specific molecular targets involved in tumour genesis and/or tumour growth, and thanks to their targeted action they have a remarkably lower systemic toxicity as compared to conventional regimens. The molecular targets of novel therapeutics may be tumour type-specific, or common to different tumour types, or specific to the blood vessels feeding the tumour mass or to the factors supporting their formation and growth: in the second and third case, they offer the potential for application of a therapy in several different oncology indications. Novel targeted therapies often can act both as single-agent alternatives, and as enhancers of or in synergy with existing treatments. The current focus in tumour therapy improvement is to use a combination of different classes of agents rather than a single therapeutic approach: the introduction of next-generation biotech-derived cancer therapies could enable further extension of patients 1 Source: IMS Health Top 15 Global Therapeutic Classes 2008, IMS Health, Page 8

11 survival and improvement of their quality of life, eventually reducing tumours from rapidly progressing and life-threatening diseases to well-managed chronic pathologies. The investigational therapeutics developed by MolMed belong to the context of novel anti-tumour biologics. 2.2 MolMed s investigational therapeutics address severe oncology indications with high unmet medical need MolMed s activities are primarily focused on identification, characterisation, and preclinical, clinical and pharmaceutical development of novel therapies for tumours with very different patterns and very different levels of incidence: however, they all share the common traits of severity and actual need of new therapeutic options. Incidence (Europe, North America, Japan, Australia) 700, , , , , ,000 Colon-rectum Lung (NSCLC) NGR-hTNF Lung (SCLC) Leukaemia Liver 100,000 Ovary Sarcomas 1 Mesothelioma 0 TK Mortality/incidence ratio Unmet medical need No or few therapeutic options available or in development: First/second line Third/fourth line Orphan Drug designation in EU & US Figure 1. Indications addressed by of MolMed s investigational therapies in ongoing clinical trials Sources: Globocan Database 2008; 1 MolMed estimate On one hand, MolMed is addressing tumours considered to be uncommon - although with ever-growing incidence because of exposure to environmental conditions that contribute to disease onset - that have no or very few therapeutic options available, such as high-risk leukaemia, malignant pleural mesothelioma, primary liver cancer, small-cell lung cancer (SCLC) and soft-tissue sarcomas. On the other hand, clinical investigation of MolMed therapies includes much more widespread indications, thus having indeed a much wider range of treatments available or in development - such as colorectal, ovarian and non-small cell lung cancer (NSCLC) - but with many patients becoming either intolerant (because reaching cumulative toxicity) or refractory (because of loss of disease control over time) to all possible treatment lines. For these heavily pre-treated patients with no efficacious treatment lines left, MolMed devotes its efforts to offer a new therapeutic option. To successfully address the cure of each of these tumours, MolMed is developing two distinct investigational therapies. Both are new, entirely original and giving origin to novel therapeutic classes, but each of them is relying on a different technological approach: TK, a cell therapy product for blood tumours: this approach is aimed at making available to all patients the curative potential of transplants of haematopoietic stem cells derived from the bone marrow of a healthy donor, that is currently feasible in a safe and effective way only if the donor is fully compatible with the patient, a condition that can be satisfied only for approximately 50% of candidates to the transplant; Page 9

12 NGR-hTNF, a biological drug targeting blood vessels for solid tumours: this approach is based on the use of a highly selective vascular targeting agent whose molecular target is a structure which is only present on blood vessels that feed the tumour mass. The antivascular effect of the drug cuts off supplies of oxygen and nutrients to the tumour, thus blocking its growth. 3. PRODUCT PIPELINE MolMed s product pipeline is headed by the two investigational anticancer therapies TK and NGRhTNF. Further advancement of the clinical and pharmaceutical development of these two investigational products has been the chief focus of activities carried out by the Company functions in year Product Indication Trial code Phase I Phase II Phase III TK NGR-hTNF High-risk leukaemia Leukaemia (Japan/Takara Bio) TK007, TK008 random. Solid tumours MTD EORTC Solid tumours low dose Solid tumours high dose Colorectal cancer Monotherapy Liver cancer Mesothelioma NGR002 NGR013 NGR006 NGR008 NGR010, NGR015 random. Mesothelioma/maintenance NGR019 random. + doxorubicin Solid tumours NGR003 Lung cancer/sclc Ovarian cancer Ovarian cancer Soft tissue sarcomas NGR007 NGR012 + Xelox Colorectal cancer NGR005 + cisplatin Solid tumours Lung cancer/nsclc NGR018 random. NGR016 random. NGR004 NGR014 random. Figure 2. MolMed clinical development pipeline at ongoing completed 3.1 TK - A cell-based therapy for the treatment of leukaemia TK is an investigational cell therapy product based on genetically engineered cells, allowing more safe and effective transplant of haematopoietic stem cells (HSCT) even from a partially compatible donor, thus opening to all patients the door of this practice, which is the only potentially curative treatment available, especially for high-risk leukaemia. HSCT allows regenerating the haematopoietic and immune system of a leukaemic patient, which is severely compromised by the disease and by the radiotherapy and pharmacotherapy endured before the transplant; but it needs time - several months - in order to give origin to the mature cells characterising a fully functional immune system. In the meantime, the patient lacks any defence against both infections and possible disease relapse, so it is in absolute need of a vicarious protection: when the donor is fully compatible, this can be provided by donor T cells, thanks to their ability to fight infections and to detect and eliminate residual leukaemic cells. But, at present, donor T cells cannot be used as vicarious protection when the donor is only partially compatible with the patient, because in this case they become a double-edged sword: on one hand, they provide an effective immunotherapeutic benefit against infections and leukaemia relapse, but on the other hand they carry a very high risk of eliciting an attack to the normal tissues of the patient, known as graftversus-host disease (GvHD), that can produce very serious damage. This risk has so far prevented the Page 10

13 use of donor T cells as add-backs to HSCT in all cases of partial incompatibility between donor and recipient, thus making the transplant option unavailable for approximately the half of leukaemia patients. TK therapy was designed in order to allow keeping the protective action of donor T cells, which is vital for the transplant to be really successful, even in the case of partial incompatibility between donor and recipient. This is achieved by the genetic engineering of donor T cells, in order to endow them with a selective elimination system acting only on the cells actively involved in a GvHD reaction. To this end, donor T cells are transduced with a gene (TK) making them sensitive to the common antiviral drug ganciclovir. In the case of GvHD onset, T cells involved in the aggression can be promptly eliminated by administering the drug at the very first symptoms. Thus, TK allows to take advantage of the vicarious protection of a fully functional immune system provided by donor T cells, while the new immune system entirely reconstitutes from the transplanted haematopoietic stem cells, and therefore it opens the door of HSCT to all patients, since a partially compatible family donor is available for nearly every candidate to the transplant. TK was granted Orphan Drug designation both in the European Union and in the United States. Donor haematopoietic stem cells Haemat. stem cells Day 0 Hospital Day 21+ TK cells TK cells Protection from infections Protection from leukaemia relapse Haploidentical donor MolMed GMP facility Genetic engineering of donor T cells No immune-suppression needed (prompt abrogation of GvHD by administration of ganciclovir) T cells Donor T cells HSV-TK Figure 3. Overview of TK therapy application in HSC transplant from a partially compatible donor In 2011, MolMed started the international expansion of Phase III trial (TK008) for the treatment of high-risk leukaemia in adult patients undergoing HSCT from partially compatible donors (haplo-hsct). TK008 is a pivotal trial - which will compare the outcome of haplo-hsct with or without TK addbacks, with a randomisation ratio of 3:1 in favour of TK add-back - aimed at assessing efficacy and safety of TK in its final formulation, in compliance with regulatory requirements in view of registration and market launch. The trial is expected to involve 15 centres in several European countries, Israel and the US. In 2011, MolMed obtained clearance of the IND filed with the U.S. Food and Drug Administration (FDA) to include patients enrolled in U.S. clinical centres in Phase III trial TK008. Following a meeting with the FDA, the new trial design has been confirmed with a wider primary end-point, i.e. disease-free survival - which includes also disease relapse in addition to transplant-related mortality - evaluated on a patient population increased to 170 patients. Secondary end-points include overall survival, reduction of transplant-related mortality associated with the haplo-hsct procedure, safety and patients quality of life. At European level, in 2011 patient recruitment in the trial continued in Italy, and two clinical centres were activated in Spain and Greece, with recruitment of the first patient in Spain. So far, recruitment in the trial has been slower than expected due to additional regulatory requirements of Page 11

14 some EU Member States, which delayed the activation of clinical centres. Taking also into account the increased number of patients, the planned regulatory submissions have be postponed accordingly, since the primary analysis is expected not before (Trial identifier in clinicaltrials.gov: NCT ). Results of a completed Phase II trial (TK007), published by The Lancet Oncology 2, demonstrated that TK add-backs after haplo-hsct allow to achieve a rapid and efficient immune-reconstitution in adult patients affected by high-risk leukaemia, substantially reducing transplant-related mortality and leading to long-term disease-free survival. In 2011, new clinical data from the long-term monitoring of the trial were presented 3, giving evidence of the clinical benefit following treatment with TK: patients treated - including the first patients enrolled in the ongoing Phase III trial - show restoration of a fully functional immune system. Data presented in December 2011 at ASH show - in patients treated with TK cells - a regeneration and renewed functionality of the thymus, which results into circulation of T cell precursors mediating a robust and specific immune protection. This effect is due to TK cells, which stimulate the production and release of interleukin-7, an important mediator in the development of the immune system: without TK cells engraftment no rise in levels of interleukin- 7 is observed and no immune-reconstitution is achieved. The IP coverage of TK progressed in 2011 with the grant of a key European patent (EP ) covering the gene forming the basis of TK. This new composition of matter patent, part of a large patent family owned by MolMed, covers a non-splicing variant of the HSV-TK gene, i.e. a variant that is transcribed in a stable and unmodifiable manner. The patent affords protection until 2025 with the possibility of a 5-year term extension, and gives right to market exclusivity in 29 designated countries within the European Patent Convention, including all major countries of the European Union, Switzerland and Turkey. Equivalent patent applications are pending in the United States, Japan and important emerging markets. Moreover, in 2011 MolMed was granted another European patent (EP ) covering a closed system for the production of TK cells, with the same terms of validity and the same geographic coverage. Concerning TK manufacturing, in 2011 MolMed continued the project for the development of an automated production process, carried on in collaboration with Areta International S.r.l. and Datamed S.r.l. The enjoys a non-refundable grant of approximately Euro 1.4 million awarded by Regione Lombardia - of which MolMed s share is Euro 449,000 - that will partially cover the R&D costs incurred for a period of 36 months. Areta is in charge of the development and implementation of an optimised production and purification process for the monoclonal antibody used for the selection of TK cells, while Datamed carries out design and optimisation of the automated system modules and related engineering work. Abstracts of the key publications concerning TK, as well as posters of clinical results, are available on MolMed s website ( 3.2 NGR-hTNF - A biological drug targeting tumour blood vessels for the treatment of solid tumours NGR-hTNF is a selective vascular targeting agent characterised by a unique mode of action, and is first-in-class in the class of peptide-cytokine complexes targeting tumour blood vessels. It is a homotrimeric protein, where each of the three subunits is formed by combining a tumour homing peptide (NGR) with the human cytokine Tumour Necrosis Factor (htnf). NGR targets a particular receptor complex including CD13, selectively expressed by endothelial cells of human tumour vessels. NGR-hTNF acts specifically on blood vessels feeding the tumour mass, inducing an anti-vascular effect that allows, inter alia, an improved penetration into the tumour tissue of other anticancer drugs administered in combination, thereby enhancing their therapeutic effectiveness. Therefore, NGR-hTNF can be used both as new single-agent therapeutic option, and in combinations with most cytotoxic-based chemotherapeutic regimens currently available. 2 Ciceri, Bonini et al, Lancet Oncol May 1;10: ASCO 2011, poster # 6526; ASH 2011, poster # 1968 Page 12

15 Unlike all other drugs commonly classified as vascular targeting/disrupting agents (VTAs/VDAs), NGRhTNF appears to exert its antivascular and antitumour activity without inducing harmful counterregulatory mechanisms: neither increase at the tumour site of bone marrow-derived cell infiltrates nor increase in circulating growth factors are induced, i.e. two phenomena that stimulate angiogenesis, post-therapy tumour re-growth and metastasis. Cyclic CNGRCG peptide: selectively binds receptor CD13, expressed on the surface of newly formed tumour blood vessels Human TNF (htnf): powerful antitumour activity Approved only for locoregional treatment systemic use hampered by toxicity Destroys blood vessel functions Figure 4. The NGR-hTNF molecule: properties of its moieties The clinical development of NGR-hTNF includes clinical trials both as monotherapy and in combination with different chemotherapeutic regimens, in a total of seven indications: colorectal, liver, small-cell lung, non-small-cell lung and ovarian carcinomas, soft tissue sarcomas and malignant pleural mesothelioma. For mesothelioma and liver cancer, NGR-hTNF has received Orphan Drug designation both in the U.S. and in the European Union, where it is now listed in the Register of orphan medicines for human use under the code EU/3/08/549 for malignant mesothelioma, and under the code EU/3/09/686 for primary liver cancer. Clinical data obtained by MolMed to date demonstrate the antitumour activity of NGR-hTNF in six different types of solid tumours; these include two orphan indications as well as more widespread diseases, which altogether account for more than 1.4 million new cases each year in Europe, North America and Japan. In 2011, MolMed implemented the international expansion of pivotal Phase III trial (NGR015) for the treatment of malignant pleural mesothelioma, with 24 centres participating in Europe (Italy, the UK, Ireland and Poland), the US, Canada and Egypt. 124 patients were enrolled at. The trial is expected to include more than 40 centres worldwide, with primary data analysis expected in NGR015 is a randomised, double-blind, placebo-controlled trial, expecting to enrol 390 adult patients affected by malignant pleural mesothelioma with disease progressing after a pemetrexedbased chemotherapy. The primary endpoint of the trial is overall survival; secondary endpoints include progression-free survival, disease control rate, safety profile and patient quality of life. In 2011, new data of five clinical trials of NGR-hTNF were presented: First results of a randomised Phase II trial of NGR-hTNF in combination with cisplatin-based chemotherapy as first-line treatment for non-small cell lung cancer 4.In this ongoing trial, MolMed presented interim data for safety and preliminary antitumour activity on the first 100 patients enrolled, showing evidence of clinical improvement in terms of disease control and duration of progression-free survival as compared to chemotherapy alone, particularly in younger patients and in patients with squamous cell histology. Absence of pulmonary haemorrhage or bleeding events (which are associated to the use of antiangiogenic drugs in patients with squamous cell histology) was also confirmed. Patient recruitment is continuing beyond the initially planned population of 102 patients in order to ensure the inclusion of an adequate number of 4 EMCC 2011, poster # 9014; ASCO 2011, poster # 7568 Page 13

16 patients with squamous cell histology for a deeper primary analysis in this tumour subtype. Availability of trial results is expected in 2012 and will be one of the key determinants for selection of the second indication to take to Phase III, after mesothelioma. As a consequence, the start of a Phase III trial in a second indication is expected in Follow-up of a completed Phase II trial of NGR-hTNF in combination with doxorubicin for the treatment of relapsed ovarian cancer 5. The primary endpoint - six partial responses on the entire study population - was met after the recruitment of less than half of the patients. The primary endpoint of the trial - six partial responses in the entire study population - was met after enrolment of less than half of patients. Long term follow-up data show that disease control was achieved in 50% of patients resistant/refractory to prior platinum-based regimens, with a median duration of 5.0 months, and in most patients partially sensitive to prior platinum-based therapy, with a median duration of 7.8 months. Resistant/refractory patients with a normal immune response (measured as normal/high baseline lymphocyte counts) experienced a prolonged clinical benefit, with median progression-free survival of 4.9 months and median overall survival of 15.8 months. On the basis of this positive outcome, MolMed has started a randomised Phase II trial (NGR018). Follow-up of a completed Phase II trial of NGR-hTNF in combination with doxorubicin for the treatment of relapsed small-cell lung cancer 6. Disease control was achieved in more than half the patients, with similar antitumour activity in terms of disease regression in both chemosensitive and chemo-refractory patients. Prolonged clinical benefit was also observed in patients heavily pre-treated with two or more prior therapies. Patients with a normal immune response (i.e. normal/high baseline lymphocyte counts) had an almost double median overall survival time (8.4 months) compared to patients with a weak immune response (4.6 months). Long-term follow up of a completed Phase II trial in malignant pleural mesothelioma 7. the long-term analysis confirms a strong advantage of the weekly over the tri-weekly administration schedule in prolonging disease control: the 2-year survival rate was three-fold higher considering the entire patient population and five-fold higher in patients who achieved disease control at the first tumour re-assessment. In both cohorts, patients who achieved disease control at the first tumour re-assessment and continued therapy had a double median survival time with respect to patients who progressed at the first tumour re-assessment and consequently discontinued treatment (16.7 v 8.3 months). On the basis of these evidences, MolMed started a randomised Phase II trial (NGR019) of NGR-hTNF as first-line maintenance therapy. Outcome of a Phase I and pharmacodynamic trial of NGR-hTNF at high doses 8. This trial tested the administration of NGR-hTNF at escalating dose levels higher than the previously established maximum tolerated dose. Results of the dose escalation up to 325 μg/m 2 showed that NGR-hTNF can be safely administered by using a prolonged (2-hour) infusion time and a mild pre-medication with paracetamol. The trial plans to explore further dose escalation. Antivascular effects were registered by dynamic imaging (DCE-MRI) in 80% of patients. As previously recalled, in 2011 MolMed started two new randomised Phase II trials: a double-blind, placebo controlled trial as monotherapy for first line maintenance treatment in patients affected by malignant pleural mesothelioma who completed the pemetrexed-based chemotherapy (NGR019), and a trial in combination with pegylated liposomal doxorubicin in ovarian cancer refractory/resistant to prior platinum-baed regimens (NGR018). Moreover, recruitment progressed in a randomised Phase II trial (NGR016) for the treatment of soft tissue sarcomas, investigating the administration of NGRhTNF either as monotherapy or in combination with doxorubicin. In February 2011, the positive outcome of a Phase I trial (NGR004) in combination with cisplatin, leading the way to the ongoing randomised Phase II trial in non-small cell lung cancer, was published as a full paper by Clinical Cancer Research 9. 5 EMCC 2011, poster # 8030: ASCO 2011, poster # EMCC 2011, poster # 9103; ASCO 2011, poster # ASCO 2011, poster # EMCC 2011, oral presentation # 1205; ASCO 2011, poster # Gregorc V. et al, Clinical Cancer Research 2011; doi: / ccr Page 14

17 Posters and presentations of the results of NGR-hTNF clinical trials, as well as abstracts - or full-text in the case of open-source articles - of the key publications on NGR-hTNF are available on MolMed s website ( In terms of manufacturing, scale-up and formulation, NGR-hTNF is a fusion protein suited for industrial development; it is produced by recombinant DNA technology in the host bacterium Escherichia coli with a fermentation process. Manufacturing of the protein - representing the bulk drug substance, i.e., the active pharmaceutical ingredient, or API - and of the drug product in its final formulation are outsourced to external specialised CMOs. To date, a total of nine GMP batches of NGR-hTNF have been produced: seven batches of bulk drug substance were used for Phase I and Phase II trials, and the last two batches of bulk drug substane yielded two batches of drug product to cover Phase III trials. MolMed is currently working on further scale-up of the manufacturing process for commercial production of the drug, following the same outsourcing strategy. 3.3 Vascular/tumour targeting programme NGR-IFN NGR-hTNF is the first molecule resulting from MolMed s vascular/tumour targeting programme. A second compound issued from this programme, again formed by the combination of the NGR peptide with a cytokine, is NGR-IFN, associating NGR with the cytokine interferon-, now in preclinical development. Similarly to NGR-hTNF, NGR-IFN shows a targeted location on newly formed tumour blood vessels, mediated by interactions between the two moieties of the molecule - the NGR peptide and IFNγ - and both their receptors, CD13 and IFN-R, while no location on healthy tissues has been observed. In animal models, antitumor activity was observed in the absence of significant toxic effects, and especially an antitumour activity at low dose in mouse models of lymphoma, colon cancer and prostate cancer: in the latter, a prolonged survival was observed following multiple injections of NGR-IFN. New molecules In view of feeding MolMed s anticancer pipeline, the programme is currently carrying on the exploration of other possible targeting molecules, either to tumour blood vessels or to other tumour targets including cancer cells, and of effector molecules with strong anti-tumour activity. The programme plans to identify and validate targeting moieties and appropriate effector moieties to be conjugated or used in combination. So far, three new targeting molecules (targeting peptides) have been identified, characterised by specificity for vascular or tumour targets and high stability; moreover, some molecules with anti-tumour properties have been selected, including a class of kinase inhibitors. Page 15

18 4. DEVELOPMENT AND GMP PRODUCTION ACTIVITIES Over the years, MolMed has developed a specific expertise in the field of gene and cell therapy, including the use of stem cells for the treatment of different pathologies and tissues, positioning the Company among the leading players at international level. The area GMP Solutions provides tailormade services to third parties for cell and gene therapy projects, offering top-level expertise to develop, conduct and validate custom studies from preclinical to Phase III trials, devising innovative testing procedures and addressing the unique test specifications required for novel cell-based therapeutics. MolMed holds leading expertise in development, manufacturing and clinical trials of ex vivo cell and gene therapeutics, including scale-up and cgmp production of clinical-grade viral vectors, and manufacturing of patient-specific genetically engineered cells. In 2011 there were important achievents in this area, with the signature of two agreements for development and production of novel gene therapy treatments for seven rare genetic diseases, all caused by a single defective gene, thus making it possible to develop a potential cure by inserting the correct form of the gene into the patient s own stem cells derived from the bone marrow, through ex vivo gene transfer technology. In March 2011, MolMed signed an agreement with the Telethon Foundation to develop and manufacture novel gene therapy treatments for four more rare genetic diseases, in addition to pursuing the production of investigational gene therapies for the treatment of metachromatic leukodystrophy (MLD) and of Wiskott-Aldrich syndrome (WAS), started under a previous agreement. The four new diseases involved are beta-thalassemia, mucopolysaccharidosis type I (MPS I), globoid leukodystrophy (GLD) and chronic granulomatous disorder (CGD). Under the agreement, providing for MolMed up to 8.3 million in revenues over a 4-year period, MolMed will develop and produce clinical grade lentiviral vectors carrying the relevant therapeutic gene and manufacture patients cells to be investigated in clinical trials, already ongoing for MLD and WAS since In August 2011, MolMed signed an agreement with GlaxoSmithKline (GSK) to develop a retroviral vector-based production process for the investigational gene therapy of ADA-SCID, a severe form of immunodeficiency (the so-called bubble boy disease ). This gene therapy, which is in late stage clinical trials, has been developed by the San Raffaele Telethon Institute for Gene Therapy (HSR- TIGET) and was in-licensed by GSK for further development and commercialisation. The agreement is worth up to 5.5 million in revenues over a two-year period. These activities on behalf of Telethon and GSK are consolidating the Company's leadership in the field and is producing a significant increase in revenues, as well as providing new opportunities for innovative partnerships in the context of cell-based therapies. 4.1 Development Development activities, conducted by staff with high experience in the fields of cell biology, molecular biology and virology, involve design and optimisation of processes and analytical methods in order to transfer methods from the lab to GMP production. In this context, development projects currently include implementing a technology platform for the large-scale, semi-stable and stable production of lentiviral vectors. In 2011, new activities were started related to development of investigational gene therapy treatments: development activities for the production of lentiviral vectors to be used in clinical trials of gene therapy treatments for beta-thalassemia and mucopolysaccharidosis type I, as well as support activities for the GMP validation of such vectors. These activities were carried out under the new agreement with the Telethon Foundation; characterisation of two cell lines for the production of retroviral vectors to be used in manufacturing of ADA-SCID gene therapy, and development of analytical methods for GMP production of such vectors. These activities were carried on under the agreement with Glaxosmithkline. Page 16

19 Moreover, activities carried on in 2011 included pursuing projects ongoing since 2010: development of a stable packaging cell line prototype for the production of third-generation lentiviral vectors; development activities related to the production of lentiviral vectors to be used in clinical trials of gene therapy for MLD and WAS, and support to their GMP validation. These activities were carried on under the previous and the new agreement with the Telethon Foundation; scale-up of mesangioblast cell cultures for the subsequent GMP production phase, under the EU- FP7 co-funded project OPTISTEM; development and optimisation of the production process of lentiviral vectors for in vivo preclinical studies, under the EU-FP7 co-funded project PERSIST; development and optimisation of the production process of lentiviral vectors and transduction of haematopoietic stem cells for in vivo preclinical studies, under the EU-FP7 co-funded project CELL-PID. 4.2 GMP production MolMed has been granted the status of Drug Company by the Italian healthcare authority AIFA (Agenzia Italiana del Farmaco), and runs an in-house GMP facility authorised for the production of cell-based medicinal products used in clinical trials, and qualified to support all stages of drug development of cell-based therapies, including pivotal clinical trials. The facility - which includes six aseptic rooms, five production rooms, one quality control room, separate areas dedicated to fermentation and purification processes, and to research laboratories, having a total surface area of approximately 1,400 square meters - satisfies EMA and FDA requirements for the production of clinical-grade sterile investigational medicines. Besides manufacturing TK for its own Phase III trial, the facility also provides GMP production services in gene and cell therapy to third parties, representing a source of revenues. Provision of services is regulated by dedicated contracts that often include also the relevant regulatory support activities. Altogether, these service activities allow MolMed to optimise the use of its GMP facility, as well as building and maintaining strategic collaborations in the field of cell and gene therapy. In 2011, the following activities ongoing since 2010 were pursued: production of patient-specific transduced cells using lentiviral vectors for the investigational treatment of MLD and WAS, again under the mentioned agreement with the Telethon Foundation; production of cells for the investigational treatment of patients affected by Duchenne muscular dystrophy; service activities provided under several different agreements with the San Raffaele Foundation, including cell selection and manipulation, and manufacturing and release of clinical-grade lots of genetically modified patient-specific cells for use in cell- or gene therapy trials of rare diseases Quality Control services (sterility assays according to Pharmacopoeia). Page 17

20 5. IP PROTECTION ACTIVITIES In 2011, activities were focused on consolidating the intellectual property protection for TK and NGRhTNF, with the prosecution of patent applications in countries belonging to the major industrialised areas, as well as in important emerging markets. Regarding TK, in 2011 MolMed was granted two new European patents: a key composition of matter patent (EP ) covering a non-splicing variant of the gene forming the basis of TK, i.e. a variant that is transcribed in a stable and unmodifiable manner (see also chapter 3.1), and a patent (EP ) covering a closed system for the production of TK cells. Both patents afford protection until 2025 with the possibility of a 5-year term extension, and give right to market exclusivity in 29 designated countries within the European Patent Convention, including all major countries of the European Union, Switzerland and Turkey. Equivalent patent applications are pending in the United States, Japan and important emerging markets. With regard to NGR-hTNF, in 2011 the key patent on the molecule - already granted in Europe and the US - was granted in Japan. 6. BUSINESS DEVELOPMENT ACTIVITIES In 2011, the Business Development function focused its activities on exploring collaboration agreement opportunities - from co-development to out-licensing - for MolMed s investigational therapeutics TK and NGR-hTNF. Such activities were oriented along two action lines: on one hand there was an intensification of long-term relationships with major pharmaceutical companies, and on the other hand actions were taken to increase the visibility of MolMed to new potential partners. The first line led to a doubling, with respect to 2010, of one-to-one meetings aimed at evaluating opportunities to maximise Molmed s products value, while the second line resulted into presenting the company and its products and holding new one-to-one meetings at several international conferences devoted to partnering opportunities between biotech and pharmaceutical companies. The Business Development function also continued its contribution to the selection of providers for crucial activities linked to the development and forthcoming commercialisation of MolMed s investigational therapies, and performed analyses for their positioning in the competitive scenario. 7. COMMUNICATION AND INVESTOR RELATIONS ACTIVITIES In 2011, MolMed intensified contacts with investors and the financial community, with a particularly intense IR activity towards institutional investors, including two international road shows, in the US in June and in Switzerland in July. MolMed held company presentations at several international meetings, particularly in Europe and the US, aimed at bringing together public biotech companies and specialised investors. The presentations, some of which with live and replay audio webcast, were published on the home page of the Company s website. The Company held a live meeting with the financial community and the National press, organised in Milan on April 5, Page 18

21 8. ORGANISATION AND HUMAN RESOURCES MolMed s organisation structure in 2011 is reported here below. Chairman & Chief Executive Officer C. Bordignon General Manager Business & Administration M. Del Bue General Manager R&D and Operations G. Carganico Administration, Finance & Control Business Development & Investor Relations Special Projects Human Resources Legal Affairs & Corporate Governance Regulatory Affairs Quality Assurance & CMC Intellectual Property Information Technology Research & Development Clinical Development Operations Figure 6. Functional organisation flow chart at In the beginning of 2011, MolMed significantly strengthened its company organisation and top management team with the arrival of Germano Carganico to serve as General Manager responsible for Research & Development and Operations, in charge of coordinating the final development stages and registration of MolMed s investigational therapeutics, as well as their market launch. MolMed s staff at counted 88 employees and 11 project workers. MolMed is aware that staff members are a very important factor for the successful achievement of its target objectives. Respect, fair treatment, professional development, team work, continuous training and communication are key values for MolMed. In 2011, overall staff training activities were focused on deepening some aspects of the Model of organisation, management and control - pursuant to Legislative Decree 231/ adopted by MolMed (see also chapter 11.2), through a workshop on "Legislative Decree 231, 10 years after". The workshop training material was made available to MolMed staff through the Company intranet. The upgrading of skills through scientific and professional training programmes and opportunities (courses, seminars and other events) for specific roles and tasks, were pursued as usual. In particular, internal courses were organised to enhance skills in statistics-computer science and in project management. Page 19

22 9. RESEARCH & DEVELOPMENT GRANTS AND OTHER FINANCIAL SUPPORT As a R&D-based company, MolMed enjoys some benefits derived from funding schemes and other financial measures - at European, National or regional level - aimed at supporting and promoting innovation. MolMed is a strategic partner in four projects co-funded by the European Union under the Seventh Framework Programme of Research and Development (EU FP-7), with different international research teams. The projects, named PERSIST, OPTISTEM, ATTRACT and CELL-PID, do involve MolMed for development and manufacturing activities related to highly innovative investigational therapies, as well as for education, training and exchange activities involving highly qualified staff. Activities within these projects will continue throughout the forthcoming years: funding granted goes from 50% to 75% of incurred costs throughout the whole duration of the projects, for a total amount of Euro 1,948 million. At regional level, MolMed applied for a grant from the regional authority Regione Lombardia for a project called INNOPROTEGE - New manufacturing system of genetically modified cells for innovative therapies in the fields of oncology, infectious diseases and genetic diseases, under a call for process and service organisation innovation. The project was approved and funded under the regional Decree nr. 3432, and was awarded a contribution of Euro 322,000 over a 18-month period. Again at regional level, MolMed - together with two industrial partners - is carrying on another project approved for co-funding by the regional authority on 7 June 2010, under a Call for industrial research and experimental development activities in the priority thematic areas. The project is devoted to the development of an innovative automated manufacturing process for MolMed s cellbased therapy product TK (see also Chapter 3.1). The non-refundable grant awarded amounts to Euro 1,438 million, that will partially cover the R&D costs incurred for a period of 36 months: MolMed s share of the grant amounts to Euro 499,000. Page 20

23 10. CORPORATE GOVERNANCE MolMed adheres to the Code of Conduct of public companies set forth in March 2006 by the Corporate Governance Committee promoted by Borsa Italiana, as subsequently amended. In compliance with law requirements, MolMed publishes an annual Report on the company s Corporate Governance, providing information on ownership, on adherence to codes of conduct and on compliance with arising commitments, highlighting the choices of the Company regarding the application of the principles of self-discipline. The Report is available (in Italian) on MolMed s website ( as well as on the website of Borsa Italiana Direction and coordination activities MolMed s shareholders structure is such that no shareholder controls a majority of the votes or has enough votes to exercise dominant influence over the Company. There is no obligation to consolidate the statutory financial statements Implementing the Model of Organisation, Management and Control, following the Italian Legislative Decree 231/2001 According to the Legislative Decree 231/2001, entered into force on June 8, 2001, legal entities respond, by way of administrative responsibility, of crimes committed by Directors, officers or employees to the benefit or in advantage of the entity, unless it is demonstrated that, among other things, a Model of organisation, management and control adequate to prevent the commission of these crimes has been adopted and practically implemented. In 2007 MolMed approved the adoption of a Model of organisation, management and control for the prevention of crimes, and established a Supervisory Body characterised by the appropriate requirements of autonomy, independence and professionalism, and endowed with the powers of inspection and control of the Company s powers and functions as provided for by the Model itself. In 2011, in accordance with the Audit plan presented to the Board of Directors, the Supervisory Body pursued the assessment of the Operating procedures (forming Annex 6 to the Model) with the relevant heads of function; the assessment outcome will be reported by the Body to the Board of Directors in its usual half-year report. Furthermore, following the tutorial plan presented to the Board of Directors, the Supervisory Body prepared and delivered to Company staff a multiple choice questionnaire in order to assess the actual knowledge of the principles underlying Law 231 and identify any gaps to be filled by forthcoming training initiatives. An English translation for convenience of the public version of the Model is available on MolMed s website ( Transactions with related parties MolMed has adopted the new procedure for transactions with related parties, unanimously approved by the The Board of Directors on 11 November 2010 upon unanimous favourabel opinion expressed by the ad hoc Committee formed by the three independent directors. The procedure has been adopted by MolMed in order to implement the provisions of Consob (Resolution nr of March 12, 2010, as amended by Resolution nr of June 23, 2010), by which Consob issued the "Regulations containing provisions on transactions with related parties" pursuant to Article 2391-a of the civil code and Articles. 113-ter, 114, 115 and 154-ter of the consolidated text on finance ( TUF, i.e. Legislative Decree nr. 58 of 24 February 1998, n. 58), and taking into account the findings and the guidelines set forth in Consob Communication nr. DEM/ of 24 September Page 21

24 The procedure for transactions with related parties currently in force is available (in Italian) on MolMed s website ( For information on transactions with related parties, please the Notes to the statutory financial statements. Page 22

25 11. MAIN RISKS AND UNCERTAINTIES TO WHICH MOLMED IS EXPOSED 11.1 Risks associated with external factors Risks associated with products in the clinical development stage The Company has still not completed the development of its experimental products which are currently at the clinical testing stage, in particular TK and NGR-hTNF. In regard to the experimental products TK and NGR-hTNF, which have the largest revenue prospects, no guarantee can be provided that the Company will successfully complete Phase III of the clinical testing. The experimental products which are being developed by the Company could still prove to be ineffective or cause side effects during clinical trials and might not receive the necessary approvals from the competent authorities or may not obtain such approvals in good time for marketing the products. In addition, it might happen that the non-randomised studies of Phase II, which were successfully completed, do not provide the same positive results in subsequent stages of development. Moreover, clinical trials may be suspended at any time by the Company or its partners, or by the competent authorities in the interest of the patients health. Even after approval by the competent authorities, a product might prove to be unsafe or not have the envisaged effects (for example, side effects might emerge after the product is launched or the product s real effectiveness may be lower than that which emerged in the experimental stages), or, in any case, it might not be accepted by market operators (who might prefer rival products) or, generally, for other reasons which are beyond the Company s control, thus preventing the product s use on a wide scale or forcing its withdrawal from the market. The inability of the Company or its partners to achieve timely completion of the development programs and clinical trials for its products may materially and adversely affect MolMed s business, and its income, equity and/or financial position. Risks associated with strong competition The biotechnology and pharmaceutical products markets are characterised by significant competition. This is especially true in the field of oncology. The Company may face competition from pharmaceutical corporations and companies that have much greater financial resources and are able to take advantage of economies of scale, making possible more effective and timely development of their products. Because of their greater financial resources, this kind of competitors may also be better able to in-license new products and technologies than the Company. Moreover, the Company competes with companies of similar sise and operational features to sign outlicensing agreements or partnerships with other bio-pharmaceutical companies. In the future, these competitors might be able to develop safer, more effective or cheaper products than those developed by MolMed. In addition, these companies might be more effective at manufacturing and marketing their own products, due to the quality of their staff or that of their licensors and/or licensees. The level of competition in the reference market and the presence of well-structured and bigger competitors might therefore in the future cause a loss of market shares, with a negative impact on the Company s positioning as well as a fall in possible revenues and profits. Such circumstances might limit the Company s chances of competing on the market, with a possible impact on its income, equity and/or financial position. Risks associated with sector regulation The Company s activities are subject to strict regulation by Italian and European laws, and the Company is also subject to similar regulation in any country in which it may wish to test or commercialise its products. The Ministry of Health in Italy, the European Medicines Agency ( EMEA ) throughout Europe and the Food and Drug Administration ( FDA ) in the United States, plus similar institutions in other countries, impose detailed restrictions on the production and commercialisation of therapeutic products, all of which, together with the complex, time-consuming authorisation Page 23

26 procedures, may cause significant delays, both in the start-up of the Company s planned or future trials, and in the commercialisation of the Company s products. Moreover, even if the commercialisation of a product in a particular country is authorised, there can be no certainty that the product will be authorised in other countries, with the subsequent need for further testing which might entail the use of further significant resources. In addition, the subsequent discovery of previously unknown problems or failure to comply with the applicable legal requirements, might lead to restrictions on the commercialisation of the products, the withdrawal of their authorisations or their withdrawal from the market, as well as the application of possible sanctions. Furthermore, regulatory systems are subject to change, and the evolution of current regulations may cause a lengthening of the procedures for production and/or testing, with concomitant cost increases for the Company. The occurrence of these circumstances could impact the Company s business and its income, equity and/or financial position Strategic and operating risks Risks associated with research, clinical and preclinical trials, and production The Company undertakes research, preclinical and clinical trials on its products as well as manufacturing both directly and through third parties on the basis of cooperation agreements (with entities, institutions and companies operating in the medical biotechnology industry). The Company s strategy therefore envisages maintaining and, in the future, signing other cooperation agreements for the development of these products with third parties in order to undertake the necessary clinical trials and the possible subsequent manufacture of the drug. In addition, despite the fact that there are numerous companies specializing in the sector and that the Company is not contractually related to any of them, it may happen that third parties engaged to undertake research and preclinical and clinical trials as well as manufacture on behalf of the Company do not fulfill their obligations in whole or in part or in an appropriate manner or are not capable of undertaking the trials in compliance with the deadlines envisaged or the quality standards requested by the Company. Such circumstances could cause delays in completing the preclinical and clinical trials or even make it necessary to replace the third party that has been engaged. The occurrence of such circumstances could impact the Company s business and its income, equity and/or financial position. Risks related to the protection of intellectual property rights and dependence on industrial secrets MolMed is highly committed to protect its intellectual property and actively seeks to protect its inventions through patents on an international basis, when appropriate. In addition to the patents, MolMed also actively protects its industrial secrets, including those relating to manufacturing processes for biologically active products. The effectiveness of this policy is essential for the success of the Company s business. In this regard, it should be noted that it is impossible to guarantee that the Company is able to develop new products or processes with patentable features, or that currently pending or future patent requests will be accepted, or that the patents held by the Company are not challenged or considered invalid, or, finally, that the Company manages to obtain, at market conditions, the right to use third-party patents which are necessary to carry out its business. In addition, the right to exclusivity guaranteed by the patent might not be sufficiently extended either in terms of scope or geographical area, and/or its duration might not be sufficient for its adequate exploitation. Moreover, patent requests for new inventions are not usually published for 18 months from the filing date; therefore, it is impossible to rule out the possibility that the invention covered by the patent request may have already been developed by others who, having filed the patent request first, can validly demonstrate that they have created such invention. In addition, the Company relies on proprietary and non-patented technologies, processes, know-how and data considered industrial secrets and protected under confidentiality agreements with its employees, consultants and certain contract counterparties, including third-party manufacturers. In this regard, it should be noted that it is not possible to guarantee: (i) that such agreements or means Page 24

27 of protection of industrial secrets will, in fact, provide adequate protection, or that such agreements will not be breached; (ii) that the Company would obtain effective remedies in the case of any such breach; or (iii) that the industrial secrets of the Company will not become publicly known or otherwise be developed by competitors. Finally, it should be noted that the protection of intellectual or industrial property rights or rights to exclusivity is normally very complex and often leads to legal issues relating to the ownership of such rights. For this reason, in carrying out its commercial and research and development activities, the Company could in the future be involved in disputes relating to violations of third-party intellectual or industrial property rights, or could be forced to take legal action against third parties to protect its own rights. Any claims and/or disputes for violation of rights regarding patents and/or other intellectual or industrial property rights whether they are initiated by the Company or taken against it could entail significant legal costs, impose limitations or a ban on the use of the products which are involved in any dispute and/or lead to payment of milestones and royalties for their commercialisation. The occurrence of such circumstances could impact the Company s business and its income, equity and/or financial position. Risks connected to license and supply agreements As part of its operations the Company has signed licenses with several companies (including biotechnology and pharmaceutical companies, universities and research institutes) to acquire rights over a range of technologies, patents and manufacturing and supply processes for the development and future commercialisation of its own products as well as for the purchase of equipment for its own research and business activities. MolMed s inability to maintain the contractual conditions in force and/or to sign new license and/or supply agreements on acceptable terms for the Company, as well as the inability of suppliers to provide MolMed with the material needed for the Company s research and business, could have a negative impact in the future on its business and income, equity and/or financial position. Risks related to reliance on key personnel The Company heavily depends on the professional contribution of key scientific and managerial staff and, especially, on the Chairman and Chief Executive Officer, Claudio Bordignon, and the Director and General Manager, Marina Del Bue, both of whom have made an essential contribution to the Company s growth and to the development of its strategies. Were MolMed to lose any of the key personnel, there can be no assurance that the Company would be able to promptly find adequate substitutes with the same operational and professional skills. In addition, the development and future commercialisation of new products will largely depend on the Company s ability to attract and maintain its qualified scientific staff and other senior personnel, also in light of the intense recruitment competition by biotech and pharmaceutical companies, universities and research institutes. The Company s ongoing expansion in areas and activities which require greater know-how, for example in commercial development and marketing, will, moreover, make it necessary to recruit managerial and technical staff with a range of competences. The loss of any of the Company s key personnel, or the Company s failure to recruit, successfully integrate or retain qualified scientific staff or other senior personnel, would have a materially adverse effect on its business and its income, equity and/or financial position. Risks related to the GMP manufacturing facility and the laboratories MolMed owns a GMP manufacturing facility formally authorised by AIFA, the Italian pharmaceutical industry regulator, for the production of genetically modified cell-based medicinal products for use in clinical trials. Besides providing TK therapy for its own clinical trials, MolMed makes its GMP facility available to selected customers or partners for cell therapy services. In addition, MolMed undertakes research and development in its own laboratories. This facility is subject to operating risks, such as breakdowns or delays in manufacturing processes, or malfunctions of machinery, technical errors, delays in the supply of raw materials, strikes, natural Page 25

28 disasters, the risk of the authorisations being revoked, new regulatory measures or environmental regulation, including the risk that the facility be non-compliant with GMP regulations, that may paralyze the Company s research and development activities and the treatment of patients in clinical trials, and which may prevent MolMed from fulfilling its contractual obligations to its customers. In addition, although the Company has taken out relevant insurance, the negative impact of such events might not be fully covered by the policies that the Company has entered into or may exceed the indemnity limits. The occurrence of such circumstances could impact the Company s business and its income, equity and/or financial position. In addition, the Company s GMP facility is adequate for its current production needs and it is planned to develop a fully automated system for the production of TK cell therapy. However, should in the future the Company increase the number of products which are under development or should it be necessary to produce greater quantities of existing products, the facility production capacity might reach saturation point, with consequent possible delays in progressing clinical testing and/or in the time-to-market for its products. In this case, the Company might be required to invest to expand the facility and its manufacturing capacity, with a possible impact on the Company s business and its income, equity and/or financial position. Risks associated with civil liability related to the testing, manufacture and commercialisation of products The Company has never been involved in legal action for civil liability regarding its testing activities. Nonetheless, the Company is exposed to liability risks related to its current and future operations in the clinical testing, manufacture and commercialisation of therapeutic products for humans. Despite the fact that the Company has taken out specific insurance cover, in keeping with market practice and in compliance with the key legislation, with indemnity limits which are considered adequate for its testing activities, should the Company face legal proceedings, be liable for compensation, and be forced to incur damages exceeding the indemnity limits envisaged by its insurance cover, it could be required to directly cover the relevant costs. The Company signs specific contracts with the Italian and foreign clinical centers at which tests are carried out. Although the Company, in line with relevant law, has taken out insurance cover for the testing undertaken at these clinics, it is exposed to the risk of claims by the clinics and their insurers. In addition, contracts signed with clinics and testing facilities generally exclude liability for the Company should the clinical protocol not be complied with. However, should the clinical or testing facilities deviate from the clinical protocols, the Company could nonetheless be exposed to the risk of being involved in compensation suits and claims and be sentenced to pay compensation for any damage caused to third parties. The occurrence of these circumstances could impact the Company s business and its income, equity and/or financial position. Risks connected to the use of dangerous materials and the breaking of laws which protect environment and health In its research and development activities the Company uses dangerous materials and chemical and biological substances which require special disposal systems which must be set up in compliance with specific legislative and regulatory provisions on the environment and health and safety at workplaces. In this regard it should be noted that, although the safety procedures adopted by the Company for the handling and disposal of such materials are considered suitable to avoid or reduce the risks of accidental contamination or workplace injuries, it is impossible to rule out such events happening in the future and thus the Company being required to pay compensation for any damage caused as a consequence of its operations. The occurrence of these circumstances could impact the Company s business and its income, equity and/or financial position. Page 26

29 11.3 Financial risks Risks related to external financing to fund research and development activities The financial risk which the Company could be exposed to consists in the failure to find suitable financial resources to fund its operations. The Company envisages that over the coming years: (i) it will continue to complete the clinical development of its own main products for various treatments; (ii) it will select further products as clinical candidates for their subsequent development; (iii) it will invest in preclinical research or purchases of further technologies and products through licenses; (iv) it will further develop its production capacity; (v) it will significantly increase its investment (beyond current levels) due to the possible creation of its own commercial network and enlargement of its production capacity through the full automation of the production of TK cell therapy. In particular, the Company plans to intensify and extend its own activity and investment in research and development, in line with the success of preclinical and clinical trials for its own products. In oncology successful preclinical and clinical testing is intensified, often by enrolling more patients, and is extended to new therapeutic indications for the same product. In order to carry out these activities, the Company must have significant cash reserves. The Company has met its liquidity requirements from its incorporation up to the date of these Financial Statements through contributions from its shareholders, including through the listing on the screen-based equity market (Mercato Telematico Azionario), organized and managed by Borsa Italiana, which occurred on March 5, 2008, and the share capital increase which was completed on August 5, 2010 and which generated gross income of 57,864 thousand Euro. Although the financial position at the date of preparing these Financial Statements was such as to guarantee the Company adequate resources to continue its operations in the foreseeable future, nonetheless the possibility cannot be ruled out that in the future the Company may need, also before completing the clinical development of its products, further financial resources which may be obtained through risk capital or third party capital, or through the signing of further cooperation agreements, sponsored research or other means. In this regard, it should be noted that it is not possible to guarantee that further financing may be found or, if found, supplied on satisfactory terms for the Company. In particular, loan contracts might include obligations such as financial and non-financial covenants which could have the effect of limiting the Company s operational flexibility. Should adequate funds not be available, the Company s business could also be affected and it might be forced to delay, reorganize or cancel research and development programs, or to sign contracts for loans, licenses or cooperation on unfavorable terms or waive rights over particular products which it would not otherwise have waived. The occurrence of such circumstances could in future impact the Company s business and its income, equity and financial position. Interest rate risk and currency risk At December 31, 2011, the Company did not have significant exposure to currency fluctuation, because there was no significant receivable or payable balance in a currency other than the Euro, nor were there any financial instruments subject to currency risk. The Company has no significant financial payables or receivables. Interest-rate risk exclusively concerns financial instruments used to manage liquidity such as bank accounts, government bonds, corporate bonds, repurchase agreements and other short/medium term cash instruments. Further information on risk management is given in the Notes to which reference should be made. Page 27

30 12. OTHER INFORMATION 12.1 Own shares The Company does not own any of its issued shares, neither directly nor indirectly. During year 2011, the Company did not purchase or sell, either directly or indirectly, any of its issued shares Protection of sensitive data and information The protection of personal data and information collected and stored at MolMed - both electronically and using traditional methods - is of great importance to the Company. For this reason, MolMed has adopted a personal data protection system that meets the requirements of applicable regulations provided for in the Code on Personal Data Protection (Legislative Decree no. 196/2003). In 2011, the Company kept its intranet site up to date, in order to provide employees with access to the entire privacy protection system by means of this useful means of internal communication. This system also enables employees to keep abreast of data protection updates in real time. MolMed and its consultants also started an audit of some business processes that may imply the handling of sensitive information and related data streams. Following the outcome of this acitvity, in the next year a review of the documentation relating to the management of sensitive information will be carried out, along with a specific training programme for staff involved in this matter. It should be noted that in 2011 there were no omissions, actions or other situations that might have jeopardised the protection of anyone s personal data within the Company MolMed and the environment, health and safety in the workplace The facilities at which MolMed operates, as well as its production activities, must comply with stringent environmental regulations and work safety regulations. These regulations govern, among other things, air pollution emissions, the dumping of harmful substances into water, on the ground and underground; storage and disposal of waste and hazardous materials, and decontamination of contaminated sites. The Company has adopted procedures to ensure the safe handling and disposal of biological refuse, within the meaning of Italian Legislative Decrees No. 81/2008 and No. 206/01 regarding the use of genetically modified microorganisms ( GMMOs ). In this regard, the Company s laboratory space has been registered with, and authorisation for each use of a GMMO is obtained from, the Italian Ministry of Health. MolMed has laboratories in which Type-2 and Type-3 GMMOs can be used. All relevant personnel have received specialised training to minimise risks of biological contamination. With regard to chemical agents used by MolMed, the degree of risk presented by the Company s laboratories, within the meaning of Legislative Decree No. 81/2008, has been classified as low for safety purposes and not significant for health purposes, according to a specific risk assessment. MolMed has implemented industry-standard protective systems and procedures to protect its personnel. The Company also complies with Legislative Decree No. 152/06 regarding the disposal of infective and chemical waste and uses a specialised sub-contractor to assist with such disposals. The Company believes that it is carrying out its activities in full compliance with all environmental regulations and has obtained all the authorisations required by applicable law. It intends to operate in an environmentally responsible manner and identify methods aimed at improving the impact its activities have on the environment, with progressive reduction of use of natural resources, consistently with its economic, financial and investment management systems. There are no environmental issues that might affect the Company s use of its tangible assets. Page 28

31 12.4 Shares held by Directors, General Managers, Statutory Auditors and other executives with strategic responsibilities (art. 79 of Consob Regulations, Resolution n of May 14, 1999) Based on information received by MolMed at, and pursuant to Article 79 of Consob Issuers Regulation, the following shares in the Company are held by Directors, General Managers, Statutory Auditors or executives with strategic responsibilities, or by their spouses who are not legally separated, or by underage children, either directly or through a subsidiary company, a trust company or any other intermediary. Name Role Company in which stake is held Nr. of shares at 31/12/2010 Nr. of shares purchased or subscribed Nr. of shares sold Nr. of shares at 31/12/2011 Luigi Berlusconi Director MolMed S.p.A. 1, ,952 Marina Del Bue Director, General Manager MolMed S.p.A. 369, , ,169 Alessandro De Nicola Director MolMed S.p.A. 23, ,000 Alfredo Messina Director MolMed S.p.A. 400, ,000 Page 29

32 13. KEY ACHIEVEMENTS IN YEAR 2011 Research & Development activities In 2011, MolMed s activities were mainly focused on pursuing the clinical and industrial development of its investigational anticancer products, NGR-hTNF for the treatment of different types of solid tumours, and TK for the treatment of high-risk leukaemia. For NGR-hTNF, major progress included: international expansion of pivotal Phase III trial (NGR015) for the treatment of malignant pleural mesothelioma, with 24 centres participating in Europe (Italy, the UK, Ireland and Poland), the US, Canada and Egypt. 124 patients were enrolled at. The trial is expected to include more than 40 centres worldwide, with primary data analysis expected in 2013; promising interim data of a randomised Phase II trial in non-small cell lung cancer, in particular in the squamous cell variant, and recruitment of a larger patient population, in order to ensure the inclusion of an adequate number of patients with this histology; start of two new randomised Phase II trials: in ovarian cancer refractory/resistant to prior platinum-based treatment regimens and in mesothelioma as first line maintenance treatment. As regards ovarian cancer, the study was initiated following promising results obtained in a nonrandomised Phase II trial completed in Progress of recruitment in a randomised Phase II trial in soft tissue sarcomas. For TK, major progress included: expansion of pivotal Phase III trial (TK008) in Europe, with the inclusion of centres in Spain and Greece, and the FDA clearance to include US centres in the trial. 7 centres were involved as of 31 December Due to additional and higher than expected regulatory requirements in some EU countries, which have delayed patient enrolment, MolMed plans to include additional centres besides the 15 centres originally planned in an effort to compensate this delay. Primary data analysis is expected in 2013; new long-term data on the clinical benefit following treatment with TK: patients treated (including the first patients enrolled in the Phase III trial) show rapid post-transplant restoration of a fully functional immune system by effect of TK cells; grant of a key European patent on a proprietary modified form of the TK gene (EP ) providing IP protection in 29 countries belonging to the European Patent Convention until 2025, with the possibility of a further 5-year extension of market exclusivity. Development and GMP production for third parties Over the years, MolMed has developed specific expertise in the field of gene and cell therapy, including the use of stem cells for the treatment of different pathologies, positioning the Company among the leading players at international level. In 2011, MolMed concluded two new agreements for the development and GMP production of gene therapy treatments for third parties: with GlaxoSmithKline (GSK), to develop a production process, based on a retroviral vector, for the investigational gene therapy of a severe form of immunodeficiency (ADA-SCID, the so-called bubble boy disease ), worth up to 5.5 million in revenues over a 2-year period; with Telethon Foundation, to develop and manufacture novel investigational gene therapy treatments for six rare genetic diseases (metachromatic leukodystrophy, Wiskott-Aldrich syndrome, beta-thalassemia, mucopolysaccharidosis type I, globoid leukodystrophy and chronic granulomatous disorder), worth up to 8.3 million in revenues over a 4-year period. Company organisation In January 2011, MolMed significantly strengthened its top management and company organisation with Germano Carganico joining as General Manager responsible for Research & Development and Operations, in order to provide the Company with the expertise necessary for the final development stages and registration of MolMed s investigational therapeutics. Page 30

33 14. ECONOMIC AND FINANCIAL DATA 14.1 Income statement data (amounts in thousands of Euro) Change % change Revenues ,0% Other income ,4% Total operating revenues ,7% Purchases of raw materials and consumables (2.863) (1.339) (1.524) 113,8% Costs for services (12.983) (9.092) (3.891) 42,8% Costs for use of third-party assets (1.018) (991) (27) 2,7% Personnel costs (7.988) (7.628) (360) 4,7% Other operating costs (139) (165) 26 (15,8%) Amortization, depreciation and write-downs (1.107) (1.209) 102 (8,5%) Total operating costs (26.098) (20.424) (5.673) 27,8% Operating result (22.680) (17.748) (4.931) 27,8% Financial income ,0% Financial charges (293) (339) 46 (13,6%) Net financial income (charges) ,3% Pre-tax result (21.569) (17.582) (3.987) 22,7% Income taxes Profit (loss) for the year (21.569) (17.582) (3.987) 22,7% Operating revenues Operating revenues in FY 2011 increased by 27.7%, from Euro 2.7 million to Euro 3.4 million. In particular, revenues generated from the intensification of development and GMP production activities on behalf of third parties increased by 69.4%, from Euro 1.6 million in 2010 to Euro 2.7 million in 2011, as a result of the agreements with Telethon Foundation and GSK. Other development and production activities carried out in collaboration with external institutions are covered by cofunding grants, and generated in 2011 other income for Euro 651 thousand, an increase compared to For further details reference should be made to the Notes. Operating costs In 2011, operating costs totalled Euro 26.1 million. The expected increase (up 27.8%) compared to 2010 is linked to a particular concentration of costs related to the progress of clinical trials of NGRhTNF and its industrial manufacturing process, and to the above mentioned intensification of development and GMP production activities on behalf of third parties. In particular, the rise in costs for raw materials and consumable materials, which largely consist of materials and reagents used in R&D activities, was primarily linked to the development of NGR-hTNF. In 2011 such costs totalled Euro 2.9 million, up 113.8% compared to Costs for external activities increased by 42.8% compared to This increase is due to a rise of external costs for development and consultancy services linked to the industrial manufacturing process of NGR-hTNF, as well as to the expansion of clinical trials of NGR-hTNF and TK. Costs for the use of third-party assets totalled Euro 1.0 million in 2011, with no significant variation compared to These costs essentially include the rental costs of premises housing MolMed s headquarters in Milan and its secondary offices in Segrate. Page 31

34 Personnel costs in 2011 grew by 4.7% compared to 2010, from Euro 7.6 million to Euro 8.0 million. This rise is due to an increase in the number of employees in R&D and Operations, needed to meet the escalation of development and production activities. Other operating costs totalled Euro 139 thousand in 2011, with no significant variation compared to Amortisation and depreciation for FY 2011 totalled Euro 1.1 million, down by Euro 102 thousand compared to FY 2010, due to the completion in 2010 of the amortisation of some assets. Investments made during FY 2011 totalled Euro 314 thousand, and were largely due to routine renewal of laboratory equipment and purchase of new devices for use in production processes. Operating result The operating result for 2011 was negative for Euro 22.7 million. The expected increase in operating loss, up 27.8% compared to 2010, is due to the expected increase in operating costs resulting from the intensification of development activities for MolMed s investigational therapeutics. Net financial income (charges) The financial income derives from the management of financial resources through temporary, lowrisk investments. The increase recorded in 2011 was linked to the investment of the financial resources obtained through the share capital increase completed in August The trend in financial charges reflects the transfer to the Income Statement of Euro 106 thousand from the fair value reserve recorded at 31 December 2010, following the maturity and sale of some securities. Profit (loss) for the year The bottom-line result for 2011 shows a loss of Euro 21.6 million, compared to a loss of Euro 17.6 million in Page 32

35 14.2 Equity and financial results The following table shows the Company s equity and financial results as reclassified based on sources and uses of funds. (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Non-current assets Fixed assets and other non-current assets Total non-current assets Net working capital Inventories Trade receivables and other commercial assets Tax receivables Other receivables and current assets Trade payables (6.884) (4.488) Other liabilities (1.372) (1.656) Total net working capital (1.334) (2.248) Non-current liabilities Other non-current liabilities (1.150) (1.058) Total non-current liabilities (1.150) (1.058) TOTAL USES Shareholders' equity Net financial position TOTAL SOURCES Non-current assets Non-current assets at December 31, 2011 and December 31, 2010 are analyzed in the following table: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Change % change Tangible assets (390) (22,7%) Goodwill ,0% Intangible assets (375) (49,4%) Financial assets (1) (7,7%) Tax receivables ,1% Other assets (516) (24,0%) Total non-current assets (1.029) (10,6%) Non-current assets amounted to 8,642 thousand Euro at December 31, 2011, and are predominantly composed of tax receivables. The latter include VAT receivables of 2,521 thousand Euro for which refunds were requested for 2009 and 2010, and VAT receivables of 2,625 thousand for which refunds have not yet been requested. It should be noted that, under the item Other assets, non-current assets consist of the amount relating to the consideration agreed to under the option agreement for the purchase of research projects entered into with the shareholder Science Park Raf S.p.A. and its parent company Fondazione Centro San Raffaele del Monte Tabor. Under this option agreement, the Company is entitled to purchase from the contracting parties the research projects they conduct in the field of gene and molecular therapies for cancer and AIDS. The validity of the option agreement, for which net consideration of 4,131 thousand Euro was to be paid, was subject to the precondition of Page 33

36 admission of the Company s shares to trading on a regulated market, which occurred on March 5, The agreement is valid for eight years after this date, with the possibility of renewal every four years. Reference should be made to the Notes for the accounting treatment of this agreement. The other changes that occurred to non-current assets in the period are mainly connected to the decrease in tangible and intangible assets resulting from the fact that investments in the period did not exceed the value of amortization and depreciation. Net working capital The following table provides an analysis of net working capital at December 31, 2011 and at December 31, 2010: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Change % change Inventories ,7% Trade receivables and other commercial assets ,8% Tax receivables ,3% Other receivables and current assets ,6% Trade payables (6.884) (4.488) (2.396) 53,4% Other liabilities (1.372) (1.656) 284 (17,1%) Total net working capital (1.334) (2.248) 914 (40,7%) Net working capital at December 31, 2011 was mainly influenced by the increase in trade payables, more than offset by the increase in trade receivables. Changes in trade receivables and payables reflect trends in invoicing and payment of goods and services. Non-current liabilities The following table contains details of the items included in non-current liabilities: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Change % change Liabilities for pensions and employee severance indemnity (TFR) (29) (15,7%) Other liabilities ,9% Total non-current liabilities ,7% Non-current liabilities, which rose from 1,058 thousand Euro at December 31, 2010 to 1,150 thousand Euro at December 31, 2011, reported an increase mainly in relation to the item Other liabilities following an advance received on a project financed under the Seventh Framework Programme of the European Union. Shareholders equity and capital transactions Details about changes in shareholders equity are provided in the Notes. Investments The Company s main investments during 2011 were largely due to the regular replacement of laboratory equipment and the purchase of new machinery to be used in manufacturing processes. Page 34

37 Net financial position The net financial position decreased from 60,040 thousand Euro at December 31, 2010 to 38,667 thousand Euro at December 31, 2011, due to the absorption of financial resources by the Company s ordinary operations. (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Cash on hand 12 8 Other cash Cash equivalents A. Total cash and cash equivalents B. Current financial receivables and other financial assets Finance lease payables (111) (98) C. Current financial debt (111) (98) D. Net current financial position (A+B+C) Finance lease payables (125) (235) E. Non-current financial debt (125) (235) F. Net financial position (D+E) The net financial position at totalled Euro 38.7 million, and included cash on hand for Euro 12 thousand, other cash for Euro 3.3 million and cash equivalents (time deposit) for Euro 17.9 million. The net financial position also included investment in current assets for Euro 17.7 million, net of Euro 236 thousand for lease payables connected with lease contracts for laboratory equipment. Taking into account changes in current financial receivables and other financial assets (items A+B of the above table), cash absorbed in the year amounted to 21,470 thousand Euro (on average 1,789 thousand Euro per month), and was entirely due to flows linked to the Company s ordinary operations. Page 35

38 15. OUTLOOK 15.1 Significant events subsequent to the end of fiscal year 2011 There have been no significant events subsequent to the end of fiscal year 2011 other than those already described in the chapters of this Report on Operations Business outlook In 2012, MolMed will maintain its focus on advancing the development of its investigational therapies NGR-hTNF and TK, while also providing strategic services for gene therapy treatments. MolMed expects in particular to: further advance the clinical development of NGR-hTNF, with the presentation of new clinical data on ongoing Phase II trials relevant for the selection of the indication for the next Phase III trial; expand the Phase III trial of TK in the United States and in other European countries; further increase revenues from development and GMP production activities of gene therapy treatments, by building on the important recognition of our know-how in gene therapy with the agreements signed in 2011 with Telethon and GSK; maintain a strict control of expenses in order to keep its expected burn rate in line with the 2011 level. 16. PROPOSED ALLOCATION OF THE LOSS FOR THE YEAR MolMed Statutory Financial Statements, as explained in this Report on Operations and in the Notes, report a loss for year 2011 of 21,569 thousand Euro. We propose to cover the loss by using: part of the share premium reserve to cover 20,695 thousand Euro. retained earnings, generated following the exercise, revocation and expiration of stock options that occurred during 2011, to cover 874 thousand Euro. [Signed by] Claudio Bordignon Chairman of the Board of Directors Chief Executive Officer Page 36

39 Financial Statements at December 31, STATEMENT OF FINANCIAL POSITION (amounts in thousands of Euro) Notes December 31, 2011 December 31, 2010 ASSETS Tangible assets Goodwill Intangible assets Financial assets Tax receivables Other assets TOTAL NON-CURRENT ASSETS Inventories Trade receivables and other commercial assets Tax receivables Other receivables and sundry assets Other financial assets Cash and cash equivalents TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Capital Share premium reserve Other reserves Retained earnings (accumulated losses) Profit (loss) for the year (21.569) (17.582) TOTAL SHAREHOLDERS' EQUITY Liabilities for pensions and employee severance indemnity (TFR) Trade payables Finance lease payables Other liabilities TOTAL NON-CURRENT LIABILITIES Trade payables Other liabilities Finance lease payables TOTAL CURRENT LIABILITIES TOTAL LIABILITIES & SHAREHOLDERS' EQUITY Page 37

40 2. INCOME STATEMENT (amounts in thousands of Euro) Notes Revenues Other income Total operating revenues Purchases of raw materials and consumables 21 (2.863) (1.339) Costs for services 22 (12.983) (9.092) Costs for use of third-party assets 23 (1.018) (991) Personnel costs 24 (7.988) (7.628) Other operating costs 25 (139) (165) Amortization, depreciation and write-downs 26 (1.107) (1.209) Total operating costs (26.098) (20.424) Operating result (22.680) (17.748) Financial income Financial charges (293) (339) Net financial income (charges) Pre-tax result (21.569) (17.582) Income taxes Profit (loss) for the year (21.569) (17.582) (amounts in Euro) Notes Basic earnings (loss) per share 29 (0,1025) (0,1144) Diluted earnings (loss) per share - - Page 38

41 3. STATEMENT OF COMPREHENSIVE INCOME (amounts in thousands of Euro) Notes Profit (loss) for the year (21.569) (17.582) Other comprehensive income (loss) Net change in fair value of available-for-sale assets Tax effect relating to components of other comprehensive income (loss) 12 (183) Other comprehensive income (loss), net of taxes (183) 3 Total comprehensive income (loss) for the year (21.752) (17.579) Page 39

42 4. STATEMENT OF CASH FLOW (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Cash and cash equivalents Opening cash and cash equivalents A Cash flow from operating activities: Profit (loss) for the year (21.569) (17.582) Amortization/Depreciation of intangible/tangible assets Bad debt provision (*) 28 - Change in liabilities for pensions and employee severance indemnity (29) (35) Non-cash costs for stock options Decrease in other assets due to option rights (*) Reversal of financial income and charges (1.111) (166) Cash flow from operating activities before changes in working capital (20.983) (15.468) Changes in current assets and liabilities (Increase) decrease in inventories (16) (40) (Increase) decrease in trade and other receivables (*) (2.982) Increase (decrease) in trade and other payables (*) Increase (decrease) in other liabilities (284) 396 Total changes in current assets and liabilities (886) (Increase) decrease in non-current tax receivables (253) (1.382) Increase (decrease) in non-current trade payables - (38) Increase (decrease) in other liabilities Interest paid (86) (100) Taxes paid - - Total cash flow generated (absorbed) by operating activities B (22.087) (14.240) Cash flow from investing activities Net (investment) divestment in tangible assets (224) (215) Net (investment) divestment in intangible assets (90) (96) Net (investment) in other financial assets (5.985) (28.519) Net divestment in other financial assets Interest received Total cash flow generated (absorbed) by investing activities C (7.818) Cash flow from financing activities Increases in capital and share premium reserve Capital increase - other reserves - 19 Other changes in shareholders' equity - deduction of listing costs - (3.562) Change in finance lease payables (97) (87) Total cash flow generated (absorbed) by financing activities D (28) Cash flow generated (absorbed) during the year E=B+C+D (15.754) Closing cash and cash equivalents A+E (*) of which with related parties (as required by Consob Resolution no of July 27, 2006) (amounts in thousands of Euro) December 31, 2011 December 31, 2010 (Increase) decrease in trade and other receivables Bad debt provision 28 - (Increase) decrease in other non-current assets (Increase) decrease in other financial assets - (5.229) Increase (decrease) in trade and other payables (643) (343) Page 40

43 5. STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY (amounts in thousands of Euro) Capital Share premium reserves Other reserves Stock option plan reserve Actuarial valuation reserve Fair value valuation reserve Retained earnings (accumulated losses) Profit (loss) for the year Total shareholders' equity Balance at January 1, (6.322) (17.446) Allocation of prior year result - (23.768) Subscription of stock options (194) Personnel costs for stock options Profit (loss) for the year (163) - (17.169) (17.332) Balance at December 31, (156) 194 (17.169) (amounts in thousands of Euro) Capital Share premium reserves Other reserves Stock option plan reserve Actuarial valuation reserve Fair value valuation reserve Retained earnings (accumulated losses) Profit (loss) for the year Total shareholders' equity Balance at January 1, (156) 194 (17.169) Allocation of prior year result - (17.169) Capital increase Deduction of capital increase costs - (3.562) (3.562) Subscription of stock options (525) Personnel costs for stock options Other changes (21) Profit (loss) for the year (17.582) (17.579) Balance at December 31, (153) 740 (17.582) (amounts in thousands of Euro) Capital Share premium reserves Other reserves Stock option plan reserve Actuarial valuation reserve Fair value valuation reserve Retained earnings (accumulated losses) Profit (loss) for the year Total shareholders' equity Balance at January 1, (153) 740 (17.582) Allocation of prior year result - (16.823) (19) (740) Subscription of stock options (122) Personnel costs for stock options Other changes - expiration of 2008 stock options plan (839) Other changes - expiration of stock options plans (439) Profit (loss) for the year (183) - (21.569) (21.752) Balance at December 31, (336) (21.569) Page 41

44 6. STATEMENT OF FINANCIAL POSITION PURSUANT TO CONSOB RESOLUTION NO OF JULY 27, 2006 (amounts in thousands of Euro) Notes December 31, 2011 December 31, 2010 ASSETS Tangible assets Goodwill Intangible assets Financial assets Tax receivables Other assets of which with related parties TOTAL NON-CURRENT ASSETS Inventories Trade receivables and other commercial assets of which with related parties Tax receivables Other receivables and sundry assets of which with related parties Other financial assets of which with related parties Cash and cash equivalents of which with related parties TOTAL CURRENT ASSETS TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY Capital Share premium reserve Other reserves Retained earnings (accumulated losses) Profit (loss) for the year (21.569) (17.582) TOTAL SHAREHOLDERS' EQUITY Liabilities for pensions and employee severance indemnity (TFR) Trade payables Finance lease payables Other liabilities TOTAL NON-CURRENT LIABILITIES Trade payables of which with related parties Other liabilities Finance lease payables TOTAL CURRENT LIABILITIES TOTAL LIABILITIES & SHAREHOLDERS' EQUITY Page 42

45 7. INCOME STATEMENT PURSUANT TO CONSOB RESOLUTION NO OF JULY 27, 2006 (amounts in thousands of Euro) Notes Revenues of which with related parties Other income of which with related parties Total operating revenues Purchases of raw materials and consumables 21 (2.863) (1.339) Costs for services 22 (12.983) (9.092) of which with related parties 33 (1.073) (1.291) Costs for use of third-party assets 23 (1.018) (991) of which with related parties 33 (810) (793) Personnel costs 24 (7.988) (7.628) of which with related parties 33 (24) - Other operating costs 25 (139) (165) Amortization, depreciation and write-downs 26 (1.107) (1.209) of which with related parties 26 (28) - Total operating costs (26.098) (20.424) Operating result (22.680) (17.748) Financial income of which with related parties Financial charges (293) (339) of which with related parties 33 (8) (23) Net financial income (charges) Pre-tax result (21.569) (17.582) Income taxes Profit (loss) for the year (21.569) (17.582) Page 43

46 Notes 1. GENERAL INFORMATION MolMed s Financial Statements have been prepared in accordance with the International Accounting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and approved by the European Union, as well as the provisions issued pursuant to art. 9 of Legislative Decree 38/2005. IFRS is also intended as including the International Accounting Standards (IAS) currently in force, as well as all the interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ), previously known as the Standing Interpretations Committee ( SIC ). The Financial Statements formats have been prepared on the basis of the revised version of IAS 1 Presentation of Financial Statements, as approved by Regulation no. 1274/2008 issued by the European Commission on 17 December 2008 and effective as from January 1, The financial statement formats adopted are consistent with those indicated in IAS 1. In particular, the Statement of Financial Position has been prepared by classifying assets and liabilities into current and non-current; the Income Statement has been prepared by classifying operating expenses by nature of expense, since this form of presentation is considered more appropriate and representative of the Company s specific business. This type of presentation is considered representative of the Company s business. The Statement of Cash Flows has been prepared showing the financial flows using the indirect method, as indicated by IAS 7. In the Statement of Cash Flows, in order to provide a better representation of cash flows, some reclassifications have been made to the comparative figures. In compliance with the requirements of Consob Resolution no of July 27, 2006 as to the format of the Financial Statements, specific supplementary formats have been provided for related party transactions so as not to compromise an overall reading of the statements. The Financial statements are in thousands of Euro, unless otherwise indicated. The Euro is the Company s functional currency. Page 44

47 2. ACCOUNTING PRINCIPLES AND VALUATION POLICIES General principles The Financial Statements have been prepared under the historical cost convention, modified as required for the valuation of certain financial instruments, as well as on the going concern assumption. Going concern MolMed s operating results are due to the business model peculiar to biotech companies which are developing new biopharmaceutical products and have no products on the market. At this stage, costs are high, linked to the clinical and pharmaceutical development of new drugs, return of which is expected in forthcoming years. In keeping with the accounting arrangements adopted, which envisage the complete recognition of research and development costs in the Income Statement in the year they are incurred, since its incorporation the Company has always reported losses. Consequently, 2011 saw a loss of 21,569 thousand Euro, an increase compared to the previous year loss of 17,582 thousand Euro due to the intensification of the research and development activities. The Company is subject to some uncertainties related to the sector in which it operates and to current product testing, regarding both the results that it may effectively achieve and the means and timeframes in which these results may come to fruition. The business plans envisage that in coming years the Company will continue its research and development activities, the results of which currently seem promising, with consequent operating results that will continue to be negative until the commercialization or licensing of one of its products. The Company, on the basis of an analysis of the future cash flows envisaged by the business plans, considers that the financial resources available will enable the Company to continue developing its product portfolio and other research and development work, as well as improving business opportunities and the Company s overall operations, thus ensuring adequate resources to continue the Company s operations in the foreseeable future of at least 12 months from the date of the approval of the financial statements. Having taken into account the above considerations, it is believed that there is no significant doubt, as defined by paragraphs 25 and 26 of IAS 1, about the Company s continuity. Hence these Financial Statements were prepared on a going concern basis. About risks and uncertainties to which MolMed is exposed, reference should be made to the specific paragraph of the Report on Operations. The accounting principles adopted are set out below. Business combinations Acquisitions of subsidiary companies are accounted for under the acquisition method. The acquisition cost is determined based on the sum of fair values, at the transaction date, of the assets acquired, the liabilities incurred or taken on and the financial instruments issued by the Company in exchange for control of the business acquired, plus costs directly attributable to the combination. The assets, liabilities and identifiable contingent liabilities of the business acquired that respect the recognition criteria of IFRS 3 are recorded at their value at the acquisition date, except for noncurrent assets (or groups of assets to be divested) which are recorded and evaluated at the lower of book value and fair value net of selling costs. The cost of a business combination is, therefore, allocated by recognizing at the acquisition date the fair value of assets, liabilities and contingent liabilities which can be identified upon acquisition. The Page 45

48 positive difference between the acquisition cost and the fair value of assets, liabilities and contingent liabilities which can be identified upon acquisition is recorded under assets as goodwill. Should the difference be negative, it is directly recorded in the Income Statement. Goodwill deriving from acquisition is initially recorded at cost and is subsequently reduced only for impairment losses. In accordance with IAS 36 (Impairment of assets), goodwill is tested for impairment annually, or more frequently, if specific events or changes in circumstances indicate that it may be impaired. However, impairment losses of goodwill are not reversed when the underlying assumptions no longer exist. For additional details, please refer to the Impairment paragraph, reported below. In the context of IFRS first-time adoption, the Company in compliance with IFRS 1 elected not to apply IFRS 3 retrospectively to those business combinations which had arisen before January 1, As a consequence, goodwill on acquisitions before that date has been retained (except for possible effects arising from the application of the new accounting standards) at the previous Italian GAAP amounts, after being tested for recoverability. This exemption was applied with regard to the acquisition of 100% of research company Genera S.p.A. in December 2001, followed by its merger into MolMed S.p.A. with effect from May 2, Impairment Intangible assets with an indefinite useful life (goodwill) are tested annually or more frequently if specific factors indicate that the goodwill may be impaired. Tangible and intangible assets are tested when indicators of impairment exist. If indicators of impairment exist, the recoverable amount of these assets is estimated to determine the amount of the write-down. When it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount of an asset is the higher of the fair value, less costs to sell, and its value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value, using a pre-tax discount rate that reflects current assessments of market, time value of money and risks specific to the asset. An impairment loss is recognized in the Income Statement when the recoverable amount of an asset or of a cash-generating unit is lower than the carrying amount. When indicators of impairment loss for assets other than goodwill cease to exist, the carrying amount of the asset or the cash-generating unit is increased to the revised estimate of its recoverable amount, but never in excess of the carrying amount that would have been recorded had no impairment loss been recognized. A reversal of an impairment loss is recognized in profit or loss. In drawing up the Financial Statements at December 31, 2011, and specifically in carrying out impairment tests for tangible and intangible assets, the recoverable value is calculated on the basis of expected cash flows and under the following assumptions: use of post-tax cash flows deducted from the plans drawn up by the management; use of discount rates that refer to the WACC (Weighted Average Cost of Capital), with a free risk rate of 5.41%, a premium risk of 7.50% and a Beta coefficient of 1.8; assessment of the probability of success during Phase III studies of products in the pipeline, based on studies in the sector and doctrine. In determining the period for projected financial flows, consideration was given to the MolMed business model, which is typical of biotech companies that are engaged in the development of new biopharmaceutical products and do not yet have any products out on the market. During this phase, massive costs are incurred, due primarily to testing and product development activities, with economic return seen in future years. Therefore, a period of more than 5 years was chosen, in order to take into account the positive financial effects of the introduction and distribution of the Company s products on the market, up to the point where they become mature, based on the penetration curves in their sector. It should also be noted that no terminal value has been calculated. Page 46

49 For the purposes of the impairment test, therefore, use was made of the approved three-year plans, under the best possible forecasts drawn up by the management, in order to take into account, under a variety of prudential assumptions, the effects of the future market launches of the products currently under development. The sensitivity of the results was also analyzed, based on scenarios that take into consideration reductions in the probability of success for Phase II and III trials of products in the pipeline, considered to be a key parameter in estimates of the fair value, and, in all cases, values in use proved higher than the book values, even assuming a decreasing variation of +/- 10% in these probabilities. The valuations made for the medium/long term take account of the sector in which the Company operates and of its research and development activities. In addition, consideration has also been given to the fact that the forecast figures for the Company s activities and its expected results are based on business valuations regarding future and uncertain events, the occurrence of which could lead to significant differences with respect to the forecasts made. These events include, among other things, the Company s ability to source adequate financial resources to meet the investment planned in order to continue with its research and development activities, given that the financial sustainability of the approved plans envisages, as noted above, the acquisition of these resources. At December 31, 2011, the book value of tangible and intangible assets and of shareholders equity was considerably lower than the Company s market capitalization. Tangible assets Tangible assets, net of accumulated depreciation and of any impairment losses, are recorded at acquisition cost, including directly attributable expenses. Subsequent expenditures made for improvements and variations of tangible assets are capitalized only if they increase the future economic benefits reliably measurable. Ordinary maintenance or repair costs that did not significantly increase the production capacity or the useful life of the assets are fully recognized in the Income Statement. Depreciation, recorded in the Income Statement, is calculated by estimating the utilization and economic-technical life of the assets based on its residual useful life. The depreciation rates indicated below are considered a fair reflection of this method. They have not changed since the previous year: General and laboratory plant and machinery 10-30%; Laboratory equipment 10-20%; Office electronic equipment 20%; Office furniture and equipment 12%. Depreciation starts when the assets are ready for use. The depreciation rates are reviewed yearly and revised if the current estimated useful life is different from that estimated previously. Leasehold improvements are capitalized under the item to which they refer and are depreciated over their estimated useful life or, if shorter, over the remaining period of the lease agreement. Leased assets Lease agreements are classified as finance leases when the terms of the agreement substantially transfer all of the risks and benefits of ownership to the lessee. All other leases are considered operating leases. Assets held under finance leases are recognized as tangible assets at their fair value at the date of the contract signing or, if lower, at the present value of the minimum lease payment. The corresponding liability towards the lessor is included in the Statement of Financial Position under financial liability items. Furthermore, gains realized on sale and leaseback transactions based on finance leases are deferred over either the lease term or the remaining useful life of the asset, whichever is shorter. Page 47

50 Since there is no reasonable certainty as to the acquisition of the ownership of the asset at the end of lease period, assets held under finance leases are depreciated over the shorter of the lease term and their useful lives. Leases where the lessor substantially retains all the risks and rewards of ownership of the assets are recorded as operating leases. Operating lease rentals are recognized in the Income Statement on a straight-line basis over the lease term. Intangible assets Purchased and internally-generated intangible assets are recognized as assets in accordance with IAS 38 Intangible Assets, assuming they are identifiable, controllable and when it is probable that the use of the asset will generate future economic benefits and that the costs of the asset can be reliably determined. Intangible assets may be divided between assets with a finite useful life and assets with an indefinite useful life. The former are recorded at acquisition or production cost, net of amortization and of any accumulated impairment losses. Amortization is calculated over their estimated useful lives, beginning from the date the asset is ready for use. The useful life is reviewed yearly and any changes are recognized in the Income Statement on a prospective basis. Intangible assets with an indefinite useful life are not amortized but are tested for impairment annually or more frequently if necessary. Goodwill Goodwill, equal to the portion of the acquisition cost in excess of the purchaser s portion of the fair value of the assets, liabilities and contingent liabilities recorded on the acquisition date, is classified as an asset with an indefinite useful life and is initially recorded at cost. After acquisition, goodwill is not amortized, but it is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. If the recoverable amount is lower than the carrying amount, the value of the assets is reduced to the recoverable amount. When goodwill has been allocated to a cash-generating unit that will be partially sold/divested, the related goodwill is considered for determining any gain/loss deriving from the transaction. Other intangible assets Other intangible assets are recorded at their historic acquisition cost, including accessory charges directly attributable, or based on the costs directly incurred for their internal production. They are amortized on a straight-line basis over their residual useful life, estimated at ten years, except for certain costs regarding concessions, licenses and software, which are amortized over five years. In detail: Concessions, licenses and trademarks These assets regard costs incurred under license and sub-license agreements for intellectual property used in the development of the Company s products. They are amortized on a straightline basis over their future useful life, which is estimated at ten years. Patents and intellectual property rights Patents that have been purchased are initially recorded at acquisition cost and amortized on a straight-line basis over their future useful life, which is estimated at ten years. Research and development costs Research costs are recognized in the Income Statement in the period in which they are incurred. In-house costs for the development of new products are recorded as intangible assets and are recognized as assets only if the following conditions are satisfied: it is technically possible to complete the asset in such a way as to make it available for use or sale and there is an intention to do so; Page 48

51 the Company is able to use or sell the asset; there is evidence that the costs incurred will generate probable future economic benefits. This evidence may consist of the existence of a market for the products resulting from the activity or of a possible internal use; there are sufficient technical and financial resources to complete the development and the sale, or the internal use, of the products developed; the costs attributable to the asset during development can be reliably valued. Given the Company s operating activities and the characteristics of the trials and tests carried on, research and development costs are fully expensed each year: the Company believes that the current state of development of MolMed s products makes it more desirable not to capitalize research and development costs. Non-current financial assets Non-current financial assets include items such as guarantee deposits that the Company intends and is able to hold until maturity. These assets do not fulfill the requirements for classification as cash equivalents. They are recorded and removed from the Statement of Financial Position in accordance with the date of negotiation. The assets are initially recognized at fair value and subsequently measured at amortized cost, net of impairment losses. Receivables Receivables are initially recorded at nominal value (representing the fair value of the transaction). They are then stated at amortized cost, following deduction of the write-downs recorded in the Income Statement where there is objective evidence that the value of the receivables may be impaired. These write-downs are determined by the difference between the book value of the receivables and the present value of estimated future cash inflows, discounted at the effective interest rate. In particular, for current trade receivables on which the time component has little effect, the valuation at amortized cost is equal to the nominal value, net of impairment losses. Inventories Inventories are recorded at the lower of cost and net realizable. Acquisition cost is calculated based on the weighted average cost. The carrying amount of inventories is adjusted by relevant write-downs made to take into account obsolete and slow moving stocks, taking into account their expected future use and estimated realizable value. Cash and cash equivalents Cash and cash equivalents are recorded, depending on their nature, at nominal value (representing the fair value) or amortized cost. They include cash on hand. Other current financial assets Financial assets are classified as available-for-sale and valued at fair value. As required by IAS 39, changes in the value of these assets, measured at fair value, are recognized in a specific equity reserve until the financial asset is disposed of or impaired, at which time income or losses are reversed to the Income Statement. The fair value is represented by the value for the securities listed on official markets. Financial asset purchases and sales are recorded at the date of trading or settlement. Employee benefits Employee severance indemnity (TFR), mandatory for Italian companies pursuant to art of the Italian Civil Code, is considered as deferred remuneration and is based on the years of service and the salary earned by the employee during the service period. Page 49

52 Under IAS 19 (Employee benefits), the amount of employee severance indemnity calculated is considered as a defined benefit plan, and the related liability to be recognized in the Statement of Financial Position is determined through actuarial calculations, using the Projected Unit Credit Method. As the time for payment of the benefit comes closer, the expenses attributable to the increase in the present value of the employee severance indemnity are included in the Income Statement under Personnel costs. Starting from January 1, 2007, the Budget Law 2007, plus the related implementation decrees, introduced significant changes in employee severance indemnity regulations, including the choice for employees of accruing the employee severance indemnity either in supplementary pension funds or in the Treasury fund managed by INPS. As a result, the Company s obligation to INPS and the contributions made to supplementary pension funds take the form, under IAS 19, of defined contribution plans, whereas the amounts recorded in the employee severance indemnity provision retain the status of defined benefit plans. Liabilities relating to employee severance indemnity to be recognized in the Statement of Financial Position for defined benefit plans represent the present value of the defined benefit obligation adjusted for actuarial gains and losses. Stock option plans The Company provides additional benefits to the Chairman, the General Manager and specific categories of employees through stock option plans. In accordance with IFRS 2, Share-based Payments, these plans are a component of recipients remuneration whose cost is measured by the fair value of the stock options at the grant date and recognized in the Income Statement on a straight-line basis from the grant date to the vesting date, with the offsetting credit recognized directly in equity. Any subsequent changes in fair value do not have any effect on the initial measurement. Personnel costs include stock options by virtue of their remuneration nature. Financial payables Financial payables, consisting of liabilities arising under finance lease agreements, are initially recognized at cost, equal to the fair value of the amount received, less transaction costs. Subsequently they are measured at the amortized cost, determined using the effective interest rate. Payables Trade and other payables are recorded using the amortized cost method. Given the nature and due date of the payables, this is normally the same as the nominal value. Provisions for risks and charges These include liabilities deriving from current (legal or implicit) obligations, relating to a past event where performance of the obligations is likely to lead to a deployment of resources whose amount can be reliably estimated. If the expected utilization of resources extends beyond a year, the liability is recorded at present value, determined by discounting projected future cash flows at an interest rate that takes into account the cost of borrowing and the risk of the liability. The provisions are reviewed whenever Financial Statements are prepared, and they are adjusted, as necessary, to reflect the best current estimate. Any changes are reflected in the Income Statement for the period in which the change took place. Risks involving a possible liability are disclosed in the Notes, but no provision is made. Recognition of revenues and income Revenues are recognized insofar as it is probable that the Company will enjoy economic benefits and assuming that their amount can be reliably determined. Revenues are stated net of discounts, allowances and returns. Page 50

53 Revenues from the performance of services are recognized with reference to the state of completion of the service only when the result of the service can be reliably estimated. Revenues relating to upfront payments from the sale of rights to third party companies relating to company products which are being developed have been divided in the period between the signing of the related out-licensing contract and the subsequent development milestone envisaged on the basis of management s estimates. The revenues relating to milestone payments upon achievement of set development objectives are fully recognized when the right to such payment is incurred. Government grant income is recognized when it is reasonably certain that it will be received. This takes place when the grant is approved by the relevant public sector bodies. This income is recognized based on the costs actually incurred as a percentage of the total costs budgeted for the research project in respect of which the grant has been awarded. Recognition of costs and charges Costs and charges are accounted for on an accrual basis when they concern goods and services purchased or consumed during the year or when they have no identifiable future benefit. Financial income and charges Financial income and charges are accounted for on an accrual basis, calculated on the basis of the net value of the related assets and liabilities using the effective interest rate. Financial charges are accounted for on an accrual basis in the Income Statement of the year in which they occur. Financial income is accounted for on the basis of the effective rate of return, determined on an accrual basis. Income taxes Income taxes include all taxes calculated on the basis of the taxable income of the Company. Income tax expense in the year is determined on the basis of the legislation in force. Income taxes are recorded in the Income Statement, except for those relating to items which are directly charged or credited to equity, in which case the tax effect is directly recognized in equity. Taxable income differs from the result shown in the Income Statement, as it does not include revenues and charges that will be taxable or deductible in other years, as well as those items that will never be taxable or deductible. Deferred tax assets and liabilities are determined on the basis of all the temporary differences between the carrying amount of an asset or liability and its underlying tax value used in calculating taxable income, and recorded using the liability method. Deferred tax liabilities are generally recorded for all taxable temporary differences, except in cases where the Company is able to control the reversal of these temporary differences and it is likely that they will not be reversed in the foreseeable future. Any deferred tax assets, whether arising from temporary differences and/or accumulated tax losses, are recognized to the extent that it is likely that there will be future taxable income to make possible the use of the deductible temporary differences and/or the accumulated tax losses. In this regard, on July 15, 2011, Law no. 111/2011 was approved which converted Decree Law no. 98/2011 governing urgent provisions for the financial stabilization of the country (Corrective Measure 2011). In particular, the Decree Law amended article 84 of the Consolidated Law on Income Tax relating to carrying forward tax losses, removing the time limit of 5 years set for carrying forward previous tax losses (which therefore means that they can be carried forward without limit), and introducing a quantitative limit for the use of previous tax losses equal to 80% of the income produced in the following financial years. This quantitative limit of 80% is not applicable to tax losses generated in the first three financial years of the company s incorporation, on the condition that they relate to new production activity. The new provisions shall apply from the 2011 financial year and, as clarified in circular 53/E 2011 from the Revenue Agency, also affect tax losses generated prior to 2011 which Page 51

54 are still subject to a carry-forward procedure under the previous legislation (for example, losses recorded from 2006 onwards). These assets and liabilities are not recorded if the temporary differences are due to goodwill or to initial recognition (not to business combinations) of other assets or liabilities in operations without an impact on statutory or taxable results. The book value of deferred tax assets is reviewed at the end of each reporting period and reduced in the event that it is no longer probable that there will be sufficient future taxable income to permit recovery of all or part of the assets. Deferred taxes are calculated by using the tax rate the Company expects to be in force when the asset is realized or the liability is settled based on the rates in force or decided at the end of the reporting period. Should the conditions exist, deferred taxes are directly recognized in the Income Statement. Exceptions are deferred taxes regarding items directly recorded in equity, in which case the deferred taxes are also recognized in equity. Current and deferred tax assets and liabilities are offset when there is a legally enforceable right to offset them, and they are classified as receivables or payables in the Statement of Financial Position. Taxes other than income taxes are included in operating costs. Foreign currency transactions Transactions in foreign currencies are initially recorded at the foreign exchange rate prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the foreign exchange rate prevailing at the end of the reporting period. Exchange differences arising from the settlement of monetary items and from their conversion at rates different from those at which they were initially recorded are recognized in the Income Statement. Earnings per share Basic earnings per share are calculated by dividing the net profit attributable to the owners of ordinary shares in the Company (the numerator) by the weighted average number of ordinary shares in issue (the denominator) during the year. Diluted earnings per share are calculated by adjusting the net profit attributable to owners of ordinary shares and the weighted average number of ordinary shares (the denominator) to take into account all potential ordinary shares with a diluting effect. A potential ordinary share is a financial instrument or other contract that could give its owner the right to obtain ordinary shares. Other information Use of estimates The preparation of the Financial Statements and related notes, in conformity with IFRS, requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Financial Statements. The estimates and assumptions used are based on experience and other factors that are considered as relevant. Actual results could differ from those estimated. Estimates and assumptions are reviewed periodically, and the effects of any changes are reflected immediately in the Income Statement for the year, if the review has effect only on this period, or for future years, if the review affects both the present and future periods. Furthermore, the preparation of the Financial Statements calls for the application of accounting principles and methodologies that, in some cases, are based on difficult and subjective assumptions and valuations tied to historical experience and to realistic and reasonable assumptions. The application of such forecasts and assumptions has an impact on the amounts recorded in the Statement of Financial Position, in the Income Statement, in the Statement of Cash Flows and in the Notes. Page 52

55 Below are detailed estimates of critical importance to the formulation of the Financial Statements, since they rely to a significant degree on subjective judgments, assumptions and estimates involving matters that are elusive by nature. Changes in the conditions underlying the judgments, assumptions and estimates adopted might have a major impact on future results since there is the risk that significant adjustments to the book value of assets and liabilities emerge in years following the Financial Statements. Recoverability of assets Tangible and intangible assets are written down when specific events suggest that the book value is not recoverable. Write-down is calculated by comparing the book value with the recoverable value, with the latter representing the higher of fair value net of disposal costs and the value in use calculated by discounting the future cash flows arising from the use of the asset. The expected cash flows are determined in accordance with the information available at the time of the evaluation, based on subjective judgments regarding the trends of future variables. Management reviews periodically the carrying value of non-current assets held and used, plus that of assets to be disposed of, when events and circumstances warrant such a review. Management performs this review using estimates of future cash flows deriving from the use or disposal of the asset, plus a discount rate suitable to calculating the present value. If the carrying amount of a noncurrent asset is considered impaired, the Company records an impairment loss for the amount by which the carrying amount of the asset exceeds its estimated recoverable amount from use or disposal, determined on the basis of the most recent Company plans. When preparing the Financial Statements for the year ended December 31, 2011, and, more specifically, when carrying out impairment testing of tangible and intangible assets, the Company has taken into consideration the expected performance for 2012 and future years, as resulting from the approved business plans and taking account of the current economic and financial position. In the current year there were no impairment losses. Models utilized for valuation are based on the assumptions indicated in the paragraph on the principle related to Impairment. In particular, in reference to intangible assets, the assumption of their recoverability has been assessed on the basis of the business plans which, as indicated previously in the paragraph on Impairment, presume the sourcing of adequate finances in the future to meet the investment planned in order to continue with the research and development activities, and which are currently uncertain. The uncertainty connected to this situation could lead to the need, currently not foreseeable, to proceed to a write-down of the intangible assets which is not currently reflected in the Financial Statements. Deferred taxes Any deferred tax assets, whether arising from temporary differences and/or accumulated tax losses, are recognized to the extent that it is probable that there will be future taxable income to enable the utilization of the deductible temporary differences and/or the accumulated tax losses. The effective recoverability of deferred taxes depends mainly on the recognition of a future taxable profit sufficient to utilize them. Directors concluded that there is not sufficient evidence to consider recoverability probable. Therefore, no deferred taxes have been recognized. For this valuation, an opinion is required since changes in the assumptions could have a material impact on the accrual of deferred tax assets. Amortization and depreciation Intangible and tangible assets with a finite useful life are amortized and depreciated according to the straight-line method applied over their estimated useful life. The estimated useful life is determined by management when assets are purchased or completed. The effective economic life may differ from the estimated useful life. The Company periodically verifies technological changes, market conditions and forecasts of future events that may impact useful life. Such periodical updates can change the amortization and depreciation period, as well as the amortization and depreciation for the years to come. Page 53

56 Equity compensation plans The Company provides additional benefits to certain members of senior management through stock option plans. In accordance with IFRS 2, Share-based Payments, these plans represent a component of recipients remuneration. Employee stock options are measured at fair value at the grant date, using models that take into account circumstances applicable at the grant date (option strike price, vesting period, current price of the underlying shares, expected share price volatility, expected dividends and interest rate for a risk-free investment over the option term) as well as the probability to achieve targets expected. At the end of each year, the previously determined fair value of each option is neither reviewed nor updated, but maintained at its original value. At that date, instead, the Company updates its estimates of the market conditions and future events that could impact the valuations. Accounting standards, interpretations and amendments to accounting standards effective from January 1, 2011 but not applicable to the Company The following accounting standards, amendments and interpretations are effective as from January 1, 2011, and regulate situations and cases which are not relevant for the Company at the date of these Financial Statements but which might have an accounting impact on future transactions or agreements: IFRS 1, pursuant to which parties who adopt the IFRS principles for the first time must prepare a First-time Adoption document; IFRS 3, which concerns the measurement of non-controlling interests in the acquired entity in a business combination; IFRS 7, which amends the disclosures concerning financial risks; IAS 1, which requires an analysis of the other components of the comprehensive income statement for each component of shareholders equity; IAS 24, which requires additional disclosures concerning related-party commitments; IAS 34, which deals with the minimum content of interim financial reports; IFRIC 14 Prepayments of a Minimum Funding Requirement ; IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments ; Other marginal amendments to other accounting principles and interpretations. Accounting standards, amendments and interpretations not yet applicable and for which the Company has not elected early adoption At the date of these financial statements, the European Union had not yet endorsed the following standards and amendments, with the exception of the Amendment to IFRS 7 Financial Instruments: Disclosures (7 October 2010), details of which are provided at the end of this section. On 12 November 2009, the IASB issued IFRS 9 Financial Instruments, which was later amended. The new standard, applicable retrospectively from 1 January 2015, represents completion of the first phase of a project to replace IAS 39 and introduces new requirements for classification and measurement of financial assets and liabilities and derecognition of financial assets. For financial assets, the standard uses a single approach to determine whether a financial asset is measured at amortized cost or fair value replacing the many different rules in IAS 39 which is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets. For financial liabilities, on the other hand, the principal amendment relates to the recognition of changes in fair value of financial liabilities measured at fair value through profit or loss, when such changes are due to changes in the credit risk of the liability. Under the new standard, these changes must be recognized in other comprehensive income rather than through profit or loss. On 20 December 2010, the IASB issued a minor amendment to IAS 12 Income taxes, requiring an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. As a result of this amendment, SIC 21 Income Taxes Recovery of Revalued Non-Depreciable Assets will no longer apply. The amendment must be adopted retrospectively from 1 January Page 54

57 On 12 May 2011, the IASB issued IFRS 10 Consolidated Financial Statements that will replace SIC-12 Consolidation Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements (to be renamed Separate Financial Statements) which addresses accounting treatment for investments in separate financial statements. There are no substantial changes from the previous version. IFRS 10 builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance for situations where control may be difficult to determine. IFRS 10 and IAS 27 are effective retrospectively from 1 January On 12 May 2011, the IASB issued IFRS 11 Joint Arrangements which supersedes IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities Non-monetary Contributions by Venturers. The new standard sets out criteria for identifying joint arrangements, by focusing on the rights and obligations of the arrangement rather than its legal form, and defines rules for treatment of joint operations in the separate financial statements. The standard is effective retrospectively from 1 January On 12 May 2011, the IASB issued IFRS 13 Fair Value Measurement, which clarifies rules for determination of fair value for the purposes of financial reporting and applies to all IFRS that require or allow fair value measurement or disclosures based on fair value. The standard is applicable prospectively from 1 January On 16 June 2011, the IASB issued an amendment to IAS 1 Presentation of Financial Statements requiring entities to group together items within other comprehensive income that might subsequently be reclassified to the profit or loss section and those that will not be reclassified subsequently to the profit or loss section. The amendment is applicable for annual periods beginning on or after 1 July On 16 June 2011, the IASB issued an amended version of IAS 19 Employee Benefits which eliminates the option to defer recognition of gains and losses, known as the corridor approach, and requires any plan deficit or surplus to be presented in the statement of financial position, the components of cost relating to service and net interest to be recognized in profit or loss, and actuarial gains and losses arising from the remeasurement of liabilities to be recognized in other comprehensive income. The amendment also introduces additional disclosure requirements. The amendment is applicable retrospectively from 1 January On 16 December 2011, the IASB issued amendments to IAS 32 Financial Instruments: Presentation, which clarifies application of certain criteria contained in IAS 32 for offsetting financial assets and liabilities. The amendments are effective retrospectively for annual periods beginning on or after 1 January On 16 December 2011, the IASB issued amendments to IFRS 7 Financial Instruments: Disclosures. The amendments require disclosure of information on the effect or potential effect on an entity s financial position of netting arrangements for financial assets and liabilities. The amendments are effective for annual periods beginning on or after 1 January Disclosure must be provided retrospectively. Lastly, on 7 October 2010, the IASB issued amendments to IFRS 7 Financial Instruments: Disclosures, applicable for reporting periods commencing on or after 1 July The amendments are intended to improve the understanding of transfers of financial assets (derecognition) for users of financial statements, including the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfers are undertaken around the end of a reporting period. Adoption of this standard will have no effect on the measurement of items in the financial statements. Page 55

58 3. SEGMENT REPORTING With regard to the presentation of income and financial reporting by business segment and geographical area in which the Company operates, it should be noted that management has identified a single business segment. The essentially uniform nature of the activities and the state of completion of the projects under development means that it is not possible to identify sectors with risks and benefits different from the other business sectors. Moreover, because of the services provided, the nature of the production processes and the type of client for the Company s products, it is not possible to split the Company s activities into several business segments. Therefore, the Company believes that, at present, reporting by business sector and geographical area would not provide a better representation or understanding of the business or the related risks and benefits. Page 56

59 4. NOTES TO THE STATEMENT OF FINANCIAL POSITION Note 1 Tangible assets The following table provides a breakdown of tangible assets at December 31, 2011 and movements thereon in the relevant period: (amounts in thousands of Euro) Balance at Purchases Reclassifications Disposals Depreciation Balance at December 31, 2010 & write-downs December 31, 2011 Gross book value Plant and machinery Industrial and commercial equipment (1) Leasehold improvements Other tangible assets (5) Assets under construction and payments on account Total gross book value (6) Accumulated depreciation Plant and machinery (391) (45) (436) Industrial and commercial equipment (2.469) (254) (2.722) Leasehold improvements (3.558) (222) (3.780) Other tangible assets (648) (93) (736) Assets under construction and payments - on account Total accumulated depreciation (7.066) (614) (7.674) Net book value Plant and machinery (45) 76 Industrial and commercial equipment (254) 814 Leasehold improvements (222) 214 Other tangible assets (93) 226 Assets under construction and payments on account Total net book value (614) The item Plant and machinery includes specific plant and machinery used to develop the Company s products and to provide services. Industrial and commercial equipment includes various types of tangible assets, including laboratory equipment used to develop the Company s products and to provide services. Leasehold improvements include the cost of refurbishing the premises used by the Company, in particular its pharmaceutical laboratories and offices. These premises are used under a lease agreement. The costs incurred generally regarded building work and work on the systems that form an integral part of the premises. Other tangible assets include furniture and fittings as well as electronic office equipment. During 2011 investments of 224 thousand Euro were made in tangible assets. The most significant changes in the financial year concerned: purchases of industrial and commercial equipment totaling 202 thousand Euro due to the periodical renewal of laboratory equipment and the improvement of existing equipment to cope with the increased activity regarding clinical development of the Company s products; the increase in other tangible assets of 22 thousand Euro, mainly due to the costs incurred to purchase electronic machinery as part of the periodic renewal of the Company s IT equipment. The item industrial and commercial equipment, of 814 thousand Euro at December 31, 2011, includes the net book value of the tangible assets held under a finance lease, totaling 199 thousand Euro, arising from the purchase of two laboratory instruments. Depreciation totaled 614 thousand Euro, in line with the prior-year period. It is worth pointing out that there is no collateral security on tangible assets. In the period no internal or external indicators were identified requiring impairment test to be carried out. Page 57

60 Note 2 Intangible assets and goodwill The following table provides a breakdown of intangible assets at December 31, 2011 and movements thereon in the relevant period: (amounts in thousands of Euro) Balance at Purchases Reclassifications Disposals Amortization Balance at December 31, 2010 Dec.31, 2011 Merger with Genera S.p.A Goodwill Patents and intellectual property rights (335) 240 Concessions, licenses and trademarks (94) 99 Other intangible assets (36) 45 Assets under construction and payments on account Intangible assets (465) 384 Total (465) 461 Goodwill refers to the value recorded under this item following the merger of Genera S.p.A. into MolMed in For its IFRS first-time adoption, the Company decided not to apply IFRS 3 Business Combinations on a retroactive basis to business acquisitions taking place before January 1, As a result, goodwill arising from acquisitions prior to the date of transition to IFRS has been maintained at the value determined under the Italian GAAP at that date, after recognition of any impairment losses following an appropriate test. The recoverability of this goodwill is linked to the know-how of the technical personnel carrying out the research activities on the new product development projects and to the possible revenues that could be generated by their commercial development. The item Patents and intellectual property rights also includes the allocation of the entire merger deficit arising from the merger of Genera S.p.A. In this regard, the last amortization charge of 255 thousand Euro was recorded in In 2011 investments in intangible assets were made relating to the validation of patents in European countries. The item Concessions, licenses and trademarks includes the payments made under license and sublicense agreements for intellectual property used in the development of the Company s products. The item Other intangible assets refers to costs incurred and capitalized for the implementation of the new IT system. Amortization amounted to 465 thousand Euro. There were no intangible assets with indefinite useful life other than goodwill. In accordance with IAS 36, at the year-end date, goodwill was tested for impairment. The impairment test confirmed the absence of significant impairment losses. Regarding the model and assumptions used to perform the impairment test, reference should be made to the section Accounting standards and valuation policies Impairment. In relation to the possibility of recovering intangible assets, reference should be made to the section on Use of estimates and Recoverability of assets in these Notes, as well as to section 11.3 Financial risks in the Report on Operations. Note 3 Financial assets Non-current financial assets, amounting to 12 thousand Euro, consist of guarantee deposits. Note 4 Tax receivables (non-current) Non-current tax receivables amounted to 5,203 thousand Euro at December 31, 2011, compared to 4,950 thousand Euro at December 31, Non-current tax receivables mainly relate to VAT receivables accrued by the Company. As its costs exceed its revenues at this stage of its business development, the Company regularly generates a VAT receivable. Page 58

61 At December 31, 2011, the item mainly consisted of 2,521 thousand Euro VAT receivables for which refunds were requested relating to 2008, 2009 and 2010 and of 2,625 thousand Euro VAT receivables for which refunds have not yet been requested. Tax receivables also include those relating to interest on VAT receivables for which refunds have been requested. Information on tax receivables classified under current assets is provided in Note 8. Note 5 Other assets Other assets, which amounted to 1,636 thousand Euro, refer to the agreed price of the option agreement the Company has signed with the Shareholder Science Park Raf S.p.A. and its parent company Fondazione San Raffaele to purchase research projects. This agreement is effective as from the listing of the Company s shares on the stock market, which occurred on March 5, It is valid for eight years after said date, with the possibility of renewal every four years. Effective from the above-mentioned date, the amount recorded under the item Other assets has started to decrease, pro rata temporis, with the related charge recorded in the Income Statement on a straight-line basis over the contract eight-year minimum duration. This amount, originally equal to 4,131 thousand Euro, is classified under current assets, with respect to the portion to be released in the Income Statement within 12 months, with the remaining balance classified under non-current assets. Note 6 Inventories At December 31, 2011 inventories are broken down as follows: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Processing materials Reagents General materials Total inventories At December 31, 2011, inventories consisted of materials and reagents used in laboratory activities. The slight increase recorded by the item was due to the temporary trend of the management of stocks in relation to the activities to be carried out. Note 7 Trade receivables and other commercial assets At December 31, 2011 trade receivables are broken down as follows: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Trade receivables Receivables from related parties Prepaid expenses concerning costs pertaining to future periods Total trade receivables and other commercial assets The increase in trade receivables, mainly relating to the provision of services, reflects the trend in the invoicing and collection activities relating to the provision of services. Prepaid expenses mainly relate to advance payments for the provision of services by suppliers. Receivables from related parties, amounting to 177 thousand Euro, mainly concern the services provided by the Company to the related party Fondazione San Raffaele. These receivables are recorded net of a bad debt provision of 28 thousand Euro, set aside during the financial year. For further information reference should be made to Note 33. Page 59

62 Note 8 Tax receivables (current) At December 31, 2011, tax receivables are broken down as follows: (amounts in thousands of Euro) December 31, 2011December 31, 2010 VAT receivables Tax credit Research and development tax credit Withholding taxes Total tax receivables Under current tax receivables, the Company only shows the amount of VAT receivables and tax credit that may be offset against other taxes under Italian tax law together with VAT receivables for which refunds were requested in previous years and are expected to be collected within the next financial year. The remaining VAT receivables, which represent the bulk of the balance, are entered under non-current tax receivables therefore reference should be made to Note 4. VAT receivables consisted of 634 thousand Euro VAT receivables concerning 2008 for which the refund notice from the Revenue Agency has been received, and of 224 thousand Euro relating to the remaining VAT receivables to be used for offsetting purposes during the financial year At December 31, 2011 tax receivables included the remaining amount of corporate income tax (IRES) of 293 thousand Euro arising from the Modello Unico tax return and which will be used for offsetting purposes during It should be noted that research and development tax credit has been fully used for offsetting purposes during the financial year under review. Note 9 Other receivables and sundry assets Other receivables and sundry assets, amounting to 1,767 thousand Euro and 1,441 thousand Euro at December 31, 2011 and December 31, 2010 respectively, include 516 thousand Euro relating to the current portion of the agreed price of the option agreement the Company has signed with the Shareholder Science Park Raf S.p.A. and its parent company Fondazione San Raffaele to purchase research projects, as detailed in Note 5. The portion classified under current assets is the amount to be released in the Income Statement within 12 months. The item also includes 935 thousand Euro of public sector research grants accrued but not yet received, and prepaid expenses related to insurance premiums, IT maintenance and assistance fees and other minor amounts. The increase compared to the previous period was due to the intensification in 2011 of activities connected to a project financed under the Seventh Framework Programme of the European Union. Note 10 Other financial assets The item of 17,740 thousand Euro at December 31, 2011 (23,456 thousand Euro at December 31, 2010), relates to the short term use of the Company s financial resources, through low-risk investments in government and corporate bonds. The movements recorded in the period mainly relate to the repayment of cash investments made in the previous period, new investments in government and corporate bonds, as well as to fair value adjustments at the year end. The other financial assets due from related parties are shown in Note 33, to which reference should be made. Page 60

63 Note 11 Cash and cash equivalents Cash and cash equivalents are broken down as follows: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Bank and post office accounts Bank and post office accounts - related parties Cash on hand 12 8 Cash equivalents Total cash and cash equivalents Cash and cash equivalents amounted to 21,163 thousand Euro at December 31, 2011 (36,917 thousand Euro at December 31, 2010) including 3,251 thousand Euro of bank accounts, 12 thousand Euro of cash on hand and 17,900 thousand Euro of time deposits. Time deposit accounts are opened with leading banks; yield rates are set for the term of the deposit in line with market rates in force at the date of the investment. The decrease in the period was due to the combined effect of the investments made as part of the Company s cash management on the one hand, and of the use of the financial resources absorbed by the Company s ordinary operations on the other. The book value of cash and cash equivalents is deemed to be in line with their fair value. Cash and cash equivalents concerning related parties are detailed in Note 33, to which reference should be made. Note 12 Shareholders equity Shareholders equity totaled 44,825 thousand Euro at December 31, 2011, broken down as follows: (amounts in thousands of Euro) December 31, 2011December 31, 2010 Share capital Share premium reserve Other reserves: Stock option plan reserve Actuarial valuation reserve - - Fair value valuation reserve (336) (153) Other - 19 Retained earnings (accumulated losses) Profit (loss) for the year (21.569) (17.582) Total shareholders' equity The breakdown of the movements in the period is provided in the relevant statement. The most important items are explained below. Share capital At December 31, 2011, the capital was fully subscribed and paid in. It amounted to 43,609 thousand Euro and consisted of 210,541,926 ordinary shares with no nominal value. The capital increase of 26 thousand Euro (May 2011) was due to the exercise of the option rights and the consequent subscription of 126,310 newly issued ordinary shares, as part of the stock option plans. Page 61

64 The allocation of capital at December 31, 2011 is detailed below: Shareholder No. of shares % Fininvest S.p.A ,96% Science Park Raf S.p.A ,49% Airain Lda ,11% Delfin Sàrl ,30% H-Equity S.r.l ,06% H-Invest S.p.A ,06% Lombard International Assurance SA ,49% Market ,53% Total ,00% The Company does not own any of its own shares, either directly or indirectly. During the year it did not purchase or sell any of its own shares, either directly or indirectly. Share premium reserve The share premium reserve totaled 20,696 thousand Euro. The net decrease in the share premium reserve was due to the combined effect of the use of 16,823 thousand Euro to cover the loss at December 31, 2010, as per the Shareholders Meeting resolution of April 29, 2011, as well as to the increase of 43 thousand Euro relating to the premium paid following exercise of option rights and the consequent subscription of 126,310 newly issued ordinary shares as part of the stock option plans. Other reserves Other reserves are detailed as follows: Stock option plan reserve The stock option plan reserve was set up on January 1, 2006 upon first-time adoption of IFRS, in order to reflect the fair value of stock option plans. The reserve was calculated by determining the fair value of the rights issued as of the granting dates. In later years, the stock option plan reserve has increased, with an effect on personnel costs in the Income Statement. The net decrease shown in 2011 of 1,297 thousand Euro was due to the combined effect of: a decrease of 839 thousand Euro reflecting the expiry of 70% of the first tranche of type B options under the 2008 stock options plans, following non-occurrence of the vesting condition; a decrease of 123 thousand Euro in the fair value of the options exercised during 2011, which was previously recorded in the stock option plan reserve, which thus fell by the same amount; an increase of 103 thousand Euro, linked to the recognition in the Income Statement of the last cost share accrued on the basis of the 2008 stock options plan; a decrease of 439 thousand Euro, reflecting the expiry of the options relating to the stock options plan. For information on contents of the above-mentioned stock option plans reference should be made to Note 32 below. Fair value valuation reserve The fair value valuation reserve reflects the fair value adjustment of financial assets available for sale. At December 31, 2011 the reserve amounted to 336 thousand Euro (negative value). The changes in the item include the recognition in the Income Statement of the fair value reserve (106 thousand Euro) recorded at December 31, 2010, following the maturity and sale of some securities and the fair value adjustment at December 31, 2011 (289 thousand Euro). Retained earnings (accumulated losses) The item includes: the fair value of options exercised in the first six months of 2011 amounting to 122 thousand Euro; the fair value, equal to 839 thousand, of 70% of the first tranche of type B options, under the 2008 stock options plans, expired following the non-occurrence of the vesting condition; Page 62

65 the fair value of the options included in the stock options plans which expired on December 31, 2011, equal to 439 thousand Euro, previously allocated to the stock option plan reserve. Details completing the analysis of the items included in shareholders equity are provided in the following table: Main shareholders equity items (amounts in thousands of Euro) Balance at December 31, 2011 Purpose of use Amount available Capital Reserves Share premium reserve A,B Stock option plan reserve Fair value valuation reserve (336) B - Retained earnings (accumulated losses) A,B,C Key: A: for share capital increase B: for coverage of losses C: for distribution to shareholders Note 13 Liabilities for pensions and employee severance indemnity (TFR) This item includes all liabilities for pension plans and other employee benefits following termination of the employment relationship or payable when certain requirements are met. It consists of accruals relating to the Company s employee severance indemnity (TFR). Liabilities for pensions and employee severance indemnity amounted to 156 thousand Euro at December 31, 2011 (185 thousand Euro at December 31, 2010). Changes in the period were as follows: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Opening balance Accruals for the year 13 8 Uses (34) (35) Actuarial (gain)/loss (8) (8) Total liabilities for pensions and employee severance indemnity (TFR) Under IAS 19, the employee severance indemnity has been considered a Defined benefit plan, determined on the basis of actuarial calculations performed by an external consultant in accordance with international accounting standards. Pursuant to IAS 19, employee severance indemnity has been assessed using the method described below, in compliance with the recent relevant measures introduced by the National Register of Actuaries, together with the competent bodies OIC, Assirevi and ABI for companies with more than 50 employees. The calculation method can be broken down into the following phases: projection for each staff member employed, as of the assessment date, of the employee severance indemnity already accrued at December 31, 2006 and revalued at the assessment date; calculation for each staff member, on a probabilistic basis, of the employee severance indemnity that would have to be paid by the Company should the employee leave on account of dismissal, resignation, disability, death or retirement, as well as of probable payments of TFR advances; discounting of each payment, on a probabilistic basis, as of the date of assessment. More in detail, the following assumptions were made: Annual discount rate: 4.75% Page 63

66 Annual inflation rate: 2.00% TFR annual increase rate: 3.00% Demographic assumptions: Probability of death: RG48 table Probability of disability: INPS tables by age and sex Age of retirement: achievement of the target required by compulsory general insurance (AGO) Yearly turnover and TFR advance payment Advance payment frequency %: 1.00% Turnover frequency: 4.00% Note 14 Trade payables Non-current trade payables had a balance of zero at December 31, Note 15 Finance lease payables Finance lease payables at December 31, 2011 mainly referred to lease agreements for laboratory equipment. In detail, current finance lease payables amounted to 111 thousand Euro, while noncurrent finance lease payables amounted to 125 thousand Euro. They can be broken down as follows: (amounts in thousands of Euro) Within the year Between one and five years Total Minimum future lease payments Interest expense (22) (8) (30) Present value of minimum lease payments Note 16 Other liabilities Other liabilities, totaling 994 thousand Euro at December 31, 2011, largely refer to the advances received during 2009, 2010 and 2011 on four projects financed under the Seventh Framework Program of the European Union (744 thousand Euro) and the ATP 2009 project subsidized by Region of Lombardy (250 thousand Euro). Note 17 Trade payables Trade payables amounted to 6,884 thousand Euro at December 31, 2011, compared to 4,488 thousand Euro at December 31, 2010, and are broken down as follows: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Trade payables Payables to related parties Deferred income concerning revenues pertaining to future periods Total trade payables At December 31, 2011, trade payables included 4,430 thousand Euro due in Italy, 1,501 thousand Euro due in other European Union countries and 370 thousand Euro due in other countries (mainly in USD and GBP). Payables to related parties mainly consisted of services provided to the Company by Fondazione San Raffaele, amounting to 92 thousand Euro, as described in Note 33. Deferred income mainly referred to revenues from services connected to cell and gene therapy, to be provided by the Company in future financial years. Page 64

67 Note 18 Other liabilities This item is broken down as follows: (amounts in thousands of Euro) December 31,2011 December 31, 2010 Amounts due to employees for holiday and bonus pay Amounts due to social security institutions Tax payables Amounts due to freelance consultants Other payables Total other liabilities Amounts due to social security institutions and tax payables consisted of withholding taxes and social security contributions on employee salaries and on the remuneration of freelance consultants for the month of December 2011, but paid to the authorities the following month. The Company recorded tax losses in the two years considered. It also has no taxable income for IRAP purposes and, therefore, has no current tax liabilities. The other payables due at December 31, 2011 included amounts due for contributions to be paid in relation to personnel (39 thousand Euro), and accrued liabilities of 43 thousand Euro. Page 65

68 5. NOTES TO THE INCOME STATEMENT Note 19 Revenues The Company s revenues are generated by the following activities: (amounts in thousands of Euro) Revenues from development and production activities undertaken on behalf of third parties Revenues from out-licensing and other services Total revenues The marked increase in revenues from 2,081 thousand Euro in 2010 to 2,767 thousand Euro in 2011 is linked to the intensification of GMP production and development activities carried out on behalf of third parties. More specifically, revenues resulting from these activities increased from 1,581 thousand Euro in 2010, to 2,679 thousand Euro in 2011 thanks to the agreements signed with Fondazione Telethon and with GlaxoSmithKline (GSK), both in relation to GMP production and development activities for new gene therapy treatments for rare genetic diseases. According to the agreements signed in 2011 MolMed expects to record revenues of up to 8.3 million Euro over a period of four years in relation to activities for Fondazione Telethon and revenues of up to 5.5 million Euro in two years concerning activities for GSK. Revenues from out-licensing and other services refer to upfront payments relating to out-licensing agreements signed in previous years and regarding the TK product. These revenues have been recorded over the period between the date of the signing of the out-licensing agreements and the subsequent development milestone, based on management estimates. The reduction in these revenues is mainly due to income recorded in 2010 in relation to licensing of a number of patents linked to the development of the TK product. Total revenues at December 31, 2011 included 385 thousand Euro of revenues from related parties. Further information is provided in Note 33. Note 20 Other income This item mainly consists of public sector research and development grants and is broken down as follows: (amounts in thousands of Euro) European Commission (Persist project) European Commission (Optistem project) European Commission (Attract project) 47 - Region of Lombardy (ATP 2009) 27 - Ministry of University and Research (FIRB GPS DM24528) - 48 Other grants 18 7 Other revenues Total other income The item Other income includes public sector grants of 613 thousand Euro, which are recorded on the basis of the costs actually incurred compared to the total costs planned in the budgets for the research projects eligible for grants. Income from the most important public sector grants recorded during 2011 related to two projects under the Seventh Framework Programme of the European Union (the OPTISTEM, ATTRACT and PERSIST projects) and to the ATP 2009 project financed by the Region of Lombardy. Page 66

69 Note 21 Purchases of raw materials and consumables This item is broken down as follows: (amounts in thousands of Euro) Processing materials Reagents General laboratory materials Maintenance materials Change in raw materials inventory Total purchases of raw materials and consumables The increase in costs for raw materials and consumables, which largely consists of materials and reagents used in research and development activities, was mainly due to the development of the NGR-hTNF product. Note 22 Costs for services The breakdown of the item in 2011 and 2010 is as follows: (amounts in thousands of Euro) Outsourced development costs Option rights Consultancy and technical fees License fees Patents and consultancy fees Maintenance Transport and storage of laboratory materials Utilities Directors and statutory auditors' fees Tax consultancy and administrative fees Audit Legal and managerial fees Listing consultancy fees and other listing costs Supervisory board fees Communications agency fees IT assistance and other IT costs Other general and administrative costs Other personnel costs Travel expenses Participation at conventions and meetings Staff training Total costs for services Costs for services rose compared to the previous year, in line with the trend in the Company s product development plans. The most important changes were largely due to the increase in outsourced development costs, consultancy and technical fees and the costs for license fees connected to the industrial production of NGR-hTNF. The costs for option rights include the share, relevant to the period, of the cost tied to the option agreement for the purchase of research projects entered into in December 2001 by the Company with the shareholder Science Park Raf S.p.A. and its parent company Fondazione San Raffaele. The reduction in costs for tax consultancy and administrative fees, from 162 thousand Euro in 2010 to 98 thousand Euro in 2011, and for listing consultancy fees and other listing costs, from 115 thousand Euro in 2010 to 80 thousand Euro in 2011, is due to the fact that in 2010 the Company incurred costs linked to the capital increase. Page 67

70 The item Directors and statutory auditors fees does not include the fees paid to the Chairman and Chief Executive Officer of 750 thousand Euro, recorded under personnel costs. The fees paid to directors and statutory auditors, including the fees recorded under personnel costs, are detailed in the table below: (amounts in thousands of Euro) Directors' fees Statutory auditors' fees Total For the fee breakdown reference should be made to Note 36. Note 23 Costs for use of third-party assets This item is broken down as follows: (amounts in thousands of Euro) Rental of premises Other rentals Total costs for use of third-party assets The item Costs for use of third-party assets of 1,018 thousand Euro and 991 thousand Euro in 2011 and 2010 respectively did not change significantly. This item mainly includes costs relating to the rental of the premises which house the Company s registered offices in Milan and the secondary offices in Segrate. The available premises within the San Raffaele Scientific Park are granted by the related party, Science Park Raf. For more information on transactions with related parties reference should be made to Note 33. Note 24 Personnel costs This item is detailed below: (amounts in thousands of Euro) Wages and salaries Social security contributions Defined contribution plans Stock option costs Other personnel costs Total personnel costs The increase recorded in personnel costs is due to the higher average number of employees compared to The remuneration component from stock option plans is related to plans with Company shares as underlying securities and represents the notional cost recognized as an offsetting entry to a specific shareholders equity reserve (see Note 12). The precise number of employees was 88 at December 31, 2011, compared to 85 at December 31, Page 68

71 The average number of employees in 2011 was 89 (84 in the previous year), broken down by position as follows: Executives Middle management Clerical staff Technicians 2 2 Total Note 25 Other operating costs This item is broken down as follows: (amounts in thousands of Euro) Printed and promotional materials 4 16 Stationery Entertainment costs Membership fees Donations Books and magazines 12 8 Other costs 8 12 Total other operating costs The reduction in other operating costs is mainly due to the decrease in costs incurred in relation to the funding of research scholarships, recorded as Donations. Note 26 Amortization, depreciation and write-downs Amortization, depreciation and write-downs amounted to 1,107 thousand Euro, compared to 1,209 thousand Euro at December 31, The item is detailed below: (amounts in thousands of Euro) Amortization of intangible assets Depreciation of tangible assets Bad debt provision 28 - Total amortization, depreciation & write-downs The item Bad debt provisions refers to the allocation concerning receivables due from the related party Fondazione San Raffaele. For more information on transactions with related parties reference should be made to Note 33. Page 69

72 Note 27 Financial income and charges This item is detailed as follows: (amounts in thousands of Euro) FINANCIAL INCOME: Interest and other financial income Gains on securities Exchange gains Other income - - Total financial income FINANCIAL CHARGES: Losses on securities (155) (182) Exchange losses (47) (68) Finance lease interest expense (35) (46) Other interest expense (8) (8) Other charges (48) (35) Total financial charges (293) (339) Total financial income (charges) Financial income mainly arose from management of the Company s cash resources through temporary low-risk investments. This increase recorded in the period was connected to investments of cash following the capital increase, completed in August Financial charges include losses on securities arising from the transfer of the fair value reserve recorded at December 31, 2010 following the maturity and sale of some securities. The impact of this transfer totaled 106 thousand Euro. Other interest expense mainly involves the interest cost determined by the actuarial valuation of the liabilities for pensions and employee severance indemnity. Page 70

73 Note 28 Income taxes No current or deferred taxes have been recorded in the Statutory Financial Statements. Taking account of the Company s activities and the outlook provided by the business plans, as in 2010 the Company did not recognize the tax credit that could arise from deferred tax assets calculated on temporary differences deductible in future years. With reference to advance tax assets there is no reasonable assurance as regards recoverability, due to a lack of adequate elements for forecasting, even taking into account changes to the carry-forward system described in the section Accounting standards and valuation policies. The following table provides a summary of the temporary differences at December 31, 2011: (amounts in thousands of Euro) Temporary differences amount December 31, 2011 December 31, 2010 Rate Tax effect Temporary differences amount Rate Tax effect Directors' fees ,50% ,50% 18 Other temporary differences 10 31,40% ,40% 2 Upfront & milestone revenues difference - 31,40% ,40% 12 Tax losses carried forward as per Article 84, par. 2 TUIR (start up losses) ,50% ,50% 427 Tax losses carried forward as per Article 84, par. 1 TUIR ,50% ,50% Total deferred tax assets Merger deficit - 31,40% ,4% 32 Other temporary differences 6 27,50% ,50% 1 Total deferred tax liabilities Note 29 Basic and diluted earnings (loss) per share The basic earnings (loss) per share are detailed below: (amounts in Euro) Basic earnings (loss) per share (0,1025) (0,1144) Diluted earnings (loss) per share - - As required under IAS 33, diluted earnings (loss) per share should take into account the effects of all dilutive potential ordinary shares. The Company has set up a stock option plan which offers call options on Company s shares at a pre-determined strike price. The Company has not calculated the diluted loss per share since the strike price is higher than the market price in the period, and therefore the options would not be exercised. The calculation of the basic earnings (loss) per share is based on the net losses in 2011 and ,569 thousand Euro and 17,582 thousand Euro respectively and on the weighted average of outstanding ordinary shares in the relevant periods 210,499,707 and 153,718,886 respectively. Page 71

74 6. OTHER NOTES Note 30 Net financial position The net financial position, as per Consob Communication no , dated July 28, 2006, is detailed below: (amounts in thousands of Euro) December 31, 2011 December 31, 2010 Cash on hand 12 8 Other cash Cash equivalents A. Total cash and cash equivalents B. Current financial receivables and other financial assets Finance lease payables (111) (98) C. Current financial debt (111) (98) D. Net current financial position (A+B+C) Finance lease payables (125) (235) E. Non-current financial debt (125) (235) F. Net financial position (D+E) The company s net financial position is positive and affected by the liquidity obtained following the capital increase completed in August As indicated in Notes 10 and 11, the net financial position is positive and almost entirely consists of cash and cash equivalents and other financial assets. Note 31 Contingent liabilities, commitments and guarantees Contingent liabilities The Company has no outstanding positions which may result in contingent liabilities. Commitments and guarantees Commitments and guarantees are broken down as follows: (amounts in thousands of Euro) December 31, 2011December 31, 2010 Guarantees Commitments Total guarantees and commitments Guarantees included 2,044 thousand Euro concerning bank guarantees for the refund of VAT receivables, and 748 thousand Euro concerning a bank guarantee for the advance received from the Region of Lombardy in relation to the grant for the subsidized project ATP Following renegotiation of the bank guarantee, the previous commitment for the same amount was cancelled. Guarantees also included 208 thousand Euro of sureties issued to Università Vita Salute San Raffaele for commitments undertaken by the Company in relation to the funding of research scholarships and 30 thousand Euro of sureties provided as guarantees for payment of real-estate rentals. Page 72

75 Note 32 Share-based payments stock option plans On December 11, 2001, an Extraordinary Shareholders Meeting gave the Board of Directors the power to increase the share capital by up to a maximum of 431,711 Euro, in order to service a stock option plan granted to the Chairman and CEO Claudio Bordignon and the Director and General Manager Marina Del Bue. The Board of Directors then resolved to grant the said beneficiaries a total of no. 431,711 options entitling them to subscribe for the same number of shares. These options included no. 265,668 options granted to Claudio Bordignon and no. 166,043 options granted to Marina Del Bue. The strike price of the options thus granted was set at Euro per share, in compliance with the resolutions of the Extraordinary Shareholders Meeting of the Company, which provided that the price be determined on the basis of an overall appraisal of the Company resulting from a qualified expert s report. On November 26, 2002, taking into account the share capital increases that had occurred, the Company s Board of Directors approved a new stock option plan to grant Claudio Bordignon and Marina Del Bue further stock options, so as to maintain the same percentage ratio between the number of shares offered for subscription to each of the beneficiaries of the stock option plan and the total number of shares included in the Company share capital. On December 20, 2002, an Extraordinary Shareholders Meeting approved a share capital increase of up to 1,669,144 Euro, in order to service the aforementioned stock option plans (i.e. the original allocation made in December 2001 and the subsequent one to the same beneficiaries in November 2002). It revoked and replaced the powers granted to the Board of Directors on December 11, 2001 and validated the actions of the Company s Board of Directors with regard to the stock options granted to Claudio Bordignon and Marina Del Bue in December 2001 and November On September 26, 2003, the Company s Board of Directors resolved to fix the number of options granted to Claudio Bordignon on November 26, 2002 at 462,032 shares while fixing the number of shares granted to Marina Del Bue at 288,770; they were given the right to subscribe the said number of shares. The strike price of these options was set at 2.4 Euro per share, based on a specific appraisal of the value of the Company. As amended by the Shareholders Meeting of April 27, 2007, the exercise period for the options granted under both stock option plans is from December 31, 2008 to June 30, In execution of the share capital increase approved by the Extraordinary Shareholders Meeting of the Company on December 20, 2002, no further options can be granted, beyond those granted by the Board of Directors on September 26, After the accounting par value of the outstanding shares was reduced, and the total number of ordinary outstanding shares increased, pursuant to a resolution approved by the Company s Extraordinary Shareholders Meeting on October 29, 2007, by the end of the year, as described above, Claudio Bordignon and Marina Del Bue can subscribe no. 2,183,100 and no.1,364,439 ordinary shares respectively. More specifically, Mr. Bordignon can subscribe no. 797,004 shares at a price of Euro per share and no. 1,386,096 shares at a price of 0.8 Euro per share, while Ms. Del Bue can subscribe no. 498,129 shares at a price of Euro per share and no. 866,310 shares at a price of 0.8 Euro per share. The options are granted free of charge. They are registered, personal and non-transferable, except upon death. They cannot be made subject to any restrictions specifically with regard to pledges and guarantees and will cease to be valid in the case of discharge for just or reasonable cause of any option holder who is a manager of the Company, or of removal from office of any option holder who is a Director of the Company; they shall also cease to be valid if the option holder resigns. Under the regulations that govern the stock option plan approved in 2002, in the event of extraordinary transactions e.g. changes in share capital or any transactions that increase or decrease the Company s net assets - the Company s Board of Directors shall, insofar as necessary to ensure that the substantive value of the options is maintained, adjust, in accordance with the rules commonly accepted as normal practice on financial markets (pursuant to the regulations), the strike price and/or the number of shares underlying the options not yet exercised, or it shall implement a new plan with roughly the same conditions (except the strike price and/or the number of shares Page 73

76 underlying each option not yet exercised). This shall be done as necessary and appropriate, in order to maintain the tax regime pursuant to Article 48(2) of Presidential Decree no. 917 of December 22, The Extraordinary Shareholders Meeting of April 14, 2009 resolved to extend to December 31, 2011 the final deadlines for collecting subscriptions relating to the share capital increase which was approved to service the incentive plan as set out in the Shareholders Meeting resolution of December 20, 2002, to support the stock option plan. Following this resolution, the final deadline for the exercise of options granted under this plan was extended from June 30, 2009 to December 31, Following the share capital increase which is described in more detail above, MolMed s Board of Directors on October 11, 2010 approved a change to the regulations for the stock option plans in force, aimed at ensuring, as envisaged by the regulations, that the substantial value of the options is maintained. In particular, it was arranged to adjust the strike price of unexercised options, by using the same adjustment factor as determined by Borsa Italiana for the purposes of adjusting the value of shares on the market when share capital increase data is published. The strike prices were therefore adjusted as follows: Strike price before the share capital increase ( ) K adjustment factor Adjusted strike price ( ) 2001 options options There is no prejudice to all the other conditions, terms and agreements as set out in the regulations for stock option plans and subsequent modifications. Here below is the summary of the options originally granted with the stock option plan: Grant period Number of Strike price Possibility Expiry of possibility Option holder Position held options (Euro) of exercise of exercise 2001 Claudio Bordignon Board Chairman, Chief Executive Officer 797, immediate December 31, Claudio Bordignon Board Chairman, Chief Executive Officer 1,386, immediate December 31, 2010 Total 2,183, Marina Del Bue Director, General Manager 498, immediate December 31, Marina Del Bue Director, General Manager 866, immediate December 31, 2010 Total 1,364,439 Total for plan 3,547,539 It should be noted that, at the date of preparing these Financial Statements, Marina Del Bue underwrote a total of 740,000 shares at a price of 0.8 Euro per share stock option plan The Company s Extraordinary Shareholders Meeting of October 29, 2007 resolved a share capital increase against payment of up to a total of 772, Euro, through the issue of a maximum of no. 3,728,034 ordinary shares. These shares will be reserved, pursuant to Article 2441 (last paragraph) of the Italian Civil Code, for the employees of the Company and of any subsidiary or parent companies, as part of the share option plans aimed at them and, pursuant to Article 2441 (5) of the Italian Civil Code, for the executive directors and consultants of the Company and of any subsidiary or parent companies, as part of the share option plans aimed at them. This share capital increase may be performed in tranches, pursuant to Article 2439 (2) of the Italian Civil Code and may be carried out and subscribed in one or more stages by December 31, The Shareholders Meeting also resolved to grant to the Board of Directors powers to draw up one or more incentive schemes, to identify the beneficiaries of options among the executive directors, consultants and employees of the Company (or subsidiary or parent companies) and to determine the number of options to be granted to each beneficiary, as well as the strike price that will be determined each time that options are granted, at Page 74

77 an amount equal to the normal value of the newly issued ordinary shares, pursuant to Article 9 (4) (a) of Presidential Decree no. 917/1986, at the date of allocation of the options. Pursuant to the powers granted by the Shareholders Meeting of January 7, 2008, the Board of Directors approved the adoption of an incentive scheme, subject to the start of trading of its shares on the MTA. The scheme provides for two different types of options that may be granted to beneficiaries to be identified by the Board of Directors or by the Shareholders Meeting, when required by law from among the Executive Directors, consultants and employees of the Company (and of any subsidiary and parent companies): Type A options: maturing at the end of the third year from the date on which trading of the Company shares begins on the MTA; these may be exercised in a single installment, starting from the maturity date and up to a deadline of seven years from the maturity date; Type B options: maturity is subject to achievement of the objectives identified by the Board of Directors upon granting and, in any case, comes no sooner than the end of the third year from the date of allocation. The options may be exercised in one or more installments, starting from the maturity date and up to a deadline of seven years from the maturity date. The Board of Directors approved an initial allocation of options to Company management, in accordance with the stock option plan and in the manner required under the regulations. It has granted a total of no. 2,400,000 options, giving the right to subscribe one ordinary share each, for a total face value of 497, Euro, at a price per share equal to the Offering Price, in the following quantities: Type A options, a total of no. 600,000 options; Type B options, a total of no. 1,800,000 options; The Board of Directors established that Type B options will mature in several installments, depending on achievement of business objectives, after three and five year periods. The options are granted free of charge. They are registered, personal and non-transferable, except upon death or incapacity. They cannot be made subject to any restrictions specifically with regard to pledges and guarantees and will cease to be valid in the case of dismissal for just or reasonable cause of any option holder who is a manager of the Company or removal from office for just cause of any option holder who is a Director of the Company; they shall also cease to be valid if the option holder resigns. Under the regulations of the aforementioned incentive scheme, in the event of any extraordinary transactions - e.g. changes in share capital or merger and/or spin-off operations - the Company Board of Directors shall, insofar as necessary to maintain the substantive value of the options, adjust, in accordance with the rules commonly accepted as normal practice on financial markets (pursuant to the regulations), the strike price and/or the number of shares underlying the options not yet exercised, or it shall implement a new plan with roughly the same conditions. Following the share capital increase which is described in more detail above, MolMed s Board of Directors on October 11, 2010 approved a change to the regulations for the stock option plans in force, aimed at ensuring, as envisaged by the regulations, that the substantial value of the options is maintained. In particular, it was arranged to adjust the strike price of unexercised options, by using the same adjustment factor as determined by Borsa Italiana for the purposes of adjusting the value of shares on the market when share capital increase data is published. The strike prices were therefore adjusted as follows: Strike price before the share capital increase ( ) K adjustment factor Adjusted strike price ( ) 2007 options Page 75

78 On May 9, 2011 the Board of Directors noted in reference to March 5, 2011: the expiry of the time period established in the regulations for stock option plans, due to the vesting, for the beneficiaries, of the type A options allocated by the resolution of January 7, 2008; that, on the contrary, the condition had not occurred to which, under the same resolution, the vesting of the first tranche of type B options was subject, equal to 70% of the options, for a total of 1,260,000 options which must, therefore, be considered expired. There is no prejudice to all the other conditions, terms and agreements as set out in the regulations for stock option plans and ensuing amendments. Below is a summary of the options originally allocated relating solely to the stock options plans for 2008, with the options that are to be considered as expired in light of the above comments: Grant period Option holder Type Strike Price (Euro) Number of options granted Number of options expired No. of residual options 2008 Claudio Bordignon B 1, Marina Del Bue B 1, Enrico Cappelli A 1, Enrico Cappelli B 1, Holger Neecke A 1, Holger Neecke B 1, Marco Dieci A 1, Marco Dieci B 1, Antonio Lambiase A 1, Antonio Lambiase B 1, Paolo Rizzardi A 1, Paolo Rizzardi B 1, Daniele Pieraccioli B 1, Cynthia Giuliani B 1, Catia Traversari A 1, Catia Traversari B 1, Total Page 76

79 Summary of the options granted The table below shows the options granted and held at December 31, 2011: Options held at January 1, 2011 Options granted during the period Options exercised during the period Options expired during the period Options held at December 31, 2011 (1) (2) (3) (4) (5) (6) (7)= (8) (9) Name and surname Position held Number of options Average strike price Average expiry date Number of options Number of options Number of options Number of options Average strike price Average expiry date Claudio Bordignon Board Chairman, Chief ,815 (*) ,480 (*) Executive Officer Marina Del Bue Director, General Director ,985 (*) ,480 (*) Enrico Cappelli Chief Financial Officer ,480 (*) ,480 (*) Holger Neecke Director of Business Development & Investor Relations ,480 (*) ,480 (*) Marco Dieci Director of Special Projects ,480 (*) ,480 (*) Antonio Lambiase Director of Clinical ,480 (*) ,480 (*) Development Paolo Rizzardi Daniele Pieraccioli Director of Research & Development Director of Intellectual Property ,480 (*) ,480 (*) ,480 (*) ,480 (*) Cynthia Giuliani Director of Human Resources ,480 (*) ,480 (*) Catia Traversari Director of Research ,480 (*) ,480 (*) Total (*) For information related to the option average expiry date, reference should be made to stock options plans as described in these Notes During 2011, the Director and General Manager, Marina Del Bue, exercised part of the options granted through the stock option plans by subscribing 126,310 shares at the price of Euro per share. The impact of this transaction is described in Note 12. In addition to the provisions of the previous paragraph on the options relating to the 2008 stock options plans to be considered expired, it should be pointed out that the date of December 31, 2011 corresponded to the deadline for exercising the options assigned on the basis of the stock options plans, for which, from this date onward, the following options, not exercised at the aforementioned date, have expired: 2,183,100 options originally assigned to the Chairman and Chief Executive Officer, Claudio Bordignon; 498,129 options originally assigned to the Director and General Manager, Marina Del Bue. Page 77

80 Note 33 Transactions with related parties Transactions with related parties include transactions between MolMed, its shareholder Science Park Raf S.p.A., Fondazione San Raffaele del Monte Tabor, which controls Science Park Raf S.p.A., and some associated companies. MolMed has also started bank dealings with Banca Esperia S.p.A. and Banca Mediolanum S.p.A., which are both related parties of the shareholder Fininvest S.p.A. These transactions do not qualify as either atypical or unusual and are part of the Company s ordinary business. These transactions are regulated at market conditions, taking account of the features of the goods and services provided. Transactions with Science Park Raf and Fondazione San Raffaele In 2001 MolMed, Science Park Raf and Fondazione San Raffaele have entered into an option agreement, under which Science Park Raf and Fondazione San Raffaele have undertaken to sell or to license or sublicense to MolMed all or some of their research projects involving genetic or molecular therapies for cancer and AIDS, as well as the rights to benefit economically from these projects, plus any technology or know-how that are part of or otherwise instrumental to said projects, together with the right for MolMed to obtain access to any and all information regarding such projects. The effectiveness of the option agreement, under which in 2008 the Company paid a fee of 4,131 thousand Euro plus VAT, was subject to admission of the Company s shares to trading on a regulated market; subsequent to fulfillment of this condition, which occurred in March 2008, the agreement is valid for eight years, with the possibility of renewal on a four year basis. On May 11, 2009 the Board of Directors of MolMed approved some amendments to the option agreement: the amendments, relating to the updating of some regulatory references which had changed over time, as well as the introduction of further means of exercising the option right by MolMed, were considered necessary for the purposes of the correct and effective execution of the contractual terms which, as they had been developed some time ago, needed adjusting to the current operational conditions, with the aim of maximizing the opportunities and benefits offered to the parties by the agreement. Between 2001 and 2008 MolMed signed in-licensing contracts with Science Park Raf and Fondazione San Raffaele, by which it acquired (exclusive and non-exclusive) rights over patents or claims over patents owned by related parties, in order to be able to develop its products. The length of these contracts is linked to the expiry of the patent. These contracts envisage different means of payment (upfront payments, milestones and royalties), linked to progress in activities regarding the products. MolMed currently has outstanding contracts with Fondazione San Raffaele through which some clinical trials relating to the Company s products TK and NGR-hTNF are carried out at the hospital managed by Fondazione San Raffaele. The fees for the purchase of these services are in line with market prices for contracts signed with other clinical centers. MolMed also has outstanding scientific cooperation agreements, by which the Company has commissioned Fondazione San Raffaele to carry out fee-based analysis projects, making use of the know-how of their researchers. MolMed signed a lease with Science Park Raf for the premises located in Milan, Via Olgettina 58, where the Company has its headquarters. This contract, which was signed at the start of 2010, annulled and replaced the previous leases which were in force up to The new contract expires at the end of 2015 and represents an improvement for the Company compared to the previous version. In calculating the rental fee, a series of services offered by the San Raffaele Science Park are taken into account, such as security and reception services, maintenance service, and access to livestock facilities, to the library and to the cafeteria and canteens by MolMed s staff. Again as part of managing its own facilities, agreements have been activated relating to the provision, by Science Park Raf and Fondazione San Raffaele, of some services linked to the technical upkeep of scientific equipment, to health physics and radiation safety services and to livestock facility services. As part of the operations, MolMed signed a series of contracts with Fondazione San Raffaele under which MolMed supplies, as part of the work of its own GMP facility, cell manipulation services, as well as the development and production of materials for clinical trials managed by researchers from Fondazione San Raffaele. In particular, GMP activities include the production of batches of retroviral supernatant, of peptides and dendritic cells, the supply of clinical batches consisting of genetically Page 78

81 modified cells from patients, and cell selection and manipulation. Economic conditions of the agreements are promptly established by the Company, based on the costs specific to the activities requested, plus the portion of the general costs attributed to the service performed and the margin deemed adequate. As part of its operations, MolMed has commercial relationships with other related parties, such as Diagnostica e Ricerca San Raffaele S.p.A. and HSR Resnati S.p.A., which are directly or indirectly controlled by Fondazione San Raffaele. Diagnostica e Ricerca San Raffaele S.p.A. performs microbiological analyses on the samples generated by clinical trials of MolMed s investigational therapies, while HSR Resnati S.p.A. carries out diagnostic assays for MolMed s personnel and other staff, in compliance with prescriptions related to workers safety. Services provided also include other occupational medicine activities, such as definition and management of healthcare protocols for preventive and periodic monitoring of the Company s personnel. Transactions with other related parties The Company has a current account at Banca Esperia S.p.A. and at Banca Mediolanum S.p.A. in order to manage the investment of liquidity which exceeds the Company s operating needs. Transactions are regulated at market conditions. Income and equity impact The following table shows the effect of transactions with related parties, identified in accordance with IAS 24, on the Company s Income Statement and Statement of Financial Position for 2011: Income impact (amounts in thousands of Euro) Revenues Financial income Costs for services Costs for use of third-party assets Personnel costs Amortization, depreciation and write-downs Financial charges Science Park Raf S.p.A Fondazione Centro S.Raffaele Diagnostica San Raf S.p.A HSR Resnati S.p.A Banca Esperia S.p.A Banca Mediolanum S.p.A Alba Servizi Aerotrasporti S.p.A Other related parties Total Financial statements item % on financial statements item 14% 91% 8% 80% 0% 3% 3% Revenues of 385 thousand Euro mainly arise from the services provided by MolMed to Fondazione San Raffaele. Costs for services of 1,073 thousand Euro relate to research agreements, contracts linked to the management of clinical testing at San Raffaele Hospital, some services connected to the management of the MolMed structure, as well as the recognition in the Income Statement of the charge relating to the straight-line decrease in the fee paid for the option to buy research projects signed with Science Park Raf and Fondazione San Raffaele. The costs for use of third-party assets include 800 thousand Euro of lease payments envisaged by the contract signed with Science Park for the use of premises by the Company within the San Raffaele Science Park, while 10 thousand Euro refers to the lease of car parking areas at the headquarters of Milano 2, made available by Alba Servizi Aerotrasporti S.p.A., a related party of the shareholder Fininvest S.p.A. The item Amortization, depreciation and write-downs refers to the allocation concerning receivables due from the related party Fondazione San Raffaele, involved in an arrangement with creditors pursuant to Article 160 et seq. of the Bankruptcy Law. For further information reference should be made to the description given in the section Equity impact. Financial income and charges relate to income and expenses for the management of bank deposits and investments in securities held with Banca Esperia and Banca Mediolanum. Page 79

82 Equity impact (amounts in thousands of Euro) Other noncurrent assets Trade receivables and other commercial assets Other receivables and sundry assets Other financial assets Cash and cash equivalents Trade payables Science Park Raf S.p.A Fondazione Centro S.Raffaele Diagnostica San Raf S.p.A HSR Resnati S.p.A Banca Esperia S.p.A Banca Mediolanum S.p.A Mediobanca S.p.A Alba Servizi Aerotrasporti S.p.A Total Financial statements item % on financial statements item 100% 5% 29% 29% 96% 2% The other assets refer to the fee agreed for the option to buy research projects signed with Science Park Raf and Fondazione San Raffaele; this amount, which was originally of 4,131 thousand Euro, is subject to a pro quota temporis decrease and the related charge will be recognized in the Income Statement on a straight-line basis over the contract eight year minimum duration. Trade receivables and payables reflect the trends in invoicing and payment of services linked to the above contractual dealings. Regarding the recent affairs involving Fondazione Centro San Raffaele del Monte Tabor, subject to an arrangement with creditors pursuant Article 160 et seq. of the Bankruptcy Law, it should be noted that the aforementioned dealings generated trade receivables of 177 thousand Euro, net of the provision of 28 thousand Euro as previously described, and trade payables of 92 thousand Euro, with a net balance at December 31, 2011 of 85 thousand Euro which is not a significant amount for the Company and which, therefore, is free from significant repercussions linked to its credit exposure to Fondazione San Raffaele. As for the shareholdings and equity investments of the Foundation, it should be recalled that Science Park Raf S.p.A., which is controlled by Fondazione San Raffaele, holds an equity investment limited to % of MolMed s capital. At October 10, 2011, the reference date for the Fondazione San Raffaele application to arrangement proceedings with creditors, receivables of 95 thousand Euro were due from the former to the Company, as shown in the receivables statement sent by the Company to the Receivers. Other receivables and sundry assets refer for 516 thousand Euro to the fee agreed for the aforementioned option to buy research projects. This agreement was not impacted by the events mentioned above. Other financial assets consist of bonds of Mediobanca S.p.A. which is also a related party of MolMed. Cash and cash equivalents consist of bank deposits. For information on fees paid to directors, statutory auditors and managers with strategic responsibilities, reference should be made to Note 36. For information on stock options assigned to directors and managers with strategic responsibilities, reference should be made to Note 32. For information on equity investments held by directors, auditors and managers with strategic responsibilities, reference should be made to section 12.4 of the Report on Operations. As far as the main impacts on financial flows of transactions with related parties are concerned, as illustrated in the Statement of Cash Flows, it should be noted that these regard the dealings and transactions described above. Page 80

83 Note 34 - Significant non-recurring events and transactions Pursuant to Consob Communication of July 28, 2006, it should be noted that, during 2011, the Company did not undertake any significant non-recurring transactions. Note 35 - Transactions resulting from atypical and/or unusual events Pursuant to Consob Communication of July 28, 2006, it should be noted that, during the period, the Company did not enter into any atypical or unusual transactions. The Communication defines as atypical or unusual transactions those transactions that may raise doubts as to the accuracy/completeness of the information in the Financial Statements, the existence of conflicts of interest, the safeguarding of the business net assets and of the minority shareholders, due to their significance/importance, the other parties involved in the transaction, the subject of the transaction, the way the transfer price was determined and the timing of the event/transaction (proximity to year end). Note 36 Fees paid to Directors, Statutory Auditors, General Managers and Managers with strategic responsibility (Article 78 of Consob Regulation no /99) Pursuant to Article 78 of Consob Regulation no of May 14, 1999, as subsequently amended, on the adoption of regulation implementing Legislative Decree no. 58 of February 24, 2008 (Testo Unico Draghi) on the provisions governing issuers, the following information is provided in relation to the fees paid to the Directors and Statutory Auditors. Name and surname Position held Term of office Term of office expiry date Fees Fringe benefits DIRECTORS Claudio Bordignon Chairman and CEO on approval of 2012 Fin.Statements Luigi Berlusconi Director on approval of 2012 Fin.Statements 14 Silvio Bianchi Martini Director on approval of 2012 Fin.Statements 44 Renato Botti Director on approval of 2012 Fin.Statements 13 Maurizio Carfagna Director on approval of 2012 Fin.Statements 17 Paolo Michele Castelli Director on approval of 2012 Fin.Statements 17 Riccardo Cortese Director on approval of 2012 Fin.Statements 27 Marina Del Bue Director on approval of 2012 Fin.Statements 17 Alessandro De Nicola Director on approval of 2012 Fin.Statements 53 Massimiliano Frank Director on approval of 2012 Fin.Statements 17 Sabina Grossi Director on approval of 2012 Fin.Statements 25 Alfredo Messina Director on approval of 2012 Fin.Statements 17 Maurizio Tassi Director on approval of 2012 Fin.Statements STATUTORY AUDITORS Fabio Scoyni Chairman of Board of Stat. Auditors on approval of 2012 Fin.Statements 38 Enrico Scio Statutory auditor on approval of 2012 Fin.Statements 25 Antonio Marchesi Statutory auditor on approval of 2012 Fin.Statements GENERAL MANAGERS Marina Del Bue Indefinite Germano Carganico Indefinite OTHER MANAGERS WITH STRATEGIC RESPONSIBILITIES No. 10 managers with strategic responsibilities Indefinite The fees due to Managers with corporate strategic responsibilities, identified on the basis of the Procedures for Transactions with Related Parties approved and implemented by the Company, amounted to 1,266 thousand Euro, consisting of salaries of 1,111 thousand Euro, bonuses of 155 thousand Euro and fringe benefits of 18 thousand Euro. On April 26, 2010 the Board of Directors recognized to the Chairman of the Board of Directors, Claudio Bordignon, as compensation for a non-competition obligation for 24 months following the termination, for whatever reason, of his role, the payment of 750 thousand Euro gross of taxes, to be paid at the end of the related mandate and should it not be renewed. Page 81

84 On May 24, 2010, based on the Board of Directors resolution of April 26, 2010, an agreement was signed between the Company and the Chairman and Chief Executive Officer, Claudio Bordignon, according to which, in the event that: a) the Shareholders Meeting should revoke his appointment as a director without just cause, b) all or part of the powers and responsibilities granted by the Board of Directors should be revoked and / or powers or responsibilities should be attributed to other parties which, except for deputy powers and responsibilities assigned to other Directors and those granted to the General Manager, are, as a whole, essentially equivalent to those attributed to the Chairman and Chief Executive Officer, or, are of such importance that they would have a significant effect on his position and his role as head of the Company, without just cause or c) the company should be put into liquidation, the Chairman and Chief Executive Officer will be paid indemnity equal to a gross total annual fee of 750 thousand Euro provided for the role of Chairman and Chief Executive Officer, multiplied by the number of remaining years until the Shareholders Meeting convened to approve the 2012 Statutory Financial Statements. Similarly, the Chairman and Chief Executive Officer will be entitled to receive the indemnity in the event of his resignation from the role with just cause corresponding to only one of the situations set out in point b). Note 37 Information pursuant Article 149 (12) of the Consob Issuers Regulations The table below has been prepared in accordance with Article 149(12) of the Consob Issuers Regulations. It shows the fees for 2011 and 2010 for the audit services and for other non-audit services provided by the external auditors. No additional services were provided by other entities belonging to the external auditors network. (amounts in thousands of Euro) Entity that provided the service Fees for 2011 Fees for 2010 Audit Deloitte & Touche S.p.A (3) (1) Certification services Deloitte & Touche S.p.A (4) (2) Total (1) Audit of Statutory Financial Statements at December 31, 2010, of the half-year report at June 30, 2010, limited audit of the interim report at March 31, 2010 and control activities on accounting procedures and reporting of operating events (2) Activities relating to the issue of comfort letters on the Prospectus and preparation of Modello Unico and Modello 770 tax returns (3) Audit of Statutory Financial Statements at December 31, 2011, limited audit of the half-year report at June 30, 2011 and control activities on accounting procedures and reporting of operating events (4) Activities relating to the preparation of Modello Unico and Modello 770 tax returns Note 38 Information on financial risks The Company constantly monitors the financial risks to which it is exposed, in order to detect the potentially negative effects in advance and take the necessary action to mitigate them. The following section provides qualitative and quantitative disclosures on the effect that these risks may have upon the Company. The quantitative data reported in the following paragraphs do not have any value as forecasts; specifically, the sensitivity analysis of market risks is unable to reflect the complexity of the market and the reactions that may result from any changes that occur. Capital management The Company s capital management objectives are geared towards guaranteeing its ability to continue to pursue the best interests of the stakeholders while also maintaining an optimal capital structure. Page 82

85 Market risk Market risk is the risk of fluctuations in the fair value or the financial flows of a financial instrument following variations in the market price due to changes in exchange rates or interest rates, or in the price quotations for equity instruments. Interest rate risk The Company has no significant financial payables or receivables. The available liquidity was invested in current account deposits, government and corporate bonds. Their yield depends on the trend in short-term interest rates. In order to limit the risk of default in the performance of obligations by the counterparties, the investments were made at various top-flight banks and financial institutions with high credit ratings, in order to diversify the counterparty risk. The extent of exposure to interest-rate risk can be determined through a sensitivity analysis, as provided for under application of IFRS 7. This analysis illustrates the effects of a given hypothetical variation on the levels of the variables pertinent to financial charges and income and, on occasion, directly to net equity. The sensitive analysis was carried out on the basis of the following premises and assumptions: the analysis was performed by applying reasonably possible variations of the risk variables to the figures of the Statutory Financial Statements at December 31, 2011 and 2010, assuming that these figures are representative of the entire year; variations in the value of financial assets generated by variations in the benchmark interest rates have an effect on income only when, in keeping with IAS 39, they are recognized at their fair value; variations in value of floating rate financial assets generated by variations in the benchmark interest rates have an impact on the financial income for the year. In order to determine the effects of interest rate variations on the Income Statement and on the Statement of Comprehensive Income, below are the results of a sensitivity analysis, in line with the requirements of IFRS 7, applying parallel, negative and positive shifts to the zero-coupon curve for market rates. The shifts in the zero-coupon curve are equal to +/- 100 basis points. (amounts in thousands of Euro) effect on financial income effect on the fair value reserve Shift compared to zero-coupon +1% -1% +1% -1% Effect 340 (340) (49) 49 Currency risk The Company s exposure to fluctuations in currency-exchange rates is marginal, since there are no significant debit or credit positions in foreign currency, or financial instruments subject to currency risks. Financial assets are denominated in Euro. The Company does not use hedging instruments for its currency positions. Credit risk This is the risk that a client or counterparty causes a loss by defaulting on an obligation and it is primarily related to financial transactions. Given the nature of the activities performed by the Company, and the resulting structure of relevant assets, the Company is subject to limited credit risk. The credit risk involving the Company s current assets, which include cash on hand, miscellaneous financial assets, tax receivables, trade receivables and other assets, presents a maximum risk equal to the value of these assets in the event that the counterparty becomes insolvent. There are no significant amounts past due. It should also be noted that all the main counterparties consist of leading financial institutions and widely respected Page 83

86 companies. In addition, investments were made at a number of different credit institutions, in order to diversify the counterparty risk. With regard to recent events involving Fondazione Centro San Raffaele del Monte Tabor, reference should be made to Note 33. Classes of financial instruments In order to provide full disclosure as required by IFRS 7, the following table show a break-down of the types of financial instruments recorded in the Statutory Financial Statements, with an indication of the measurement criteria applied and, in the case of financial instruments measured at their fair value, of the recognition (profit or loss or equity). When applicable, the last two columns of the table lists the fair value of the financial instrument and the amount recognized in the relevant reserve at December 31, (amounts in thousands of Euro) Measurement criteria for financial instruments in the Statutory Financial Statements Class of financial instruments Financial instruments at fair value through Financial instruments at amortized cost Book value at December 31, 2011 Fair value at December 31, 2011 of which fair value reserve profit or loss equity (1) (2) (3) Assets Cash and cash equivalents Financial assets (336) Trade receivables Liabilities Trade payables Finance lease payables (1) Financial assets and liabilities measured at fair value with changes recognized in profit or loss (2) Financial assets available for sale measured at fair value with gain or loss recognized in equity (3) Loans & receivables and financial liabilities measured at amortized cost The following table includes the net financial income and charges relating to financial assets and liabilities broken down into the categories provided for by IAS 39, showing for each item the type of charge and income. (amounts in thousands of Euro) IAS 39 categories at December 31, 2011 From interest From changes in fair value From writedown at fair value From shareholders' equity reserve From other income and charges Net profit (loss) Assets Cash and cash equivalents Financial assets (106) Trade receivables Liabilities Trade payables Finance lease payables (35) (35) IAS 39 categories - total (106) For further details on cash and cash equivalent, plus other financial assets, reference should be made to Notes 10 and 11. Fair value hierarchy In relation to the financial instruments recognized at fair value in the Statement of Financial Position, IFRS 7 requires such values to be classified on the basis of a hierarchy of levels which reflect the inputs used in determining the fair value. The following levels can be identified: Level 1 prices recorded on an active market for assets or liabilities to be valued; Page 84

87 Level 2 inputs other than listed prices as set out in the previous point, which can be observed directly (prices) or indirectly (price derivatives) on the market; Level 3 inputs which are not based on observable market data. Financial assets valued at fair value at December 31, 2011 were classified under Level 1. Liquidity risk Liquidity risk can arise from an inability to procure, under economical conditions, the financial resources necessary for the operations, as well as for the development of activities. The Company does not present significant indebtedness and, as of the date of December 31, 2011, it showed a net positive financial position of 38,667 thousand Euro, consisting of liquid assets and investments in current financial assets. The two main factors that determine the Company s liquidity are, on the one hand, the resources generated or absorbed by the operating and investing activities and, on the other hand, the characteristics of the financial investments in terms of their expiration and liquidity, as well as market conditions. The Company has implemented a series of policies and processes designed to optimize the management of financial resources and reduce liquidity risk: an adequate level of cash on hand is maintained; the financial flows generated by the Company s operations are constantly monitored, together with the net financial position, so that any necessary actions can be taken forthwith; monitoring of prospective conditions of liquidity, with regard to the process of corporate planning. For more information reference should be made to the section Going concern in these Notes, as well as to the section on Financial risks in the Report on Operations. Note 39 Significant events after the reporting period Following the end of the reporting period, no significant events occurred that could have a material impact on operations or make it necessary to adjust the Statement of Financial Position, the Income Statement and the Statement of Cash Flows of the Company. Page 85

88 Certification of the Statutory Financial Statements, pursuant to Article 81-ter of Consob Regulation no of May 14, 1999, and subsequent amendments and integrations 1. The undersigned, Claudio Bordignon, as Chairman and Chief Executive Officer, and Enrico Cappelli, as the Executive Officer responsible for preparing MolMed S.p.A. financial reports, declare the following, taking into account the provisions of Article 154-bis (3) and (4) of Legislative Decree no. 58 of February 24, 1998: the adequacy of the reports in relation to the characteristics of the Company and the effective application of the administrative and accounting procedures applied in the preparation of the Company s Statutory Financial Statements during The adequacy of the administrative and accounting procedures for the preparation of the Statutory Financial Statements at December 31, 2011 is assessed based on a process defined in keeping with the Internal Control Integrated Framework model issued by the Committee of Sponsoring Organizations of the Treadway Commission which is a reference framework generally accepted internationally. 3. It is also stated that: the Statutory Financial Statements at December 31, 2011: a) have been prepared in compliance with the applicable international accounting standards approved by the European Union through Regulation (EC) no. 1606/2002 of the European Parliament and Council of July 19, 2002 and subsequent amendments and integrations; b) are consistent with the results of the accounting records and entries; c) are suitable to provide a true and correct representation of the financial conditions, results of operations and cash flows of the issuer; the Report on Operations includes a reliable operating and financial review of the Company, as well as a description of the main risks and uncertainties to which it is exposed. March 12, 2012 [signed by] Claudio Bordignon Chairman of the Board of Directors and Executive Officer [signed by] Enrico Cappelli Executive Officer responsible for preparing company financial reports Page 86

89 REPORT OF THE EXTERNAL AUDITORS Page 87

90 Page 88 Statutory Financial Statements at

91 REPORT OF THE BOARD OF STATUTORY AUDITORS Report of the Board of Statutory Auditors to the Shareholders Meeting of MolMed S.p.A. pursuant to art. 153 of Legislative Decree 58/1998 Dear Shareholders, During the year ended, the Board of Statutory Auditors of MolMed S.p.A. (hereinafter the Company ) performed the supervisory activities provided for under the law, also in consideration of the principles of conduct recommended by the Italian National Councils of Certified Public Accountants and Bookkeepers. During the year 2011, the Board of Statutory Auditors obtained the information needed to carry out its tasks of general supervision, by holding meetings with the management and the various corporate departments and by taking part in the meetings of the Board of Directors, which holds decisionmaking powers over strategic transactions, as well as those having the most significant impact on the corporate business. The Board of Directors as a whole, together with the members of the Board of Statutory Auditors, provides prior approval of significant or material transactions with related parties. The Board of Statutory Auditors has obtained information from the Directors on the activities undertaken and the most important transactions carried out at least on a quarterly basis. 1. MolMed is a medical biotechnology company, focused primarily on the research, development and clinical validation of innovative therapies for the treatment of tumors with high unmet medical need. The Company s product portfolio is innovative and diversified. The main activities in which the Company was engaged in 2011 were: the clinical and pharmaceutical development of two anti-tumor treatments which are being tested: NGR-hTNF, a biological drug targeting blood vessels for solid tumors this approach is based on the use of a highly selective vascular targeting agent whose molecular target is a structure which is only present on blood vessels that feed the tumor mass. The antivascular effect of the drug cuts off supplies of oxygen and nutrients to the tumor, thus blocking its growth; TK, a cell therapy product for blood tumors this approach is aimed at making available to all patients the curative potential of transplants of haematopoietic stem cells derived from the bone marrow of a healthy donor, that is currently feasible in a safe and effective way only if the donor is fully compatible with the patient, a condition that can be satisfied only for approximately 50% of candidates to the transplant. The activities that were ongoing in 2010 continued in 2011, in particular: production of transduced cells with lentiviral vectors for the experimental treatment of patients affected by MLD and WAS as per the agreement signed with Fondazione Telethon; production of cells for the experimental treatment of patients affected by Duchenne muscular dystrophy; supply of various services as provided for by agreements entered into with Fondazione San Raffaele. supply of services related to Quality Control activities (sterility tests in accordance with the Pharmacopoeia). The Company s main investments during 2011 were largely due to the regular replacement of laboratory equipment and the purchase of new machinery to be used in manufacturing processes. The net financial position decreased from 60,040 thousand Euro at December 31, 2010 to 38,667 thousand Euro at December 31, 2011, due to the use of financial resources in the Company s ordinary operations. The Company s transactions outlined above are adequately illustrated in the Report on Operations and in the Notes. Page 89

92 The Board of Statutory Auditors has confirmed that the transactions referred to above comply with the law, the company by-laws and the principles of good management, having ensured that they were not manifestly imprudent or risky, that they did not conflict with the resolutions of the Shareholders Meeting and that they were not likely to negatively affect the Company s assets. 2. The Board of Statutory Auditors did not ascertain, during the year 2011 or after the reporting period, any atypical and/or unusual corporate transactions carried out with third parties or with related parties, as defined in Consob communication of July 27, Information on transactions carried out with related parties in the year 2011, along with a description of the characteristics and economic effects of such transactions, is found in the Report on Operations (point 10.3), in the Notes (no. 33), in the Statement of Financial Position and in the Income Statement drawn up in accordance with CONSOB Resolution no , issued on July 27, During the year 2011, the Board of Statutory Auditors, also through joint meetings with the Control and Risk Management Committee, verified whether the Company has implemented actions aimed at ensuring both the procedural and substantial fairness and transparency of decision-making and operating processes involved in transactions with related parties. In particular, the Board monitored compliance with Code provisions for the performance of significant or material transactions with related parties. 3. Taking into account the Company s structure and size, the information on the Company s transactions with related parties included in the 2011 Financial Statements is considered adequate. 4. On April 2, 2012 the external auditors Deloitte & Touche issued their report pursuant to articles 14 and 16 of Leg. Decree no. 39 of January 27, 2010 certifying that: The financial statements at December 31, 2011 comply with the rules governing their preparation criteria, have been drawn up clearly and provide a true and fair representation of the income, equity and financial position and cash flows of the Company; they comply with IFRS as well as the implementing provisions of art. 9 of Leg. Decree no. 38/2005. The external auditors also certify that the Report on Operations and the information as set out in para. 1, letters c), d), f), l), m) and para. 2, letter b) of art. 123-bis of Leg. Decree 58/98 included in the report on corporate governance and ownership structure are in line with the financial statements as required by the law. Finally, the external auditors «focus on the directors analysis included in the Report on Operations and in the Notes regarding the fact that during the year the company incurred a loss of 21,569 thousand Euro compared to a loss of 17,582 thousand Euro in the previous year and that this situation is typical of the business model of biotech companies during the development of products the economic return on which is expected for future years». The Board of Statutory Auditors held meetings with the external auditors and assessed their independence, general methods and specific approach adopted for the purposes of carrying out their audit activities, and did not identify any problematic issues. Against this background, the Directors state that the financial resources available, following the share capital increase, will enable the Company to continue developing its product portfolio and to continue its research and development activities in 2012, as well as improving business opportunities and the Company s overall operations and, therefore, will guarantee adequate resources for the Company s operations in the foreseeable future, for a period of at least 12 months starting from the date the financial statements for the year ended December 31, 2011 have been approved. 5. During the year 2011, no reports of the type referred to under Article 2408 of the Italian Civil Code were submitted to the Board of Statutory Auditors. 6. During the year the Board of Statutory Auditors did not receive any notifications or reports. Page 90

93 7. During the year 2011, the Board of Statutory Auditors did not issue to the Board of Directors, pursuant to Article 2389, paragraph 3, of the Italian Civil Code any opinion on the fees paid to the Directors with key responsibilities. 8. During the year 2011, the Company s Board of Directors held 5 meetings, all of which were attended by the Board of Statutory Auditors. The Control and Risk Management Committee met 8 times. The Remuneration Committee met 4 times. The Board of Statutory Auditors held 12 meetings, 8 of them jointly with the Control and Risk Management Committee. The Board of Statutory Auditors also took part in the Shareholders Meeting held to approve the financial statements for The Board of Statutory Auditors obtained information on and monitored, within the scope of its responsibilities, compliance with the principles of good management, through interviews, direct observations and collection of information from the top management and the heads of corporate departments, as well as meetings with the external auditors Deloitte & Touche. With regard to the decision-making processes of the Board of Directors, the Board of Statutory Auditors has verified, in part through direct participation in board meetings, that the Directors decisions comply with the law and with the company by-laws, as well as that the resulting resolutions are adequately supported by reliable information and analysis and assessment processes. For the purposes of these activities the Board of Statutory Auditors relied, when necessary, on the services of outside professionals. The Board of Statutory Auditors holds that the governance policies adopted by the Company constitute a valid control of compliance with the principles of good management in operating activities. With regard to these policies, the Board of Statutory Auditors expresses a positive evaluation. 10.The Board of Statutory Auditors gained knowledge and monitored the adequacy of the company s organizational structure by collecting information from relevant managers and from the supervisory body with which the Board of Statutory Auditors held several meetings. The organizational structure is of fundamental importance to a rational business conduct, making possible both a specialization of functions and the coordination and harmonization of the activities undertaken by individual staff members in the performance of their assigned tasks. At December 31, 2011, MolMed S.p.A. s organizational structure was broadly unchanged from the previous year, except for the appointment of the new General Manager Germano Garganico who took over full responsibility for operations. This organizational structure is supplemented by the departments and committees outlined in this report. At December 31, 2011, the Company s total staff consisted of 88 employees and 16 temporary staff members. The Board of Statutory Auditors expresses a positive judgment on the organizational structure, which appears adequate to implement the measures necessary for the achievement of corporate targets and adequate with respect to the size of the Company, the activities to be performed and the coordination measures to be implemented. Significant training activities have been undertaken with regard to the governance system adopted, the Organizational Model pursuant to Legislative Decree 231/2001 and liability for crimes involving the misuse of price sensitive information and the manipulation of markets. In addition, specific scientific training programs have been carried out, as well as training on information technology, safety and the protection of personal data. 11.During the year 2011, the Board of Statutory Auditors monitored the internal control system adopted by the Company, assessing its adequacy by holding meetings with the top management and with the Internal Control Manager, joint meetings with the Control and Risk Management Committee, as well as by obtaining and analyzing the relevant documentation. The internal control system consists of a complex set of rules, procedures and organizational structures, all aimed through an adequate process of identification, measurement, management and monitoring of the main corporate risks at ensuring correct, coordinate and efficient management, as well as the ongoing pursuit of the Company s targets. The aim of internal control is to develop within the Company transparent and reliable procedures and conduct which are linked to specific responsibilities. This system helps to ensure the Page 91

94 effectiveness and efficiency of operations, further ensuring that they can be assessed and verified, that the financial information provided is reliable, that laws and regulations are observed, that the company s assets are protected and that fraud to the detriment of the Company and financial markets is prevented. The Internal Control Manager, who is also in charge of internal audit, developed an audit plan for This plan, which was agreed with the Chief Executive Officer, was submitted for approval on December 14, 2009 to the Control and Risk Management Committee and, to the extent of their respective responsibilities, for examination by the Supervisory Committee and the Board of Statutory Auditors. Subsequently, the Internal Audit Manager drew up an annual plan including the activities to be undertaken in 2012; the plan focuses, among other things, on audits concerning the risks connected with the production and testing of drugs. The audits carried out did not identify any problematic issues. The Board of Statutory Auditors states that, on the whole, the internal control system implemented by MolMed S.p.A. appears to be well structured and adequate, with respect to the characteristics of the Company. To date, problems have not been reported. The Board of Statutory Auditors, therefore, expresses a positive judgment, also taking into account that this system is continuously subject to improvements in order to be adapted to the environment and corporate changes. 12.The Board of Statutory Auditors has assessed and monitored the adequacy of the administrative-accounting system, as well as its reliability in terms of correctly depicting operating results, by obtaining information from the managers of the relevant corporate departments, examining the Company s documentation and analyzing the results of the activities undertaken by the external auditors Deloitte & Touche. 13.The Board of Statutory Auditors has ascertained, through direct assessments and based on information received from the external auditors Deloitte & Touche, as well as from the management, that the Financial Statements and the Report on Operations have been drafted in compliance with IAS/IFRS (as well as with relevant rules and regulations). In particular, the directors indicated in the Report on Operations the financial risks to which the Company is exposed and, in the Notes, the actions undertaken to meet financial requirements. The Board of Directors verified the adequacy of the powers and means available to the Executive Officer responsible for preparing company financial reports; it also verified compliance with the administrative and accounting procedures pursuant to art. 154-bis, point 4, of Legislative Decree 58/1998. The Chairman and the Chief Executive Officer, together with the Executive Officer responsible for preparing company financial reports, have complied with the requirements of art. 154-bis, paragraphs 3 and 4, of Legislative Decree no. 58 of February 24, The Board of Statutory Auditors oversaw the arrangement and implementation of the corporate governance rules envisaged by the Code of Conduct prepared by the Corporate Governance Committee for Listed Companies, approved by the Company with resolution of the Board of Directors of November 6, 2007, and unchanged following the issue of the new Code of Conduct in The Board of Directors, in accordance with the by-laws, is appointed using the system of lists of candidates, in order to ensure that at least one of the Board Members is selected from the minority list. The Board of Directors, appointed during the Shareholders Meeting of April 26, 2010, consists of thirteen Directors, three of whom have been classified as independent, in accordance with both the Code of Conduct and Legislative Decree 58/1998. The Chairman of the Company has been appointed as Chief Executive Officer, and the Board of Directors granted him specific delegated powers. Executive powers were also delegated to the two General Managers. From among the independent Directors, the Company has established the figure of the Lead Independent Director (the Chairman of the Control and Risk Management Committee was selected for this purpose), who serves as manager responsible for the requests and contributions of the non-executive Directors, and of the independent Directors in particular. The Board of Directors, on the basis of the information available to the Company and supplied by the Directors, assessed the existence of the independence requirements. The Board of Statutory Auditors reported that the criteria and procedures adopted by the Board of Directors Page 92

95 have been applied correctly. The Board of Directors also verified the number of positions held by members in other companies. The Board of Statutory Auditors determined, pursuant to art. 10, paragraph 2, of the Code of Conduct and based on the written statements submitted by each Statutory Auditor that there exist no connections or relationships that could negatively affect the impendence of the Statutory Auditors judgments; the Board of Statutory Auditors has also verified compliance with the regulations governing the maximum number of positions that can be held by Statutory Auditors. The Board of Statutory Auditors points out that it has been constantly involved in the activities of analysis and implementation of the Company s corporate governance system and, as already specified in this report, it expresses an overall positive judgment. 15.The Board of Statutory Auditors, in accordance with the provisions of art. 19 of Legislative Decree 39/2010, monitored: a) financial disclosure as also specified at point 13 of this report, b) the effectiveness of the systems for internal control, internal audit, and risk management, as set out in more detail at point 11; c) the audit of the annual results and d) the independence of the external auditors, in particular in terms of the provision of non-audit services to the body responsible for the independent audit of the accounts. 16.The supervisory and control activities carried out by the Board of Statutory Auditors, as described earlier, did not result in further observations worthy of note to be pointed out in the Report to the Shareholders Meeting or to be reported to the other supervisory bodies. 17.The Board of Statutory Auditors, having examined the Statutory Financial Statements at December 31, 2011, has no objections to raise with regard to the resolutions proposed by the Board of Directors to cover the loss for the year 2011, as better described in the Report on Operations, section 16, to which reference should be made. Milan, April 2, 2012 The Board of Statutory Auditors [signed by] Fabio Scoyni [signed by] Antonio Marchesi [signed by] Enrico Scio Page 93