ACRES Commercial Realty
Annual Report 2013

Plain-text annual report

Delivering to patients and shareholders through product innovation CONTENTs 02 BUsiNEss sNAPshOT 04 ChAiRmAN’s LETTER 05 OPERATiNg REviEw 12 BOARd Of diRECTORs & sENiOR mANAgEmENT 14 CORPORATE gOvERNANCE sTATEmENT 20 diRECTORs’ REPORT 24 REmUNERATiON REPORT (AUdiTEd) 29 30 31 32 33 AUdiTOR’s iNdEPENdENCE dECLARATiON CONsOLidATEd sTATEmENT Of COmPREhENsivE iNCOmE CONsOLidATEd sTATEmENT Of fiNANCiAL POsiTiON CONsOLidATEd sTATEmENT Of ChANgEs iN EQUiTY CONsOLidATEd sTATEmENT Of CAsh fLOws 34 NOTEs TO ThE fiNANCiAL sTATEmENTs 55 diRECTORs dECLARATiON 56 iNdEPENdENT AUdiTOR’s REPORT 58 shAREhOLdER iNfORmATiON 61 CORPORATE diRECTORY • ACRUX LIMITED01 AnnuAl RepoRt 2013BUsiNEss sNAPshOT Financial Metrics financial metrics 2012/13 2011/12 2010/11 Special dividend per share (cents, tax-free) Final dividend per share (cents, tax-free) Earnings Per Share (cents) Profit After Tax Revenue – – $0.60 $0.08 $0.04 $0.08 $0.04 – $0.35 $7 million $7 million $57 million $17 million $11 million $93 million Revenue up 56% Share Price Since Listing Business Milestones – Axiron net sales more than doubled; net sales US$124 million, up from US$55 million in previous financial year – Estradiol spray licensed to Gedeon Richter in ex-US markets – Recuvyra launched in US and Europe – Proof of concept development initiated for two new topical products – Acrux revenue increased to $16.7 million, up 56% from previous financial year – Axiron® underarm administration patent granted in United States Axiron gross-to-net sales deductions reduced and in-line with market leader – Axiron approved for marketing in Brazil (December 2012) – Axiron launched in Australia (March 2013) – Axiron launched in Canada (June 2013) – Axiron share of transdermal gel testosterone therapy prescriptions in United States grew to 14% (September 2013) – Axiron: US healthcare plan (formulary) coverage expanded 02 Axiron underarm administration patent granted in United states ACRUX LIMITEDSep‘04ACRAll Ord$0.00$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.50$5.00Sep‘05Mar‘05Mar‘06Sep‘06Sep‘07Mar‘07Mar‘08Sep‘08Sep‘09Mar‘09Mar‘10Sep‘10Sep‘11Mar‘11Mar‘12Sep‘12Sep‘13Mar‘13Business Outlook 2013/2014 – Growth of Axiron net sales in United States and ex-US Territories – Launch of Axiron in Brazil – Approval of Axiron regulatory submissions in other ex-US Territories, including Europe – Axiron milestone payment of US$25 million in March 2014 if net sales in the 2013 calendar year exceed US$100 million ($87m achieved in H1 2013) – Progression of new product opportunities in oncology, antifungal and pain relief growth of Axiron net sales in United states and ex-Us Territories Axiron US net sales since launch (Us$ million) 50 40 30 20 10 0 s n o i l l i m $ S U Rebates now comparable with the market leader Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Share of US transdermal testosterone gel therapy prescriptions April 2011 september 2013 Androgel ® 1% Androgel ® 1.62% Total Androgel® Axiron® Testim® Fortesta® 77% – 77% – 22% 1% Total transdermal1 100 1 Androderm excluded 20.6% 44.3% 64.9% 14.0% 13.5% 7.6% 100 Change -56.4% +44.3% -12.1% +14.0% -8.5% +7.5% +14% Axiron market share growth 03 AnnuAl RepoRt 2013 ChAiRmAN’s LETTER 2013 has been another productive year for Acrux. Our primary focus is still on increasing Axiron’s market share in the United states and the roll out of the product into markets outside the Us. Lilly continues to build foundations for growth through their clinical trials, marketing and resourcing initiatives. We remain confident that there are multiple factors which will continue to expand the markets for Axiron, which is still in the early stages of its commercial development. In June we announced the licensing of our estradiol spray outside the US with Gedeon Richter, which has a presence in 38 countries across Europe and an established sales force and manufacturing capability. We have previously indicated our intention to pursue recovery of our US rights to the product in the event that the current US licensee (KV Pharmaceuticals) is unable to market the product as required under the terms of the licence agreement. KV has recently emerged from Chapter 11 through a court approved restructuring. Since Acrux was first formed we have continually looked for technologies that are complementary to the transdermal intellectual property that originated at the Victorian College of Pharmacy. 04 Over more than a decade a wide range of delivery systems, devices and prospective therapeutics have been assessed by the Acrux team and virtually all of these opportunities have been declined on the basis of their lacking robust intellectual property protection, technical differentiation, market potential or a combination of these factors. These initiatives have been processed through low-cost, fast to fail assessments as we developed our two primary products – Evamist® and Axiron. We are acutely conscious of our obligation to remain focussed on delivering shareholder value through our main developments, whilst committing sufficient capital and human resource to maintain a pipeline which will enable the development of a more broadly based business over time. Acrux has recently entered a joint development initiative with Hexima Limited and a leading cancer research institute to investigate the potential for the delivery of two of Hexima’s novel compounds, one of which is an oncology treatment (for non- melanoma skin cancers) and the other is for a human antifungal therapeutic. Hexima is the leading Australian life sciences company for the development of antifungal compounds for agricultural applications, and it has entered agreements with the two leading global agricultural companies. While most (if not all) development projects should be considered to be high risk, the teams from both Acrux and Hexima are excited about these two new projects and we expect the results of the initial proof of concept work within six months. As with our past project assessments, both initiatives are being conducted on a low-cost, fast to fail basis. If we have success with either or both projects we will be providing a more comprehensive analysis detailing the path(s) to market. When last year’s annual report was issued, investors had two material concerns with Acrux – the axilla patent had not been granted and there was a significant disparity between gross and net sales of Axiron in the US. Both of these issues have now been resolved. This year investors have repeatedly expressed two new concerns – the defensibility of the granted axilla patent and the capacity to preserve the low disparity between gross and net sales. Last year we advised the market we were confident that investors’ concerns would be resolved satisfactorily and we offer the same advice to investors this year. This year, we are very pleased to welcome Tim Oldham to the Acrux Board. Tim has a wealth of experience in pharmaceutical development, manufacturing and sales and he brings a highly complementary skill and experience base to the Board. The Company is well positioned for a further year of growth, which will enable shareholders to receive a strong dividend stream and which has the potential for further capital growth with Axiron’s market expansion and our new development initiatives. Ross dobinson Chairman ACRUX LIMITED OPERATiNg REviEw Acrux has achieved a number of milestones during the 2012/13 financial year. After reporting its 4th consecutive year of profit in the financial year 2012/13, Acrux declared its second regular dividend of 8 cents per share. As Acrux is a Pooled development fund, both dividends and capital gains are exempt from tax for shareholders. %!#""! Revenue was up 56% to $16.7 million, predominantly on the back of improved gross-to-net margins on sales of Axiron. Furthermore, Axiron was launched in Canada and Australia, providing the first sales outside of the US. Marketing authorisation was also attained in Brazil. The grant of the underarm administration patent in the US, along with the significant investment by Lilly into promotion and preparation for product launches outside the US, places Axiron in a strong position for future growth. %!"""! $!#""! $!"""! !#""! Us TEsTOsTERONE ThERAPY mARkET !"! The US testosterone market grew at more than 20% per annum over %""#! the last six years and 35% in 2012 to approximately US$2 billion per annum. Transdermal therapies comprise about 90% of the dollar value sales and the number of transdermal prescriptions in 2012 was 28% higher than in 2011. *+,-./012! 304562! %""&! %""'! *78-.+2! Previously the market had been dominated by Abbvie’s Androgel, which had 77% share of transdermal prescriptions (excluding Androderm) prior to Axiron’s launch and its market share has since fallen to a collective 65% share for the two variants of Androgel. Diagnosis of men suffering the effects of low testosterone has been, and is still considered to be, very low. Growth is expected to continue to be driven by demographic trends as the population ages (the incidence of testosterone deficiency increases with age), together with increasing awareness among doctors and patients of the symptoms and treatment options. After extraordinarily high growth %"")! in 2012 (35%), the total US market growth rate has been lower so far in 2013 with around 9% growth in total prescriptions to date. There are a number of factors driving the long term growth prospects of the testosterone therapy market with testosterone deficiency recently linked to a growing number of disease states. *+,-.,0-62! 9.-:04:;2! %"$"! %""(! %"$$! %"$%! <+=0>5.+4! ?:@0-! US testosterone therapy market (US$ million) Androgel® Axiron® Androderm® Other Testim® Fortesta® Injections Us $2 billion testosterone therapy market 2500 2000 1500 1000 500 0 2005 2006 2007 2008 2009 2010 2011 2012 05 AnnuAl RepoRt 2013OPERATiNg REviEw continued In particular, the growing incidence of Type II Diabetes and obesity has been associated with a higher incidence of low testosterone. Current studies indicate that approximately 50% of obese men (including obese diabetics) have low testosterone; and approximately 30% of lean diabetics have low testosterone levels. The World Health Organisation predicts that there will be 700 million obese adults by 2015. Exploratory clinical studies have also been publicised investigating testosterone’s effects in both Alzheimer’s and Multiple Sclerosis. A vast number of clinical trials investigating the indications for and benefits of testosterone therapy are currently underway and further clinical studies are anticipated. Lilly has already initiated clinical trials with Axiron to study the product’s impact on sex drive/energy levels, ejaculatory dysfunction and efficacy for low testosterone patients that failed to respond to other testosterone gel(s). LiLLY’s COmmiTmENT TO mEN’s hEALTh ANd AxiRON Lilly’s committed financial investment in Axiron is already very substantial and is designed to maximise the product’s long term prospects. In addition to the AUD$166 million it has paid to Acrux to date, a significant investment has been made in the supply chain, US promotion and preparation for product launches outside the US. For example, Lilly has recently released new TV advertisements as part of its national direct to consumer advertising. All of these investments are funded by Lilly and their costs are not deducted from gross sales. There is a fully operational men’s health sales force within Lilly. Axiron will be marketed alongside Cialis, which is a significant product in the erectile dysfunction market. Lilly’s success with Cialis and the synergy between prescribing groups of Axiron and Cialis provide the Board and management of Acrux with confidence in their ability to grow the market for Axiron. ThE Us hEALThCARE sYsTEm The managed healthcare system in the US is unique and complex, involving multiple organisations and channels. A large number of individual managed care organisations (MCOs) receive premiums from members and meet the cost of members’ healthcare, including the cost of approved prescription medicines. Typically the MCO will require its members to make a co-payment towards the cost of medicines that are prescribed by doctors. The amount of co-pay required from the patient may vary depending on whether the medicine is on a list (“formulary”) of recommended medicines. The formulary may have more than one co-pay tier, with different levels of co-pay depending on which tier the medicine is listed. When a new medicine is launched, the pharmaceutical company is required to negotiate a contract with each MCO, or Pharmacy Benefit Manager (PBM) that manages medicine prescriptions for the MCO, in order to gain access to its formulary. MCOs and PBMs may wait 12 months after a product launch before they review and add new products. Lilly has significantly expanded the healthcare plan formulary coverage of Axiron. Currently, 82% of testosterone replacement therapy flows through an MCO and at least 87% of all commercially insured lives now have some form of access to Axiron. 06 ACRUX LIMITEDAxiRON gROss ANd NET sALEs, ROYALTiEs ANd miLEsTONE PAYmENTs The following table shows the current share of transdermal prescriptions for each product, compared with just prior to Axiron’s launch two years ago. Axiron has grown to 14%, furthermore Axiron and Fortesta have grown at the expense of Androgel and Testim. Axiron has now overtaken Testim to become the second largest product. Share of US transdermal testosterone gel therapy prescriptions Androgel ® 1% Androgel ® 1.62% Total Androgel® Axiron® Testim® Fortesta® Total transdermal1 1 Androderm excluded April 2011 september 2013 77% – 77% – 22% 1% 100 20.6% 44.3% 64.9% 14.0% 13.5% 7.6% 100 Change -56.4% +44.3% -12.1% +14.0% -8.5% +7.5% Rebates in the initial launch period had been high, but as anticipated these have reduced in 2013 and are now comparable with the market leader. Q1, 2013 saw net sales of US$37 million and Q2, 2013 saw net sales of US$47 million, compared with US$24 million in Q4, 2012. 07 AnnuAl RepoRt 2013ANimAL hEALTh PROdUCTs In addition to commercialising Axiron, Lilly’s animal health business, Elanco Animal Health, has an exclusive worldwide licence to develop and commercialise Acrux’s technology to deliver medicines through the skin of companion animals. The first product, Recuvyra, for post-operative pain relief in dogs, was launched in the US and Europe during the 2012/2013 financial year and the first royalties have been received. Elanco is working on a number of other products for companion animals for which Acrux will receive royalties on worldwide sales as well as product approval milestones. OThER PROdUCTs Acrux recently announced that it has initiated low cost proof of concept development of two new topical products in substantial market sectors, one being an oncology treatment (for non-melanoma skin cancers) and the other being a human antifungal therapeutic. The collaboration with Hexima Limited investigates the potential for the delivery of two of Hexima’s novel compounds using the Acrux technology, and are being conducted in partnership with a leading cancer research institute. Proof of concept data is anticipated during the next six months. In addition further formulation development of a topical pain relief therapeutic is underway. OPERATiNg REviEw continued AxiRON OUTsidE ThE UNiTEd sTATEs Lilly has made excellent progress in the last year with the registration of Axiron in markets outside the United States. Axiron was launched in Canada and Australia in H1 2013. Canada is the largest ex-US market for testosterone and is dominated by transdermal products. Meanwhile, Axiron has been approved in Germany (which is the second largest market outside of the US) and Brazil and launch plans are in preparation. In other European countries, regulatory submissions are progressing. Current annual sales of testosterone therapy for ex-US markets are approximately US$300 million, which is about one tenth of the total market and similar to US sales about ten years ago. This highlights the under- developed nature of testosterone therapy markets outside the US and the considerable opportunity to grow Axiron sales. Whilst the ex-US markets are fragmented and in many cases the prices achieved are lower than those in the US, the potential number of patients is considerably greater than in the US. AxiRON PATENT PROTECTiON The Acrux patent concerning the underarm administration of testosterone formulations was granted by the US Patent and Trademark Office (USPTO) in May 2013. In the United States, Axiron is now protected by eight patents with expiry dates ranging from 2017 to 2030. The patents cover three different important aspects of the product – the formulation and delivery method, administration to the underarm and the physical applicator. Axiron’s sales have now reached a level that has attracted a generic company, Perrigo, to attempt to challenge the Acrux patents. This type of action is very common in the US (Perrigo has also separately challenged the Androgel patents). 08 Lilly and Acrux have filed a lawsuit in the US alleging infringement by Perrigo of the applicator and underarm patents following the submission of an Abbreviated New Drug Application (ANDA) by Perrigo to the FDA for a copy of Axiron. The average time to trial for these type of cases is about two and a half years. EsTRAdiOL sPRAY The first product developed by Acrux was the estradiol spray for women to treat the symptoms of menopause. The spray was approved by the FDA in 2007 and launched into the US market in 2008. Branded Evamist®, the spray is distributed in the United States by Acrux’s licensee KV Pharmaceutical (KV). In 2009, KV underwent a significant restructuring of its business, including a reduction in the size of its sales force, following a number of product recalls and the suspension of its manufacturing activities by the FDA. In August 2012, KV filed petitions seeking relief under chapter 11 of the United States Bankruptcy Code. Following a number of attempts, KV emerged from chapter 11 protection in September 2013 after creditors accepted a reorganisation plan to recapitalise the company. Acrux has engaged US legal advisors and is closely monitoring KV’s emergence from bankruptcy. US net sales of Evamist are approximately US$10 million per annum. Meanwhile, good progress was made with the commercialisation of estradiol spray therapy for female menopause symptoms outside of the US (alternative brand name to Evamist to be decided). In June, Acrux appointed Gedeon Richter to commercialise the product in ex-US markets and received US$1 million upon signing the agreement. Acrux can earn further payments of up to US$2.6 million upon achievement of European regulatory milestones by Gedeon Richter, plus royalties on sales expected to commence in 2015. Marketing applications are also under review in South Africa and South Korea. ACRUX LIMITEDProduct portfolio Product name Territory Commercial partner Axiron® Recuvyra® Other animal health US Canada, Australia Europe Brazil Others US, Europe US, Europe Lilly Lilly (Elanco) US KV Pharmaceutical Switzerland Vifor Pharma status Marketed Marketed Registration Launch pending Registration Marketed In development Marketed Launch pending Evamist®/Estradiol spray Other Europe Gedeon Richter Approved in Sweden Registration Oncology Antifungal Pain Others South Africa Aspen Pharmacare South Korea Dream Pharma Worldwide Worldwide Worldwide Worldwide Available Available Available Available Registration Registration Formulation Formulation Formulation Formulation to Ph II 09 AnnuAl RepoRt 201330 June 2013 $m 30 June 2012 $m 30 June 2011 $m 15.5 1.2 16.7 (0.5) (1.3) (4.8) (6.6) 10.0 – – 10.0 (3.1) 6.9 9.0 1.7 10.7 (0.3) (0.2) (5.3) (5.8) 4.9 – – 4.9 2.5 7.4 89.6 3.9 93.5 (3.0) – (9.5) (12.5) 81.0 1.4 0.1 82.5 (25.4) 57.1 4 cents 4 cents 35 cents 6.3 – (13.4) 22.8 (2.5) – (0.6) 30.0 64.4 8.0 (99.0) 33.2 OPERATiNg REviEw continued Finance Product agreement revenue Interest and grant income Total revenue Royalties payable Capitalised development amortisation Other expenditure Total expenditure Profit before capitalised development costs Capitalised Axiron Capitalised Estradiol Profit before tax Income tax (expense)/benefit Profit after tax Earnings per share Net cash inflow/outflow before financing New share capital Dividend paid Net cash 10 ACRUX LIMITEDThe first sales milestone of US$25 million is payable when the worldwide net sales of Axiron in a calendar year equal, or exceed US$100 million. Acrux expects this milestone to be earned in the 2013 calendar year. The Company expects to fund a special dividend in the first half of 2014 from the net proceeds of this milestone. The next milestone payment of US$50 million, is anticipated to be achieved in the 2014 calendar year. Further milestone payments totalling US$120 million are expected over the four financial years commencing 2018/19. Acrux’s annual operating expenditure for the 2013/14 financial year is expected to remain at approximately $5 million, excluding Monash royalty payments and non-cash items. This expenditure includes maintenance of the company’s operations, intellectual property expenses and research and development expenditure. Royalty payments due to Monash Investment Trust cease in February 2017. CAsh fLOw Net cash provided by operating activities increased to $6.3 million (2012: net cash used $2.4 million), driven by receipts from product agreements increasing to $12.6 million (2012: $6.4 million) due to the growth of Axiron royalties. Income taxes of $2.6 million were paid during the year (2012: $4.6 million). Net cash outflow after dividend payments was $7.0 million (2012: $3.1 million). Cash reserves at 30 June 2013 were $22.8 million (30 June 2012: $30.0 million). OUTLOOk The revenue received under its global licence agreement with Eli Lilly, for the marketing and distribution of Axiron, has led to Acrux recording operating profits for the last four financial years. This is expected to continue for the foreseeable future. Acrux receives royalties on worldwide net sales of Axiron and can also earn milestone payments of up to US$195 million. Axiron royalties are calculated on a percentage of worldwide net sales. Net sales in a calendar year are recorded in tiers, with each higher tier attracting a higher royalty percentage up to a maximum percentage. The first tier of sales attracts a rate of 11%. As net sales pass through these tiers the average royalty rate will increase. REvENUE Total revenue for the financial year was $16.7 million (2012: $10.7 million). Revenue related to product agreements was $15.5 million (2012: $8.8 million). Axiron royalties and development services contributed $14.4 million (2012: $7.2 million) and a signing fee of $1.1 million was recorded following the execution of a manufacturing and marketing agreement with Gedeon Richter to commercialise Acrux’s estradiol spray in markets outside the United States. Interest income added $1.2 million (2012: $1.6 million). ExPENsEs Total operating expenditure was $6.6 million (2012: $5.8 million). Employee benefits expenses and Directors’ fees reduced to $2.5 million (2012: $2.8 million). Royalty payments to Monash Investment Trust increased to $0.5 million (2012: $0.3 million), in-line with increased product income. Depreciation and amortisation expense increased to $1.4 million from $0.3 million in the prior year, as a result of the International Financial Reporting Committee’s (IFRC) clarification of the allowable methods of amortising capitalised research and development expenditure. Income tax expense for the financial year was $3.1 million, compared with an income tax benefit of $2.5 million in the prior year. The prior year tax benefit was the result of $4.1 million of tax losses recorded from excess imputation credits on dividends received by the parent entity and additional tax deductions received from amended prior year research and development tax concession claims, offset by tax expense of $1.6 million. 11 AnnuAl RepoRt 2013BOARd Of diRECTORs & sENiOR mANAgEmENT 1 2 3 4 5 6 7 1. R. dOBiNsON, BBus 2. B. PARNCUTT, Bsc, mBA Executive Chairman Ross has been a Director since 1998 and was appointed Non-Executive Chairman in January 2006 and then Executive Chairman on 1 July 2012. He is a founder and former CEO of Acrux. Ross has a background in investment banking and stockbroking. He is currently Managing Director of TSL Group Ltd, a corporate advisory company specialising in establishing and advising life sciences companies. He was a founding Director of Starpharma Holdings Limited (ASX: SPL), and is a Director of a number of unlisted companies, including TPI Enterprises Ltd and Hexima Limited. Ross is Executive Chairman of Hexima Limited, which was listed on ASX from July 2010 to June 2011. Non-Executive Director Bruce joined the Board on 30 April 2012. His career spans over 40 years in investment management, investment banking and stockbroking including seven years as Chief Executive of listed securities firm McIntosh Securities (1990 to 1996) and three years as Senior Vice President of Merrill Lynch (1997 to 1999). His experience includes extensive involvement in financial analysis, merger and acquisition transactions, capital-raisings, and investment in companies across a broad spectrum from early stage to mature public companies. He holds a Bachelor of Science, an MBA, and is a Member of the Financial Services Institute of Australasia. Bruce is Chairman of the investment and corporate advisory firm, Lion Capital. He is President of The National Gallery of Victoria, a Board Member of the NGV Foundation and the Australian Ballet Company and a Director of listed Praemium Limited (ASX: PPS), from August 2011. He was previously a Director of ASX listed Stuart Petroleum Limited (from August 2010 to May 2011) and was a Director of McIntosh Securities Limited, Australian Stock Exchange Ltd and Vision Systems Ltd for varying periods prior to 1 July 2010. 12 ACRUX LIMITED3. R. BARROw, Bsc.hons, mBA 6. N. wEBsTER, Ph.d., m.iP.Law, mBA Commercial Director Nina has over 20 years in the pharmaceutical industry, with leadership roles in business development, project management, intellectual property portfolio management, research and development and general management. Most recently, Nina spent two years with Immuron Limited where, as Director of Commercialisation and Intellectual Property, she was responsible for the intellectual property portfolio and research & development. Prior to this, Nina spent ten years with Acrux Limited as Director of Business Development, responsible for the strategic identification, development and maintenance of commercial partnerships globally, and six years in research and development at Wyeth in the UK, gaining experience from formulation development through to pharmaceutical scale-up and technology transfer. Nina holds a Ph.D in Pharmaceutics from Cardiff University, a Bachelor degree in Pharmacology, a Masters degree in Intellectual Property Law from Melbourne University and an MBA from RMIT. 7. T. di PiETRO, B.Com, CPA Chief Financial Officer and Company Secretary Tony was appointed Finance Manager in March 2004, then Financial Controller in January 2007 before being recently appointed Chief Financial Officer and Company Secretary. Working closely with Senior Management at Acrux, Tony has been involved in a number of key events including the listing of Acrux on the Australian Stock Exchange and the subsequent capital raising for the Phase 3 development of Axiron. Prior to joining Acrux, Tony held a number of finance positions at companies including ExxonMobil Limited, Wilson Parking Pty Ltd and BHP Limited (prior to the merger with Anglo-Dutch Billiton plc). Tony qualified as a CPA in 2000 and holds a Bachelor of Commerce Degree from Swinburne University. Non-Executive Director Ross joined the Board on 1 April 2012. He has extensive experience in the life sciences sector. Ross was Chief Operating Officer and a Director of Vision BioSystems Limited during the period when the company became a leader in the global histopathology market. Following acquisition by Danaher Corporation, Ross played a pivotal role overseeing the global integration of the company with Danaher’s subsidiary, Leica Microsystems GmbH. Ross is currently the Chief Executive Officer and a Director of Paranta Biosciences Limited. 4. T. OLdhAm, Bsc(hons), LLB(hons), Phd Non-Executive Director Tim joined the board in October 2013. He has more than a decade of life sciences business development, alliance management and sales and marketing experience in Europe, Asia and Australia including as President Asia Pacific for Hospira (2007 to 2012) and a variety of senior management roles with Mayne Pharma (2002 to 2007) prior to its acquisition by Hospira. These roles encompassed the development and commercialisation of pharmaceuticals, devices and biologics. Prior to this, he was an engagement manager with McKinsey & Co (1997 to 2001). Tim has been chairman of the European Generic Medicines Association Biosimilars and Biotechnology Committee, director of the Generic Medicines Industry Association and a member of the Pharmaceutical Industry Strategy Group. Tim gained his undergraduate degrees at the Australian National University and his PhD in Chemistry from Imperial College in London and is a member of the Australian Institute of Company Directors. 5. C. BLOwER, Bsc (hons), Ph.d. Chief Operating Officer Clive has been with Acrux since 2007, successfully leading the Chemistry, Manufacturing and Controls (CMC) program for the approval, manufacture and launch of Axiron. More recently as Chief Technical Officer, he was responsible for the ongoing support of Axiron and the Research and Development program at Acrux. Prior to that, Clive was at Hospira (previously Faulding Pharmaceuticals, then Mayne Pharma) where he held a number of senior management positions, including leading the Injectable Drug Development Group. He obtained his Doctorate in Chemistry from Monash University in 1992 and has over 20 years of experience in all stages of drug development, from concept to commercialisation, having contributed to the development and launch of more than 25 pharmaceutical products. 13 AnnuAl RepoRt 2013CORPORATE gOvERNANCE sTATEmENT This statement summarises the corporate governance policies and procedures adopted by the Board and discloses the extent to which the Company has followed the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (“ASX Principles”) during and since the reporting period g. overseeing and ratifying the terms of appointment and, where appropriate, removal of Senior Management, including their remuneration; h. monitoring Senior Management performance and their implementation of strategy and ensuring appropriate resources are available; The Company’s corporate governance principles, details of which can be found on the Company’s website (www.acrux.com.au), comprise: – statement of corporate governance principles – code of conduct – Board Charter – Audit and Risk Committee Charter – Human Capital Committee Charter – continuous disclosure and shareholder reporting policy – share trading policy. In addition the website contains summaries of the Company’s: – risk management policy – Director and Senior Executive performance policies – whistleblower policy. 1. ThE BOARd Of diRECTORs 1.1 Board Role and Charter The Board has the primary responsibility for guiding and monitoring the business and affairs of the Company, including compliance with the Company’s corporate governance objectives. The Board’s role is set out in the Board Charter which establishes the relationship between the Board and Management and describes their respective functions and responsibilities. The Board is responsible for the oversight and performance of the Company, including matters such as: a. evaluating, approving and monitoring the strategic and financial plans and performance objectives for the Company; b. evaluating, approving and monitoring the annual budgets and business plans; c. evaluating, approving and monitoring major capital expenditure, capital management and all major corporate transactions including the issue of any securities of the Company; d. monitoring and approving all financial reports and all other reporting and external communications by the Company; e. evaluation of Board and individual Director performance; f. appointing, removing and managing the performance of, and the succession planning for, a Chief Executive Officer or an Executive Director; 14 i. monitoring the Company’s performance in relation to best practice principles of corporate governance; j. approving and monitoring the Company’s risk management strategy and internal controls and accountability systems and their effectiveness; The Board has delegated the day to day management of the Company to an Executive Director who, in turn, may delegate to Senior Management. The delegations to the Executive Director include: a. developing business plans, budgets and company strategies for consideration by the Board and, to the extent approved by the Board, implementing those plans, budgets and strategies; b. operating the business of the Company within the parameters determined by the Board and keeping the Board promptly informed of all developments material to the Company and its business; identifying and managing operational risks and formulating strategies for managing those risks for consideration by the Board; c. d. managing the Company’s financial and other reporting mechanisms and control and monitoring systems to ensure that they capture all relevant material information on a timely basis and are functioning effectively. 1.2 Board Composition The Board seeks to achieve a mix of skills and diversity that enables it to most effectively carry out the functions and responsibilities set out in the Board Charter. This includes: – commercial and technical expertise and experience gained in the pharmaceutical industry; – expertise and experience in business management and financial markets; and – relevant relationships in the pharmaceutical industry and in the business community. The current Board is made up of an Executive Chairman, (Ross Dobinson) and three Non-Executive Directors Ross Barrow, Bruce Parncutt and Tim Oldham. Ross Dobinson was a founding Director of Acrux and he has been intimately involved with the development and implementation of the company strategy. Ross Barrow and Tim Oldham both have extensive technical development and commercialisation skills in the life sciences sector. Bruce Parncutt has highly regarded commercial skills from his 40 years in investment management, investment banking and stockbroking. ACRUX LIMITEDThe names of the Directors, the year of their appointment or retirement, their status as non-executive, executive or independent Director and whether they will seek election at the 2013 annual general meeting are set out in the table below. The details of their background, skills and experience are set out on page 13 of this report. Name Ross Dobinson Ross Barrow Bruce Parncutt Tim Oldham Appointed/ Retired Non- Executive Executive independent seeking election at 2013 Agm Appointed 1998 Appointed 1 April 2012 Appointed 30 April 2012 Appointed 1 October 2013 No Yes Yes Yes Yes No No No No Yes Yes Yes Yes No No Yes 1.3 Director Independence In accordance with the recommendations of ASX Principle 2, the Board Charter requires the Board to include a majority of Non-Executive Independent Directors, a Non-Executive Independent Chairman and to have different persons filling the roles of Chairman and Chief Executive Officer. At all times during and since the end of the financial year a majority of Board members were independent, Non- Executive Directors, as recommended in ASX Principle 2.1. The Board appointed Ross Dobinson as Executive Chairman following the departure of the Chief Executive Officer and Managing Director at the end of 2012 financial year. Notwithstanding the Board Charter, the Board determined that with his extensive experience the current needs of the business were best served by appointing Ross into an executive role. The Board will continue to review this assessment as the business progresses. The Chair is responsible for the leadership of the Board, for ensuring that the Board functions effectively and, where appropriate, communicating the views of the Board to the public. The Chair sets the agenda for Board meetings, and manages the conduct of meetings by facilitating open discussion between Board members, between the Board and management and with the public. 1.4 Terms of Director Appointment The Non-Executive Directors do not have formal letters of appointment. The remuneration of the Non-Executive Directors and the terms of appointment of the Executive Chairman are disclosed in the Remuneration Report. 1.5 Access to Information and Independent Advice All Directors have unrestricted access to employees of the Company and, subject to the law, access to all Company records and information held by the Company, its employees and advisors. The Board receives for each Board meeting an agenda, detailed financial and operational reports and the reports of the Board Committees. Each Director is entitled to obtain independent professional advice at the Company’s expense for the purpose of assisting them in performing their duties. A Director who wishes to obtain such advice must first obtain the approval of the Chair (which approval must not be withheld unreasonably) and must provide the Chair with the reason for seeking such advice, the identity of the person from whom the advice will be sought and the likely cost of obtaining such advice. Except in certain circumstances detailed in the Board Charter, advice obtained in this manner is made available to the Board as a whole. 1.6 Human Capital Committee The members of the Human Capital Committee of the Board are Ross Barrow (Chair) and Bruce Parncutt. The Committee met once during the year ended 30 June 2013, with all members attending. Members of the Committee are chosen having regard to their skills and experience in relation to the matters for which the Committee is responsible. Members of the Committee have unrestricted access to Company records, management and advisers and the external auditors. 15 AnnuAl RepoRt 2013CORPORATE gOvERNANCE sTATEmENT continued The Committee’s role, which is set out in its Charter, in general terms is to: a. establish a formal and transparent procedure for the b. selection and appointment of new Directors to the Board; identify suitable candidates to fill Board vacancies as and when they arise and nominating candidates for the approval of the Board; c. consider processes for the orientation and education of new Directors and developing ongoing policies to facilitate continuing education and development of Directors; d. assess periodically the skills required for each Director to discharge competently the Director’s duties; e. regularly review the structure, size and composition of the Board and the effectiveness of the Board as a whole; f. establish and conduct an appropriate evaluation of the Board’s process and of existing Directors, including an evaluation of whether each Director is contributing the time required of him or her for Board duties; g. recommend to the Board a policy and framework for senior employees’ remuneration; h. review and monitor the implementation of the human i. resources plan of the Company and Senior Management succession planning; and review and recommend to the Board the total individual remuneration package of each member of Senior Management, including any bonuses, incentive payments, and participation in any share or share option plans in accordance with the policy and framework for senior employees’ remuneration. In accordance with the recommendations of ASX Principle 2.4, the Committee’s Charter further provides that, where practical, a majority of the Committee must be independent Non-Executive Directors and the Chair must be a Non- Executive Director who is not the Chair of the Company. Executive Directors may not be members of the Committee. These requirements were met at all times during and since the end of the financial year. A further recommendation of ASX Principle 2.4 is that the Committee have at least three members. However as the Board was made up of three members, with one holding an executive role, the Board had determined that, in accordance with ASX Listing Rule 12.8, only Non-Executive Directors should serve on the Committee and as such the Committee consists of the two Non-Executive Directors. The Company intends to appoint Tim Oldham as the third member of the Human Capital Committee to ensure compliance with the ASX recommendation. The Company’s Code of Conduct, which has been in place since 2005, contains a principle of equal opportunity to be applied in all human resource decisions and in the workplace environment. 16 To date, the Committee has determined that the Board should not supplement the Code of Conduct principle by adopting an additional formal diversity policy with measurable objectives for achieving gender diversity, as recommended by ASX Principle 3.2. The workforce at Acrux is small and the majority of positions require specialist qualifications and experience. Since 2009, there has been a significant gradual reduction in employee numbers following the completion of the development of Axiron. The Committee believes that these factors make a formal diversity policy and specific diversity objectives impractical at this time. As at the date of this report, Acrux’s workforce numbered 18 people, 14 (78%) of whom were female. Dr Nina Webster was recently appointed to the Senior Management team joining two other male senior executives and the four current Board members are male. The Committee and the Board will review the potential need for a formal diversity policy in future as the business changes. 1.7 Audit and Risk Committee The members of the Audit and Risk Committee are Bruce Parncutt (Chair) and Ross Barrow, whom held these positions throughout the financial year. The Audit and Risk Committee met twice during the year ended 30 June 2013, with all members attending. Members are chosen having regard to their skills and experience in relation to the matters for which the Committee is responsible. Members of the Committee have unrestricted access to company records, management, advisers and the external auditors. The Committee’s role, as set out in its Charter, in general terms is to: a. oversee the Company’s system of financial reporting for the purpose of safeguarding its integrity, including viewing all regular financial reports and other formal announcements relating to the Company’s financial performance prepared for release to the ASX, regulators and the public before making appropriate recommendations to the Board; b. determine the extent of internal audit activities required and monitor the effectiveness of those activities (note that the Committee has determined that the Company, due to its size, does not presently warrant establishing a separate internal audit function); c. monitor the performance and activities of the external auditor including: – overseeing the process for the appointment, re-appointment and removal of the external auditors (including audit engagement letters), overseeing the rotation of the principal audit partner and reviewing the level of the external auditors’ fees; assessing the performance and independence of the external auditors and the quality of the audit work performed; requiring, reviewing and monitoring compliance with the audit plan of the external auditors, including the scope of the plan and the levels of financial statement materiality; – – ACRUX LIMITED – – reviewing reports from the external auditors and meeting with the external auditors at least once annually in the absence of management and also meeting with the external auditors as requested by the Board, the Committee or the external auditors; and receiving, reviewing, developing and implementing policy on the engaging of the external auditors to supply non-audit services. d. oversee and review the Company’s financial and risk management compliance and internal control framework including: – overseeing the creation, implementation and maintenance of the risk management system of the Company and its controlled entities and their internal control framework, including information systems; reviewing the effectiveness of the Company’s implementation of its risk management systems and internal controls on an on-going basis and reviewing the outcome of any non-financial audits; requiring management to report to the Board at least annually on whether the Company’s material business risks are being managed effectively; developing an understanding of the overall business environment, relevant laws and codes of importance to the Company and the programmes that the Company has in place to provide reasonable assurance of compliance; reviewing the Company’s occupational health and safety policies and ensuring regular reporting to the Committee on issues related to occupational health and safety; reviewing insurance coverage and claims trends; ensuring that the Chief Executive Officer and the Chief Financial Officer state in writing to the Board annually that: – – – – – – i. the Company’s financial reports present a true and fair view, in all material respects, of the Company’s financial condition and operational results and are in accordance with the relevant accounting standards; ii. the statement in (i) above is founded on a sound system of risk management and control which implements the policies adopted by the Board; and iii. the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects. The Board has received the report from management, referred to above, on whether the Company’s material business risks are being managed effectively. The Board received the statement in writing from the Executive Chairman and the Chief Financial Officer, referred to above, on 26 August 2013. In accordance with the recommendations of ASX Principle 4.2, the Committee’s Charter provides that the Committee have at least three members, Executive Directors may not be members of the Committee, a majority of the Committee must be independent Directors and the Chair must not be the Chair of the Company. These requirements, apart from the requirement to have at least three members, were met at all times during and since the end of the financial year. During the financial year the Audit and Risk Committee consisted of the two independent Non-Executive Directors. ASX Listing Rule 12.7 requires that the Company complies with ASX Principle 4.2. In response to this requirement, as well as the current business requirements, the Board has recently announced the appointment of Tim Oldham to the Board. Tim has relevant financial experience and will join the Audit and Risk Committee as an independent, Non- Executive Director. 1.8 Director and Senior Management Remuneration and Performance The remuneration structure for Senior Management and Directors and the amounts paid to each during the year are set out in the remuneration report section of the Directors’ report on pages 24 to 28. Non-Executive Directors are remunerated by way of fees only and do not participate in executive remuneration schemes, nor receive options, bonus payments or retirement benefits (other than statutory superannuation). At the end of each financial year, the performance of senior executives against personal goals is assessed and personal goals and development plans for the next financial year are set, aligned with the Company’s objectives. The review of Senior Management team members is carried out by the Executive Chairman and the results are subject to further review and approval by the Human Capital Committee. The review of the Executive Chairman is carried out by the Human Capital Committee and approved by the Board. A performance evaluation in accordance with this process was undertaken in respect of the year ended 30 June 2013. The scope of the review of the Executive Chairman was a performance review including goal achievement and bonus entitlement. A formal review of the performance of the Board and its Committees was not undertaken during the year ended 30 June 2013. 17 AnnuAl RepoRt 2013CORPORATE gOvERNANCE sTATEmENT continued 2. disCLOsURE ANd COmmUNiCATiON 2.1 Continuous Disclosure The Board has approved a written continuous disclosure policy to ensure compliance with the ASX Listing Rules continuous disclosure requirements. This policy: a. gives guidance as to the information that may need to be disclosed; b. gives guidance for dealing with market analysts and the media; c. establishes regular reminders to Directors and Senior Management to actively consider whether there is any price sensitive information which needs disclosure; d. allocates responsibility for approving public disclosures and shareholder communications. 2.2 Communications with Shareholders The Board has approved, as part of the continuous disclosure policy, the Company’s policy to promote effective communication with its shareholders. In addition to its disclosure obligations under the ASX Listing Rules, the Company communicates with its shareholders through a number of means including: a. annual and half-yearly reports; b. regular shareholder updates sent by email or mail; c. media releases, public announcements and investor briefings; and d. annual general meetings. All the above are posted on the Company’s website (www.acrux.com.au). Shareholders are encouraged to receive shareholder materials electronically. In addition the Company is committed to using general meetings of the Company to effectively communicate with shareholders and to allow reasonable opportunity for informed shareholder participation at general meetings. Where possible the Company will comply with the ASX best practice guidelines for the content of notices of meeting. Further, the external auditor is requested to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit of the Company and the preparation and content of the auditor’s report. The Company is committed to further developing its communications strategies to optimise shareholder communication. 18 3. shARE TRAdiNg Under the Company’s share trading policy all employees and Directors of the Company and its related companies are prohibited from trading in the Company’s shares if they are in possession of inside information. In addition, the Directors and senior executives are prohibited from trading in the Company’s shares during the period from the end of the financial year to the release of financial results to the market. The Directors, the Company Secretary and persons reporting directly to an Executive Director (and their associated persons) may not trade in shares in the Company without the approval of the Company Secretary (or the chair in the case of the Company Secretary) and only if they have first given a statement that they are not in possession of material non-public information. Such approval expires after five business days. 4. CONdUCT ANd EThiCs The Directors and management of the Company and its controlled entities are committed to observing high standards of ethics and behaviour in all of the Company’s activities, including the Company’s interaction with its shareholders, employees, business partners, customers, suppliers, the community and the environment in which the Company operates. The Company has adopted a code of conduct which provides the ethical and legal framework for how the Company will conduct its business and how the Company will relate to shareholders, employees, business partners, customers, suppliers, the community and the environment in which the Company operates. Issues covered by the code of conduct are: – values – compliance with laws – fair dealing – confidentiality and protection of Company assets – conflicts of interest – shareholders and the financial community – trading in Company securities – equal opportunity – health, safety and environment – reporting non-compliance and grievances – compliance with taxation laws – bribes and financial inducements – political donations ACRUX LIMITEDIn addition the Company has adopted a whistleblower policy. The purpose of this policy is to encourage the reporting of conduct by employees of the Company and other persons with whom the Company deals closely where the interests of others, including the public, or of the Company itself are at risk. The conduct covered by the policy is conduct that is: a. b. c. illegal, dishonest, fraudulent or corrupt; in breach of Commonwealth or state legislation or local authority by-laws; in breach of applicable industry practices, such as Good Laboratory Practice, Good Clinical Practice or Good Manufacturing Practice; d. unethical (being either a breach of the Company’s code of conduct or generally); e. gross mismanagement; f. a serious or substantial waste of resources; g. an unsafe work practice; h. failure to comply with the Company’s code of conduct; failure to comply with agreements with the Company’s i. commercial partners; j. a breach of proper environmental practice; k. other serious improper conduct; l. any other conduct that may cause financial or non-financial loss to the Company or otherwise be detrimental to the interests of the Company. 19 AnnuAl RepoRt 2013Directors’ report The Directors present their report together with the financial report of the consolidated entity consisting of Acrux Limited and the entities it controlled for the financial year ended 30 June 2013 and the independent auditor’s report thereon. This financial report has been prepared in accordance with Australian Accounting Standards. principal Activities The principal activities of the consolidated entity during the financial year were the development and commercialisation of healthcare products. There has been no significant change in the nature of these activities during the financial year. operating results The consolidated profit, after income tax, attributable to the members of Acrux Limited was $6.9 million (2012: $7.4 million). Diluted earnings per share were 4.16 cents (2012: 4.44 cents). review of operations A review of the operations of the consolidated entity during the financial year and the results of those operations are as follows: Vision Acrux is an innovative Australian drug delivery business developing and commercialising a range of patient- preferred, patented products for global markets, using unique proprietary technology to administer drugs. Business strategy Acrux’s strategy is to create new human and veterinary pharmaceutical products by combining proven drugs with innovative, patented delivery technologies. Using proven drugs means that the development time is usually shorter and the risk and expenditure lower than is typical for new drug development. Acrux’s development skills are used to progress a range of products through clinical and regulatory milestones, before commercialising them in global markets through selected commercial partners, who provide expertise in the particular market. The value of each product is shared with the partner. Fundamental features of the design of all Acrux’s products are that they are better than the existing products on the market (“patient-preferred”) and cannot be copied by competitors (“patent-protected”). operating results The consolidated profit before tax increased to $10.0 million (2012: $4.9 million), due to Axiron® royalties more than doubling to $14.1 million (2012: $5.9 million). The consolidated profit after tax was $6.9 million (2012: $7.4 million). 20 Revenue Total revenue for the financial year was $16.7 million (2012: $10.7 million). Revenue from product agreements was $15.5 million (2012: $8.8 million). Axiron royalties and development services contributed $14.4 million (2012: $7.2 million) and a signing fee of $1.1 million was recorded following the execution of a manufacturing and marketing agreement with Gedeon Richter to commercialise Acrux’s estradiol spray in markets outside the United States. Interest income reduced to $0.9 million (2012: $1.6 million), due to falling interest rates and reduced cash reserves following payment of the final dividend for the 2011/12 financial year. Operating Expenditure Operating expenditure totalled $6.6 million (2012: $5.8 million). Employee benefits expense fell to $2.0 million (2012: $2.6 million) following the elimination of the Chief Executive Officer position at 30 June 2012. Directors’ fees increased to $0.5 million from $0.2 million as the Chairman took on an executive role. Royalty payments to Monash Investment Trust increased to $0.5 million (2012: $0.3 million), in-line with increased product income. Depreciation and amortisation expense increased to $1.4 million from $0.3 million in the prior year. During the reporting period the International Financial Reporting Committee (IFRC) issued their interpretation of allowable methods of amortisation contained in the intangible assets accounting standard. As a result capitalised Research and Development expenditure will now be amortised on a straight line basis. Amortisation of Research and Development expenditure for the reporting period was $1.3 million (2012: $0.2 million). Income tax expense for the financial year was $3.1 million, compared with an income tax benefit of $2.5 million in the prior year. The prior year tax benefit was the result of $4.1 million of tax losses recorded from excess imputation credits on dividends received by the parent entity and additional tax deductions received from amended prior year research and development tax concession claims, offset by tax expense of $1.6 million. Cash flow Net cash provided by operating activities increased to $6.3 million (2012: net cash used $2.4 million). Net cash outflow after dividend payments was $7.0 million (2012: $3.1 million). Cash reserves at 30 June 2013 were $22.8 million (30 June 2012: $30.0 million). Receipts from product agreements increased to $12.6 million (2012: $6.4 million) due to the increase in Axiron royalty receipts. Interest receipts added $1.2 million (2012: $1.4 million). Payments to suppliers and employees reduced to $4.8 million (2012: $5.6 million). Income taxes of $2.6 million were paid during the year (2012: $4.6 million). ACRUX LIMITEDThe payment of the final dividend for the 2011/12 financial year produced an outflow for financing activities of $13.4 million compared with a modest outflow in the prior year of $0.6 million representing the clearing of unclaimed payments from the 2011 special dividend. Contributed Equity The exercise of 25,000 employee share options added $46,000 to contributed equity. There were no changes to contributed equity in the prior year. No employee share options remained at the end of the reporting period (2012: 25,000). Key events During the Year – Axiron’s net sales for the 2012/13 financial year increased to US$124 million from US$55 million in the prior year. – Axiron sales made it the second placed product in the US testosterone therapy market. – Axiron was launched in Australia and Canada. – A marketing authorisation for Axiron was received in Brazil. – A US patent concerning the underarm administration of testosterone formulations was granted by the US Patent and Trademark Office, expiring in 2027. – Acrux and Lilly filed a lawsuit in the United States against Perrigo for infringement of three issued patents covering Axiron. – Gedeon Richter was appointed to commercialise Acrux’s estradiol spray in markets outside the United States, earning Acrux a US$1 million signing fee, potential milestone payments of $2.6 million, as well as royalties on sales of the product. – Recuvyra®, the first animal health product utilising Acrux’s delivery technology, was launched by Elanco in Europe and the United States. Significant Changes in the State of Affairs There have been no significant changes in the state of affairs of the consolidated entity during the year. After Balance Date events A total of 1,270,000 options over unissued ordinary shares were granted to employees on 31 July 2013. These options are exercisable at $4.30 per share until 31 July 2016. No other matters or circumstances have arisen since the end of the financial year that have significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years. Likely Developments The Company will continue to pursue its operating strategy to create shareholder value. For the forseeable future, the consolidated entity’s financial results will be materially influenced by the sales performance of Axiron in the United States. Under a license agreement with Eli Lilly, the consolidated entity receives royalties on worldwide sales of Axiron by Eli Lilly and is eligible to receive potential sales milestone payments of up to US$195 million. environmental regulation The consolidated entity’s operations are subject to certain environmental regulations under a law of the Commonwealth and of a State or Territory. Details of the consolidated entity’s performance in relation to such environmental regulation are as follows: Laboratory Waste In order to ensure compliance with the Environment Protection Act 1970 the consolidated entity engages an external waste management consultant. This consultant has ISO 14001:2004 Certified Environmental Management to ensure compliance with the legislative requirements. The consultant issues an EPA Transport Certificate at every collection of waste to ensure safe collection, transport, delivery and disposal/recycling procedures. trade Water Waste An agreement exists with City West Water to ensure compliance under the Water Industry Act 1994 and Water Industry Regulations 1995. This agreement ensures that the acceptance of trade waste into the sewage network is managed effectively and that City West Water is aware of the type and quantities of waste disposed of by the consolidated entity. The Directors are not aware of any breaches during the period covered by this report. Dividend paid, recommended and Declared A final un-franked dividend for the 2011/12 financial year of 8 cents per share, $13.3 million, was paid during the reporting period. On 26 August 2013, the Directors resolved to declare a final dividend to shareholders of 8 cents per share, unfranked. The total amount of the dividend, based on the number of shares on issue at 30 June 2013 and at the date of this report, is $13.3 million. 21 AnnuAl RepoRt 2013These patents include claims relating to the application of testosterone formulations to the underarm and to the applicator used to apply Axiron. A Paragraph IV certification alleges invalidity, unenforceability and/or non-infringement of a patent. This ANDA does not contain Paragraph IV certifications with respect to the four other issued patents that cover Axiron, which expire in 2017. No other person has applied for leave of a court to bring proceedings on behalf of the consolidated entity. information on Directors and company secretary The qualifications, experience and special responsibilities of each person who has been a Director or Company Secretary of Acrux Limited at any time during or since the end of the financial year are provided on pages 13, except for Jonathan Pilcher (resigned 16 August 2013) whose are below. resignations J. pilcher (company secretary June 2003 to March 2005 and July 2006 to 16 August 2013) Responsibilities Chief Financial Officer and Company Secretary Qualifications BSc (Hons), ACA Experience Jon joined Acrux in October 2002 and was appointed Chief Financial Officer in March 2004. He was reappointed Company Secretary in July 2006, having previously held that position from June 2003 to March 2005. This period included the listing of Acrux on the Australian Stock Exchange. Prior to joining Acrux, Jon was a Senior Manager at ANZ Banking Group and spent seven years with international pharmaceutical groups, Medeva and Celltech, based in the UK, where he held senior financial positions in the Research & Development and Corporate functions. He qualified as a Chartered Accountant in 1991 and holds a Bachelor of Science (in Biotechnology) from the University of Reading in the UK. Directors’ report continued shares Under option Unissued ordinary shares of Acrux Limited under option at the date of this report are as follows: Number of unissued ordinary shares under option Date options granted Issue price of shares Expiry date of the options 31 July 2013 1,270,000 $4.30 July 2016 No option holder has any right under the options to participate in any other share issue of the Company. A total of 1,270,000 options over unissued ordinary shares were granted to employees on 31 July 2013. A further 600,000 options, with the same terms as those options granted on 31 July 2013, are proposed to be granted to Executive Chairman, Ross Dobinson subject to shareholder approval at the Company’s 2013 Annual General Meeting. shares issued on exercise of options 25,000 ordinary shares of Acrux Limited were issued on 1 March 2013 as a result of the exercise of options. The exercise price of these options was $1.84. There are no amounts unpaid on shares issued as a consequence of the exercise of options. Indemnification and Insurance of Directors and Officers During the financial year, the consolidated entity has paid premiums in respect of an insurance contract to indemnify officers against liabilities that may arise from their position as officers of the Company and its controlled entities. Officers indemnified include the company secretary, all Directors and all executive officers participating in the management of the Company and its controlled entities. Further disclosure required under section 300(9) of the Corporations Act 2001 is prohibited under the terms of the insurance contract. proceedings on Behalf of the consolidated entity In May 2013 Acrux DDS Pty Ltd, a wholly owned subsidiary of Acrux Limited, together with Eli Lilly filed a lawsuit in the United States District Court for the Southern District of Indiana against Perrigo Israel Pharmaceuticals Limited (“Perrigo”) for infringement of three issued patents covering Axiron. The patents are owned by Acrux DDS and exclusively licensed to Eli Lilly. The lawsuit was filed in response to notice letters sent by Perrigo regarding its filing with the US Food and Drug Administration of an Abbreviated New Drug Application (“ANDA”) for a Testosterone Metered Dose Transdermal Solution. The letters stated that the ANDA contains Paragraph IV certifications with respect to US Patent Numbers 8177449, 8419307 and 8435944, which are expected to expire in 2030, 2026 and 2027 respectively. 22 ACRUX LIMITEDDirectors’ Meetings The number of meetings of the board of Directors and of each Board Committee held during the financial year and the numbers of meetings attended by each Director were as follows: Directors R Dobinson B Parncutt1 R Barrow2 Committee Meetings Directors’ Meetings Audit & Risk Human Capital Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Number attended 9 9 9 9 9 9 – 2 2 2* 2 2 – 1 1 1* 1 1 1 Appointed Non-Executive Director 30 April 2012. 2 Appointed Non-Executive Director 1 April 2012. * Attended by invitation. Directors’ and executives’ interests in shares and options Directors’ and Executives’ relevant interests in shares of Acrux Limited and options over shares in the Company as at 30 June 2013 are detailed below: Total No. of Shares Total No. of Options Directors R Dobinson B Parncutt R Barrow executives J Pilcher C Blower total 1,372,593 718,137 9,375 100,000 – 2,200,105 – – – – – – Directors’ interests in contracts Directors’ interests in contracts are disclosed in Note 23 to the financial statements. Auditor’s independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 in relation to the audit for the financial year is provided with this report. Non-Audit services Non-audit services are approved by resolution of the audit committee and approval is provided in writing to the Board of Directors. Non-audit services provided by the auditors of the consolidated entity during the year, Pitcher Partners (Melbourne) and network firms of Pitcher Partners are detailed below. 2013 $ 2012 $ Amounts paid or payable to Pitcher Partners (Melbourne) for non-audit services: Amounts paid or payable to network firms of Pitcher Partners for non-audit services: Amounts paid or payable to non-related auditors of group entities for non-audit services: total auditors’ remuneration for non-audit services Nil Nil Nil Nil Nil Nil Nil Nil 23 AnnuAl RepoRt 2013 reMUNerAtioN report (AUDiteD) The Directors present the consolidated entity’s 2013 remuneration report which details the remuneration information for Acrux Limited’s Executive Chairman, non- executive Directors and other key management personnel. HUMAN cApitAL coMMittee The Human Capital Committee carries out the following functions in relation to the remuneration of senior management: a. recommending to the Board a policy and framework for senior employees’ remuneration which should aim to set remuneration which: (i) is competitive, fair and designed to attract employees of high quality, experience and integrity; (ii) motivates senior employees to pursue the long term growth and success of the Company within the appropriate control framework; and (iii) establishes a clear relationship between the performance of senior management and their remuneration; b. reviewing and recommending to the Board the total individual remuneration package of each member of senior management (including an executive Director), including any bonuses, incentive payments, and participation (including the level of participation) in any share or share option plans in accordance with the policy and framework for senior employees’ remuneration; c. reviewing benchmarks against which salary reviews are made; d. reviewing and recommending the establishment and terms of any employee share or share option plan or other incentive plan and recommending any changes to the Board; e. reviewing and recommending on the superannuation arrangements of the Company and its controlled entities; and f. ensuring that equity-based senior management remuneration is made in accordance with thresholds set in plans approved by shareholders. reMUNerAtioN poLicY The main principles of the Company’s remuneration policy are: – remuneration is set at levels intended to attract and retain good performers and to motivate and reward them to continually advance the business of the Company; – remuneration is structured to reward employees both for superior performance and for increasing long term shareholder value; and – rewards are linked to the achievement of business objectives as set by the Board. 24 reMUNerAtioN strUctUre The remuneration of employees is structured in two parts: – Fixed Remuneration, which comprises salary, superannuation and other benefits in lieu of salary; and – Variable Remuneration, which may comprise a short term incentive in the form of cash and a long term incentive in the form of options under the employee share option plan (ESOP). All permanent staff are eligible to participate in the short term incentive plan and the ESOP. However the level of participation varies according to the level of seniority and the ability to influence the performance of the business. The Company aims to set the level of fixed remuneration at market levels for comparable jobs in the industry in which the Company operates, based on market sources. The Company then aims to set the short and long term incentives to provide for top performers to be remunerated at the upper end of the market, subject to the overall performance of the Company measured against the goals set by the Board. The aim of both the short term and long term incentive plans is to drive performance to successfully implement annual business plans and to increase shareholder value. No advice from a remuneration consultant was sought during the financial year for the company’s remuneration structure. sHort terM iNceNtiVe pLAN The purpose of the short term incentive plan is to reward achievement of business objectives on a year by year basis. Each financial year the Board, in conjunction with senior management, sets the business objectives aimed to be achieved during the year to implement the Company’s business plan. The business objectives are clearly defined outcomes in product development and commercialisation, achievement of which can be readily and objectively measured at the end of the financial year. Measurement of achievement of the business objectives does not involve comparison with factors external to the Company. Achievement of each objective is expected to create immediate value for shareholders, or secure a material step towards value that will crystallise in a future period. Achievement of the business objectives has significantly increased shareholder wealth over the 5 years ending 30 June 2013. Shareholder returns in the form of tax-free share price increase and dividends are shown in the table below. Total return over the 5 years was $2.97 per share, tax-free, compared with a share price at 30 June 2008 of $1.22. Comparison of the achievement of objectives and shareholder returns for an individual year is not meaningful, because the value may crystallise in a future year. ACRUX LIMITEDThe Company’s earnings in each of the 5 years ended 30 June 2013 are not relevant to the impact of performance on shareholder wealth, because the Company has invested in product development over several years before becoming profitable and earning regular revenue. Financial year 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 total Closing share price ($) Share price increase ($) Dividend ($ per share) 1.22 1.13 1.81 3.39 4.25 3.51 (0.09) 0.68 1.58 0.86 (0.74) 2.29 0.60 0.08 0.68 There are different levels of the short term incentive plan, with senior executives, other than executive Directors, able to achieve annual incentives up to 24% of fixed remuneration. The key principles of the plan are: – Payments under the short term incentive plan are at the discretion of the Board. – The amount of at-risk remuneration payable under the short term incentive plan is dependent upon the overall level of achievement of the year’s business objectives. – The level of achievement of the business objectives is assessed by the Board at the end of each year. – For staff other than senior executives, achievement of personal objectives set for the financial year may also form part of their assessment for short term incentive plan payments. LoNG terM iNceNtiVe pLAN The purpose of the long term incentive plan is to align the interests of senior executives and other employees more closely with those of the shareholders towards long term sustained superior performance. Long term incentive plan instruments are designed to meet the requirements of ASX Listing Rules and the Company’s status as a Pooled Development Fund. The current long term incentive plan consists of options to acquire ordinary shares, with the following terms: – The options expire three years after grant; – The options lapse on termination of employment, other than through death or redundancy; and – The exercise price is set at a 25% premium to the volume weighted average market price of the Company’s shares on the grant date. The Board evaluates the effectiveness of existing and potential long term incentive plans as the business environment changes. reMUNerAtioN AND terMiNAtioN eNtitLeMeNts oF eXecUtiVe Directors AND seNior MANAGeMeNt The director and management services of the Executive Chairman Ross Dobinson are provided by Espasia Pty Ltd. The contract for services can be terminated by either party by giving three months notice in writing. For the 2012/13 financial year the contract provided for fees of $118,000 per annum in respect of director services, $160,000 per annum in respect of executive services and an additional payment of up to 60% of the executive services, dependent on the achievement of objectives, set by the Board. The Board has absolute discretion over the amount of the additional payment. The fees for executive services were increased from $160,000 to $200,000, effective 1 July 2013. Other senior executives have no fixed term of employment and either party may terminate the employment contract on periods of written notice of three months. The employment contracts contain no other entitlement to termination benefits in addition to statutory entitlements. Names and positions held by executives of the consolidated entity in office at any time during the financial year are: Executives Position J Pilcher C Blower Chief Financial Officer and Company Secretary Chief Technical Officer The following changes occurred after reporting date: Executives Position Appointed/Resigned/ Title Change J Pilcher C Blower Chief Financial Officer and Company Secretary Chief Operating Officer Resigned 16 August 2013 Title Change 19 August 2013 N Webster Commercial Director Appointed 1 July 2013 T Di Pietro Chief Financial Appointed 16 August 2013 Officer and Company Secretary share options (a) compensation options: Granted and vested during the year No options over unissued ordinary shares were granted by Acrux Limited, or vested, during the financial year to Directors and Executives as part of their remuneration. A total of 600,000 employee share options were issued to Executives on 31 July 2013. These options are exercisable at $4.30 per share until 31 July 2016. A further 600,000 share options with the same terms are proposed to be issued to executive chairman, Ross Dobinson, subject to shareholder approval at the 2013 Annual General Meeting. 25 AnnuAl RepoRt 2013reMUNerAtioN report (AUDiteD) continued (b) shares issued on exercise of compensation options No ordinary shares were issued to Directors and Executives on exercise of compensation options during or since the end of the financial year. Details of the remuneration of the Executives are set out in the following table: primary Post employment Termination Benefits 2013 Salary $ Bonus* $ J Pilcher 238,530 34,348 C Blower 203,530 29,308 Super $ 16,470 16,470 442,060 63,656 32,940 2012 J Pilcher C Blower H Alsop1 216,172 167,704 128,695 15,564 12,074 – 15,775 15,775 10,516 512,571 27,638 42,066 $ – – – – – – – Equity Options $ – – – – – – – Total $ 289,348 249,308 538,656 247,511 195,553 139,211 582,275 Equity as % of Total Bonus as % of Total % 0% 0% 0� 0% 0% 0% 0� % 12% 12% 12� 6% 6% 0% 5� * Bonus relates to achievement of objectives for the financial year. The amount of bonus earned was 60% of the maximum amount payable for the 2012/13 financial year and 30% for the 2011/12 financial year. 1 Director of Business Development until 2 March 2012. reMUNerAtioN oF NoN-eXecUtiVe Directors The Human Capital Committee considers the level of remuneration necessary to attract and retain Directors with the skills and experience required by the Company at its stage of development. The Committee then recommends to the Board whether or not the Directors’ fees should be put to the shareholders for change. For the 2012/13 financial year Directors’ fees were $65,400 per annum, including superannuation for each non-executive director. The fees were increased to $76,475 per annum, including superannuation, effective 1 July 2013. At the 2004 Annual General Meeting shareholders set the maximum aggregate amount of non-executive Directors’ fees at $450,000. In addition non-executive Directors are entitled to re-imbursement of reasonable expenses incurred by them on Company business. No retirement allowances are paid to non-executive Directors. No equity based remuneration is paid to non-executive Directors. Non-Executive Directors do not receive any additional remuneration for being members of Board Committees. 26 ACRUX LIMITEDThe remuneration of each person who held the position of Director at any time during the financial year is set out in the following table: Post employment Termination Benefits 2013 primary Fees $ Bonus* $ R Dobinson1 305,799 63,360 B Parncutt2 R Barrow3 60,000 60,000 – – Super $ – 5,400 5,400 425,799 63,360 10,800 2012 R Dobinson B Parncutt2 R Barrow3 H K Windle4 B C Finnin5 117,996 10,900 15,000 12,833 10,000 – – – – – – – 1,350 41,667 900 R Treagus6 396,136 72,130 25,000 562,865 72,130 68,917 Equity Options $ – – – – – – – – – – – Total $ 369,159 65,400 65,400 499,959 117,996 10,900 16,350 54,500 10,900 493,266 703,912 Equity as % of Total Bonus as % of Total % 0% 0% 0% 0� 0% 0% 0% 0% 0% 0% 0� % 17% 0% 0% 13� 0% 0% 0% 0% 0% 15% 10� $ – – – – – – – – – – – * Bonus relates to achievement of objectives for the financial year. The amount of bonus earned was 60% of the maximum amount payable for the 2012/13 financial year and 30% for the 2011/12 financial year. 1 Appointed Executive Chairman 1 July 2012. 2 Appointed Non-Executive Director 30 April 2012. 3 Appointed Non-Executive Director 1 April 2012. 4 Resigned as Non-Executive Director 30 April 2012. 5 Resigned as Non-Executive Director 31 August 2011. 6 Resigned as Managing Director 29 June 2012. Number of shares held by Key Management personnel Directors and Executives Balance 1/07/2012 Granted as Remuneration Options Exercised Net Change Other Balance 30/06/2013 Directors R Dobinson B Parncutt R Barrow executives J Pilcher C Blower total 1,372,593 550,637 – 100,000 – 2,023,230 – – – – – – – – – – – – – 1,372,593 167,500 718,137 9,375 9,375 – – 100,000 – 176,875 2,200,105 27 AnnuAl RepoRt 2013reMUNerAtioN report (AUDiteD) continued Voting and comments made at the company’s 2012 Annual General Meeting (AGM) At the company’s most recent AGM, resolution to adopt the prior year remuneration report was put to the vote and at least 75% of ‘yes’ votes were cast for adoption of that report. No comments were made on the remuneration report that was considered at the AGM. This is the end of the audited remuneration report. rounding of Amounts The amounts contained in the report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the company under ASIC Class Order 98/0100. The company is an entity to which the Class Order applies. Signed in accordance with a resolution of the Directors. r DoBiNsoN Executive Chairman Melbourne B pArNcUtt Director Melbourne Dated this 26th day of August 2013 Dated this 26th day of August 2013 28 ACRUX LIMITEDAUDitor’s iNDepeNDeNce DecLArAtioN 29 AnnuAl RepoRt 2013coNsoLiDAteD stAteMeNt oF coMpreHeNsiVe iNcoMe For the year ended 30 June 2013 Revenue Foreign exchange gain Employee benefits expense External research and development expenses Directors’ fees Professional fees Royalty expense Occupancy expenses Depreciation and amortisation expenses Payroll taxes Insurances Other expenses profit before income tax Income tax benefit/(expense) profit for the year total comprehensive income for the year total comprehensive income attributable to: Members of the parent Non-controlling interest Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The accompanying notes form part of these financial statements. Notes 2013 $'000 2012 $'000 4 5 5 5 6 16 17 8 8 16,528 10,465 132 240 16,660 10,705 (2,009) (2,630) (752) (466) (471) (533) (400) (1,423) (75) (74) (416) (905) (211) (341) (261) (376) (349) (107) (74) (535) (6,619) (5,789) 10,041 (3,115) 6,926 6,926 6,926 – 6,926 4.16 4.16 4,916 2,475 7,391 7,391 7,391 – 7,391 4.44 4.44 30 ACRUX LIMITED coNsoLiDAteD stAteMeNt oF FiNANciAL positioN As at 30 June 2013 current assets Cash and cash equivalents Receivables total current assets Non-current assets Plant and equipment Intangible assets total non-current assets total assets current liabilities Current tax payable Payables Short term provisions total current liabilities Non-current liabilities Deferred tax liabilities Long term provisions total non-current liabilities total liabilities Net assets equity Contributed equity Reserves Retained earnings equity attributable to the owners of Acrux Limited Non-controlling interests total equity The accompanying notes form part of these financial statements. Notes 2013 $'000 2012 $'000 9 10 11 12 6 13 14 6 14 15 16(a) 16(b) 17 22,840 6,825 30,017 3,863 29,665 33,880 93 23,137 23,230 110 24,509 24,619 52,895 58,499 1,675 1,256 331 560 996 322 3,262 1,878 2,860 20 2,880 6,142 3,504 14 3,518 5,396 46,753 53,103 95,873 95,825 – 4 (49,120) (42,726) 46,753 53,103 – – 46,753 53,103 31 AnnuAl RepoRt 2013 coNsoLiDAteD stAteMeNt oF cHANGes iN eQUitY For the year ended 30 June 2013 Balance as at 1 July 2011 Profit for the period total comprehensive income for the year transactions with owners in their capacity as owners: Contributions Employee Share Options Expense Lapsed Employee Share Options Dividends Paid total transactions with owners in their capacity as owners Balance as at 30 June 2012 Balance as at 1 July 2012 Profit for the period total comprehensive income for the year transactions with owners in their capacity as owners: Contributions Employee Share Options Expense Lapsed Employee Share Options Dividends Paid total transactions with owners in their capacity as owners Notes 15(b) 16(a) 16 7 15(b) 16(a) 16 7 Contributed Equity $'000 95,825 – – – – – – – 95,825 95,825 – – 48 – – – 48 Balance as at 30 June 2013 95,873 The accompanying notes form part of these financial statements. Reserves $'000 Retained Earnings $'000 Total Equity $'000 4 – – – – – – – 4 4 – – – (4) – – (4) – (50,117) 45,712 7,391 7,391 7,391 7,391 – – – – – – – – – – (42,726) 53,103 (42,726) 53,103 6,926 6,926 6,926 6,926 – – – 48 4 – (13,320) (13,320) (13,320) (13,276) (49,120) 46,753 32 ACRUX LIMITED coNsoLiDAteD stAteMeNt oF cAsH FLoWs For the year ended 30 June 2013 Consolidated Entity Notes 2013 $'000 2012 $'000 cash flows from operating activities Receipts from product agreements Payments to suppliers and employees Interest received Grant income received Taxes paid Net cash flows provided by/(used in) operating activities 18(a) cash flows from investing activities Purchase of plant and equipment Net cash flows used in investing activities cash flows from financing activities Net proceeds from issues of ordinary shares Dividends paid Net cash flows used in financing activities Net decrease in cash held Foreign exchange differences on cash holdings Add cash at the beginning of the year cash at end of year The accompanying notes form part of these financial statements. 18(b) 12,528 (4,833) 1,248 36 (2,644) 6,335 6,375 (5,610) 1,407 21 (4,625) (2,432) (30) (30) (83) (83) 46 (13,413) (13,367) (7,062) (115) 30,017 22,840 – (629) (629) (3,144) 2 33,159 30,017 33 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 1: stAteMeNt oF siGNiFicANt AccoUNtiNG poLicies The following is a summary of significant accounting policies adopted by the consolidated entity in the preparation and presentation of the financial report. The accounting policies have been consistently applied, unless otherwise stated. (a) Basis of presentation of the financial report This financial report is a general purpose financial report that has been prepared in accordance with Australian Accounting Standards, Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The financial report covers Acrux Limited and controlled entities as a consolidated entity. Acrux Limited is a company limited by shares, incorporated and domiciled in Australia. Acrux Limited is a for-profit entity for the purpose of preparing the financial statements. The financial report was authorised for issue by the directors as at the date of the directors’ report. compliance with iFrs The consolidated financial statements of Acrux Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention The financial report has been prepared under the historical cost convention, as modified by revaluations to fair value for certain classes of assets as described in the accounting policies. critical accounting estimates The preparation of the financial report requires the use of certain estimates and judgements in applying the entity’s accounting policies. Those estimates and judgements significant to the financial report are disclosed in Note 2. (b) principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising the financial statements of the parent entity and of all entities, which Acrux Limited has the power to control the financial and operating policies so as to obtain benefits from its activities. The financial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies, which may exist. 34 All inter-company balances and transactions, including any unrealised profits or losses have been eliminated on consolidation. Subsidiaries are consolidated from the date on which control is established and are de- consolidated from the date that control ceases. Non-controlling interests in the results of the subsidiaries are shown separately in the consolidated statement of comprehensive income and consolidated statement of financial position respectively. (c) revenue recognition Interest revenue is recognised when it becomes receivable on a proportional basis taking into account the interest rate applicable to the financial assets. Revenue from rendering of services to customers is recognised in the period in which the service was performed for the customer. Revenue from product agreements is made up of milestone payments and revenue relating to product sales. Revenue from milestone payments is recognised upon completion of the milestone, which is the trigger point for the right to receive the revenue. Revenue relating to product sales, such as royalties and distribution fees, is recognised in the period in which the sales occur. Government grants are recognised at fair value where there is a reasonable assurance that the grant will be received and all grant conditions will be met. Revenue from the receipt of contracted grants is recognised in the period the monies associated with the grants are expensed. Other revenue is recognised as received or over the time period to which it relates. All revenue is stated net of the amount of goods and services tax (GST). (d) cash and cash equivalents Cash and cash equivalents include cash on hand and at banks, short term deposits with an original maturity of three months or less, held at call with financial institutions. (e) plant and equipment cost Each class of plant and equipment is carried at cost less, where applicable, any accumulated depreciation and any accumulated impairment losses. Depreciation The depreciable amount of all fixed assets are calculated on a straight line basis over their estimated useful lives to the entity commencing from the time the asset is held ready for use. ACRUX LIMITED  Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The useful lives for each class of assets are: 4. Reliable measurement of expenditure attributable to the product during its development. 5. High probability of the product entering a major pharmaceutical market. Leasehold improvements: Plant and equipment: 2013 $'000 2012 $'000 Not Applicable Not Applicable 2.5 to 14 years 2.5 to 14 years (f) Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. operating Leases Lease payments for operating leases are recognized as an expense on a straight-line basis over the term of the lease. (g) intangibles The intangible assets are recognised at cost at the date of acquisition. The balances are reviewed annually and any balances representing probable future benefits that are no longer anticipated are written off. intellectual property Acquired intellectual property is initially recorded at cost. Intellectual property with a finite life is carried at cost less any accumulated amortisation and any impairment losses. The intellectual property is amortised over the useful life of the relevant patents. The useful life is approximately 13 years. Amortisation expense is included in ‘Depreciation and amortisation expenses’ of the Statement of Comprehensive Income. research and Development Expenditure during the research phase of a project is recognised as an expense when incurred. Product development costs are capitalised only when each of the following specific criteria has been satisfied: 1. Technical feasibility of completing development of the product and obtaining approval by regulatory authorities. 2. Ability to secure a commercial partner for the product. 3. Availability of adequate technical, financial and other resources to complete development of the product, obtain regulatory approval and secure a commercial partner. Capitalised development costs have a finite life and are amortised on a systematic basis over the period from first commercial sale of the product and cease at the earlier of the date that the asset is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with AASB5 and the date that the asset is derecognised. The estimated useful life and total economic benefit for each asset are reviewed at least annually. During the year the expected pattern of consumption of future economic benefits has been reassessed and the carrying amount of the asset will be amortised based on a straight line basis over the remaining useful life of 18 years. Previously the useful life of each asset and the total economic benefits that would be generated by the asset over its useful life was estimated and the asset cost was divided by the total economic benefits resulting in an amount of cost to be amortised per dollar of economic benefit. The useful life of one asset for which amortisation has commenced is approximately 18 years. Amortisation expense is included in ‘Depreciation and amortisation expenses’ of the Statement of Comprehensive Income. (h) impairment Assets with an indefinite useful life are not amortised but are tested annually for impairment in accordance with AASB136. Assets subject to annual depreciation or amortisation are reviewed for impairment whenever events or circumstances arise that indicate that the carrying amount of the asset may be impaired. An impairment loss is recognised where the carrying amount of the asset exceeds its recoverable amount. The recoverable amount of an asset is defined as the higher of its fair value less costs to sell and value in use. (i) income tax Current income tax expense or revenue is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognised for temporary differences at the applicable tax rates when the assets are expected to be recovered or liabilities are settled. No deferred tax asset or liability is recognised in relation to temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. 35 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 1: stAteMeNt oF siGNiFicANt AccoUNtiNG poLicies (coNtiNUeD) Deferred tax assets are recognised for deductible temporary differences and unused tax losses only when it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. (j) Employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. Contributions are made by the consolidated entity to employee superannuation funds and are charged as expenses when the obligation to pay them arises. Bonus The consolidated entity recognises a provision when a bonus is payable in accordance with the employee’s contract of employment, and the amount can be reliably measured. share-based payments The consolidated entity operates an employee share option plan. The bonus element over the exercise price for the grant of options is recognised as an expense in the Statement of Comprehensive Income in the period(s) during which the employee becomes entitled to exercise the options. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options at grant date. The fair value of options at grant date is determined using a Binomial option pricing model, and is recognised as an employee expense over the period during which the employees become entitled to the option. Termination benefits Termination benefits are payable when employment of an employee is terminated before the normal retirement date. 36 The consolidated entity recognises a provision for termination benefits when entitlement to contractual benefits arises or when the entity can no longer withdraw the offer of non-contractual benefits. (k) comparatives Where necessary, comparative information has been reclassified and repositioned for consistency with current year disclosures. (l) Financial instruments Non Derivative Financial instruments Financial Assets Trade receivables are carried at full amounts due less any provision for impairment. A provision for impairment is recognised when collection of the full amount is no longer probable. Amounts receivable from other debtors are carried at full amounts due. Other debtors are normally settled 30 days from month end unless there is a specific contract, which specifies an alternative date. Amounts receivable from related parties are carried at full amounts due. Non-listed investments in controlled entities, for which fair value cannot be reliably measured, are carried at cost and tested for impairment. Financial Liabilities Financial liabilities include trade payables, other creditors and inter-company balances. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Trade liabilities are normally settled 30 days from month end. Derivative Financial Instruments The consolidated entity holds derivative financial instruments to hedge its risk exposures from foreign currency exchange rate movements. Hedge accounting Certain derivatives are designated as hedging instruments and are further classified as either fair value hedges or cash flow hedges. At the inception of each hedging transaction, the consolidated entity documents the relationship between the hedging instruments and hedged items, its risk management objective and its strategy for undertaking the hedge transaction. The consolidated entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. ACRUX LIMITED (i) Fair value hedge Material changes in the fair value of derivatives that are designated and qualified as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) Cash flow hedge To qualify as a cash flow hedge the underlying transactions generating the cash flows must be highly probable. Material changes in the fair value of derivatives that are designated and qualified as cash flow hedges are recognised in equity in the cash flow hedging reserve. This gain or loss is released to profit or loss in the same period when the forecast transactions occur, thereby mitigating any exchange fluctuations that would have transpired in the absence of the hedge. (m) Foreign currency translations and balances Functional and presentation currency The financial statements of each of the consolidated entity’s subsidiaries are measured using the currency of the primary economic environment in which that entity operates (the functional currency). The consolidated financial statements are presented in Australian dollars, which is the consolidated entity’s functional and presentation currency. transactions and balances Transactions in foreign currencies of entities within the consolidated group are translated into functional currency at the rate of exchange ruling at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the financial year. Except for certain currency hedges, all resulting exchange differences arising on settlement or re- statement are recognised as revenues and expenses for the financial year. (n) Goods and services tax (Gst) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis. (o) rounding amounts The parent entity and the consolidated entity have applied the relief available under ASIC Class Order CO 98/0100 and accordingly, amounts in the consolidated financial statements and directors’ report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. (p) New accounting standards and interpretations A number of standards and interpretations have been issued at the reporting date but are not yet effective. The directors’ assessment of the impact of these standards and interpretations is set out below. (i) AASB9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB9 and AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB9 (December 2010) (effective from 1 January 2015) AASB9 Financial Instruments improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB139. AASB9 could change the classification and measurement of financial assets and liabilities. The consolidated entity has yet to determine the impact, if any, of the new provisions on any amounts recognised in the financial statements. The consolidated entity does not expect to adopt the new standard before its operative date. It would therefore be first applied in the financial statements for the annual reporting period ending 30 June 2016. (ii) AASB13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB13 (effective 1 January 2013) AASB13 introduces a fair value framework for all fair value measurements in the full suite of accounting standards. This standard explains how to measure fair value and aims to enhance fair value disclosures. The consolidated entity is currently assessing which, if any of its current measurement techniques will have to change as a result of the new standard. However, it is not yet possible to provide a reliable estimate of the impact, if any, of these new rules on any of the amounts recognised in the financial statements. However, application of the new standard will impact the type of information disclosed in the notes to the financial statements. The consolidated entity does not expect to adopt the new standard before their operative date. They would therefore be first applied in the financial statements for the annual reporting period ending 30 June 2014. Other standards and interpretations, including AASB10 Consolidated Financial Statements, AASB11 Joint Arrangements and AASB12 Disclosure of Interests in Other Entities, have been issued at the reporting date but are not yet effective. When adopted, these standards and interpretations are not expected to impact on the financial information presented. 37 AnnuAl RepoRt 2013 pricing model is discounted to reflect the probability of staff remaining employed during the vesting period of the options, based on the historical staff turnover rate. (e) Amorisation of capitalised research and Development expenditure During the year the expected pattern of consumption of future economic benefits has been reassessed and the carrying amount of the asset will be amortised based on a straight line basis over the remaining useful life of 18 years. Previously the useful life of each asset and the total economic benefits that would be generated by the asset over its useful life was estimated and the asset cost was divided by the total economic benefits resulting in an amount of cost to be amortised per dollar of economic benefit. Note 3: FiNANciAL iNstrUMeNts AND FiNANciAL risKs The consolidated entity is exposed to a variety of financial risks comprising: (a) Interest rate risk b. Currency risk c. Credit risk (d) Liquidity risk The board of directors has overall responsibility for identifying and managing operational and financial risks. (a) interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market interest rates. The consolidated entity’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities at 30 June 2013 are shown in the table on the following page. Cash is the only financial asset or liability that is exposed to interest rate risk. A change in the average effective interest rate of 1% applied to the cash balances at 30 June 2013 of $22.8 million would change the net profit and equity of the consolidated entity by approximately $0.2 million (2012: $0.2 million). Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 2: criticAL AccoUNtiNG estiMAtes AND JUDGeMeNts Certain accounting estimates and assumptions concerning the future, which, by definition, will seldom represent actual results. Estimates and assumptions based on future events have a significant inherent risk, and where future events are not as anticipated there could be a material impact on the carrying value of assets and liabilities, discussed below: (a) income tax Income tax benefits are based on the assumption that no adverse change will occur in the income tax legislation and the anticipation that the group will derive sufficient future assessable income to enable the benefit to be realised and that it will comply with the conditions of deductibility imposed by the law. Deferred tax assets are recognised for deductable temporary differences as management considers that it is probable that future tax profits will be available to utilise those temporary differences. (b) impairment testing The Company uses discounted cash flow models to determine that the parent entity’s investments in and loans to its subsidiaries, and the capitalised development costs in the consolidated entity, are not being carried at a value that is materially in excess of recoverable value. The models value each product or potential product by estimating future cashflows and discounting the future net cash flows for the probability of successful commercialisation, as well as for the time value of money using a discount rate of 11%. Revenue from a product is estimated using current market data and projections of market growth and potential market share. (c) Employee Benefits Calculation of long term employment benefits requires estimation of the retention of staff, future remuneration levels and timing of the settlement of the benefits. These estimates are based on historical trends. (d) share based payments The group operates an employee share option plan. The bonus element over the exercise price for the grant of options is recognised as an expense in the Statement of Comprehensive Income in the period(s) when the benefit is earned. The value of the bonus element is calculated using a Binomial option pricing model. This model requires the input of a number of variables including an estimate of future volatility and a risk free interest rate. Volatility is estimated based on the historical movements in the Company’s share price since listing on the Australian Stock Exchange. The risk free interest rate is the Reserve Bank of Australia’s cash rate at the options grant date. The value from the 38 ACRUX LIMITED Note 3: FiNANciAL iNstrUMeNts AND FiNANciAL risKs (coNtiNUeD) At 30 June 2013, the consolidated entity had financial instruments with carrying amounts as shown in the following table: Financial Instruments (i) Financial assets Cash Receivables Floating interest rate Fixed interest rate maturing in: 1 year or less Non interest bearing Total carrying amount as per the Balance Sheet Weighted average effective interest rate 2013 $'000 2012 $'000 2013 $'000 2012 $'000 2013 $'000 2012 $'000 2013 $'000 2012 $'000 2013 % 2012 % 3,486 2,983 19,353 27,033 1 1 22,840 30,017 3.9 5.5 – – – – 6,825 3,863 6,825 3,863 total financial assets 3,486 2,983 19,353 27,033 6,826 3,864 29,665 33,880 (ii) Financial liabilities Trade creditors Sundry creditors and accruals total financial liabilities – – – – – – – – – – – – 135 193 135 193 1,121 803 1,121 1,256 996 1,256 803 996 The net fair value of the financial assets and financial liabilities at 30 June 2013 was not materially different to the carrying amounts as disclosed in the balance sheet and notes to the financial statements. (b) currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The consolidated entity is exposed to material currency risks due to revenue denominated in US dollars. Currency risk management strategies are regularly reviewed. Bank accounts denominated in US dollars are maintained in order to facilitate receipts and payments. Cash reserves at 30 June 2013 included $0.7 million (2012: $0.3 million) denominated in US dollars. A change of 10% in the AUD/USD exchange rate at 30 June 2013 would have immaterial impact on the net profit and equity of the consolidated entity. During the reporting period, exchange rate risk was managed by eliminating US dollar revenue in excess of US dollar expenditure through spot and short-term forward sales of US dollars. Forward exchange contracts are entered into in order to sell specified amounts of US dollars in the future at stipulated exchange rates. The objective in entering the forward exchange contracts is to protect against unfavourable exchange rate movements for both the contracted and anticipated transactions undertaken in foreign currencies. The accounting policy for forward exchange contracts is detailed in Note 1(l). At balance date, the details of outstanding forward exchange contracts are: Sell United States Dollars Average Exchange Buy Australian Dollars 2013 $'000 2012 $'000 2013 $ 2012 $ Less than 6 months 2,000 1,800 1.0309 0.9755 During the reporting period, the consolidated entity received revenues of $10.5 million denominated in US dollars. Payments of royalties from Eli Lilly under the Axiron licence agreement comprised the majority of the revenue denominated in US dollars. A change of 10% in the AUD/USD rate at balance date would change the consolidated net profit and equity by approximately $1.0 million (2012: $0.4 million). In future periods, material amounts of revenue are expected to be received in US dollars as royalties and potential sales milestone payments under the Axiron agreement are payable in US dollars. 39 AnnuAl RepoRt 2013 (d) Liquidity risk Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The financial liabilities of the consolidated entity at the balance date are all expected to mature within three months of the balance date. The consolidated entity has sufficient cash reserves, $22.8 million (2012: $30.0 million) to settle these liabilities and to fund operating expenditure for the foreseeable future. The consolidated entity does not have an overdraft or loan facility. The maturity profile of the consolidated entity’s cash term deposits is actively managed and compared with forecast liabilities to ensure that sufficient cash is available to settle liabilities as they fall due. (e) Fair values The fair value of financial assets and financial liabilities approximates their carrying amounts as disclosed in the consolidated statement of financial position and notes to the consolidated financial statements. Financial asset and liabilities measured and recognised at fair value have been determined by the following fair value measurement hierarchy: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: Input other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Inputs for the asset or liability that are not based on observable market data Forward exchange contracts are level 2 on the fair value hierarchy. Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 3: FiNANciAL iNstrUMeNts AND FiNANciAL risKs (coNtiNUeD) (c) credit risk Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The maximum exposure to credit risk of recognised financial assets at balance date, excluding the value of any collateral or other security, is the carrying amount of those assets, net of any provisions for impairment of those assets, as disclosed in consolidated statement of financial position and notes to the consolidated financial statements. Cash reserves form the majority of the consolidated entity’s financial assets at 30 June 2013. Acrux Limited is a Pooled Development Fund. The Pooled Development Fund Act restricts the investment of cash reserves to deposits with an Australian bank licensed to take deposits. This policy is also followed for all cash held by the other companies within the consolidated entity. At 30 June 2013, cash was deposited with two different banks in order to spread risk and ensure interest rate competitiveness. At 30 June 2013 the consolidated entity had a material credit risk exposure to Eli Lilly and Company and its subsidiaries. The receivables recorded on the consolidated entity’s balance sheet contains an amount of $5.7 million due from Eli Lilly under the licence agreement for the commercialisation of Axiron. During future reporting periods, the consolidated entity is expected to continue to have a material credit exposure to Eli Lilly and Company and its subsidiaries, due to the royalties and milestone payments expected. At 30 June 2013, Eli Lilly’s credit ratings were AA-(S&P) and A2 (Moodys). The credit rating and financial health of Eli Lilly are monitored regularly. The grant of the license under the license agreement is subject to payment by Eli Lilly of the amounts in accordance with the agreement. The consolidated entity had a credit risk exposure at the end of financial year for the reporting period and comparative period, in relation to derivative financial instruments, arising from the potential failure by counter-parties to the contract to meet their obligations. The credit risk exposure to forward exchange contracts is the net fair value of these contracts 40 ACRUX LIMITED Note 4: reVeNUe revenues from operating activities Revenue from product agreements Grant revenue Total revenues from operating activities other revenues Interest Total revenues from non-operating activities total revenues from continuing operations 2013 $'000 2012 $'000 15,549 8,797 36 21 15,585 8,818 943 943 1,647 1,647 16,528 10,465 Note 5: proFit FroM coNtiNUiNG operAtioNs Note 2013 $'000 2012 $'000 Profit from continuing operations before income tax has been determined after the following specific expenses: employee benefits expense Wages and salaries Workers’ compensation costs Superannuation costs Training expenses total employee benefits expense Depreciation of non-current assets Plant and equipment total depreciation of non-current assets Amortisation of non-current assets Intellectual property Research and development total amortisation of non-current assets total depreciation and amortisation expenses Rental expense on operating leases External research and development expenses 1,833 2,417 7 150 19 8 182 23 2,009 2,630 51 51 95 1,277 1,372 1,423 272 752 91 91 95 163 258 349 262 905 41 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 6: iNcoMe tAX (a) Income tax recognised in profit or loss: Current tax Deferred tax (Over)/under provision in prior years income tax expense/(credit) attributable to profit (b) reconciliation of income tax expense 2013 $'000 2012 $'000 3,391 (644) 368 3,115 1,133 (1,991) (1,617) (2,475) The prima facie tax payable on profit before income tax is reconciled to the income tax expense as follows: Profit before tax from continuing operations 10,041 4,916 Prima facie income tax payable on profit before income tax at 30% (2012: 15.0% for parent entity and 30.0% for subsidiaries) 3,012 1,503 Add/(subtract) tax effect: Parent entity 15% tax rate1 Parent entity tax on unfranked dividend income Parent entity tax credit on franked dividend income Non deductible expenses Research and development tax incentive Foreign tax credits written off (Over)/under provision in prior years Previously unrecognised tax losses Previously unrecognised temporary differences Tax losses and temporary differences not brought to account income tax expense/(benefit) attributable to profit (c) current tax Opening balance (Over)/under provision in prior years Provision for current year Tax losses transferred from deferred tax Tax payments current tax (asset)/liability 1 The parent entity, Acrux Limited is a Pooled Development Fund (PDF): – PDF’s are taxed at 15% on income and gains from investments in small to medium enterprises; – PDF’s are taxed at 25% on other income – Groups containing a PDF are not permitted to consolidate for tax purposes. 42 111 1,350 (963) 4 (35) – (86) (279) – – 102 3,115 560 368 3,692 (301) (2,644) 1,675 – – – 95 (77) (5) (1,623) – (2,372) 4 (3,978) (2,475) 5,669 (1,623) 1,596 (463) (4,619) 560 ACRUX LIMITED (d) Deferred tax balances 2013 Deferred tax Liability temporary differences Intangible assets Accruals and provisions Exchange differences Accrued interest Total Deferred Tax Liability Deferred tax Assets temporary differences Accruals and provisions Leasehold improvements Patent expenses Exchange differences Accrued interest Share issue expenses Unused tax losses and credits Tax losses total Deferred tax Asset total Deferred tax Balance 2012 Deferred tax Liability temporary differences Intangible assets Accruals and provisions Exchange differences Accrued interest total Deferred tax Liability Deferred tax Assets temporary differences Accruals and provisions Leasehold improvements Patent expenses Exchange differences Accrued interest Share issue expenses Unused tax losses and credits Tax losses total Deferred tax Asset total Deferred tax Balance Opening balance $'000 Over± provision prior years $'000 Transferred to current tax $'000 Recognised in profit or loss $'000 Closing balance $'000 (6,899) 19 1 (28) (6,907) 101 216 693 – (85) 2 927 – – – – – – – – – – – – – – – – – – – – – – – – 2,476 3,403 (3,504) 454 454 454 (301) (301) (301) (6,948) 28 46 (16) (6,890) 151 228 606 9 (27) 33 1,000 395 1,395 (5,495) – – – – – (12) – – – 1 (11) (22) – – – – – – – – – – – – 2,399 2,377 2,377 (463) (463) (463) 383 3 37 25 448 4 (11) (14) (1) 66 (1) 43 – 43 491 49 (9) (45) (12) (17) (38) (12) 87 (9) (59) (20) (51) 145 94 77 (6,516) 22 38 (3) (6,459) 105 205 679 (1) (19) 1 970 2,629 3,599 (2,860) (6,899) 19 1 (28) (6,907) 101 216 693 – (85) 2 927 2,476 3,403 (3,504) 43 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 6: iNcoMe tAX (coNtiNUeD) (e) Deferred tax assets not brought to account Temporary differences Tax losses Note 7: DiViDeNDs (a) Dividends paid Dividends paid at 8 cents per share, unfranked (2012: no dividends paid) Balance of franking account on a tax paid basis at financial year–end adjusted for franking credits arising from payment of provision for income tax and dividends recognised as receivables, franking debits arising from payment of proposed dividends and any credits that may be prevented from distribution in subsequent years: Note 8: eArNiNGs per sHAre Profit from continuing operations Profit used in calculating basic and diluted earnings per share 2013 $'000 (328) 5,834 5,506 2012 $'000 (322) 6,405 6,083 2013 $'000 13,320 2012 $'000 – 22,549 19,909 2013 $'000 6,926 6,926 2012 $'000 7,391 7,391 No. of shares No. of shares Weighted average number of ordinary shares used in calculating basic earnings per share 166,504,999 166,496,711 Effect of dilutive securities: Employee Share Options Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Note 9: cAsH AND cAsH eQUiVALeNts Cash at bank Deposits at call 44 – 12,120 166,504,999 166,508,831 4.16 4.16 4.44 4.44 2013 $'000 3,487 19,353 22,840 2012 $'000 2,984 27,033 30,017 ACRUX LIMITEDNote 10: receiVABLes current Trade receivables Other receivables Prepayments (a) provision for impairment 2013 $'000 2012 $'000 6,591 115 119 6,825 2,293 1,425 145 3,863 No trade receivables are past due and all trade receivables are non interest bearing with 30 or 60 day terms. An impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. No impairment losses have been recognised for reported periods. All trade receivables are expected to be received within trading terms. Note 11: pLANt AND eQUipMeNt Leasehold improvements At cost Accumulated amortisation Total leasehold improvements plant and equipment At cost Accumulated depreciation Total plant and equipment total plant and equipment (a) reconciliations Notes 2013 $'000 2012 $'000 11(a) 11(a) 1,115 (1,115) – 168 (75) 93 93 1,115 (1,115) – 439 (329) 110 110 Reconciliations of the carrying amounts of plant and equipment at the beginning and end of the current financial year: Leasehold improvements Carrying amount at beginning Additions Amortisation expense plant and equipment Carrying amount at beginning Additions Disposals Depreciation expense 2013 $'000 2012 $'000 – – – – 110 38 (4) (51) 93 – – – – 126 75 – (91) 110 45 AnnuAl RepoRt 2013Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 12: iNtANGiBLe Assets intellectual property At cost Accumulated amortisation capitalised Development Ellavie™ External research and development expenses Employee benefits capitalised Other capitalised amounts Axiron™ External research and development expenses Employee benefits capitalised Other capitalised amounts Accumulated amortisation Net carrying amount total intangible assets (a) reconciliations Notes 2013 $'000 2012 $'000 12(a) 12(a) 12(a) 1,200 (854) 346 766 169 136 1,071 17,415 3,353 2,403 (1,451) 21,720 22,791 1,200 (759) 441 766 169 136 1,071 17,415 3,353 2,403 (174) 22,997 24,068 23,137 24,509 Reconciliations of the carrying amounts of intellectual property and capitalised development at the beginning and end of the current financial year. intellectual property Carrying amount at beginning Amortisation expense capitalised Development Ellavie™ Carrying amount at beginning Additions Axiron™ Carrying amount at beginning Additions Amortisation The remaining useful life of Axiron Capitalised Development is approximately 17 years. 46 2013 $'000 2012 $'000 441 (95) 346 1,071 – 1,071 536 (95) 441 1,071 – 1,071 22,997 23,160 – (1,277) – (163) 21,720 22,997 ACRUX LIMITEDNote 13: pAYABLes current Trade creditors Sundry creditors and accruals Note 14: proVisioNs current Employee entitlements Non-current Employee entitlements Aggregate employee entitlements liability Note 15: coNtriBUteD eQUitY (a) issued and paid up capital Ordinary shares fully paid (b) Movements in shares on issue Beginning of the financial year Issued during the year: – Employee share option plans Less Capital Raising Expenses Fair value of shares issued on exercise of employee share options Contributions from share issues At reporting date (c) share options employee share option plan 2013 $'000 2012 $'000 135 1,121 1,256 193 803 996 2013 $'000 2012 $'000 331 322 20 351 14 336 2013 2012 No. of Shares $'000 No. of Shares $'000 166,521,711 95,873 166,496,711 95,825 166,496,711 95,825 166,496,711 95,825 25,000 – – 25,000 46 (2) 4 48 – – – – – – – – 166,521,711 95,873 166,496,711 95,825 The consolidated entity operates an employee share option plan. During the financial year 25,000 options were exercised, no new options were issued under the plan (2012: Nil) and at 30 June 2013 no options remain outstanding from prior issues of options. Options hold no participation rights, but shares issued on exercise of options rank equally with existing shares. No options were held by key management personal. 47 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 15: coNtriBUteD eQUitY (coNtiNUeD) The closing market value of an ordinary Acrux Limited share on the Australian Stock Exchange at 28 June 2013 was $3.51. (i) Movement in the number of share options held under employee share option plan are as follows: Opening balance Granted during the year Exercised during the year Lapsed during the year Closing balance (ii) Details of share options exercised during the year: Proceeds from shares issued Fair value as at issue date of shares issued during the year (iii) Details of lapsed options No options lapsed during the reporting period. (d) capital Management 2013 No. 2012 No. 25,000 25,000 – (25,000) – – – – – 25,000 $’000 $'000 46 101 – – When managing capital, the directors’ objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. During 2013, management paid dividends of $13.3 million (2012: Nil). The amounts and ratio of future dividends have not been determined. Note 16: reserVes AND retAiNeD eArNiNGs share based payment reserve retained earnings (a) share based payment reserve (i) Nature and purpose of reserve This reserve is used to record the value of equity benefit provided to employees and directors as part of their remuneration. Refer note 15 for details. (ii) Movement in reserve Balance at the beginning of year Transfer fair value of employee shares options to share capital Employee share option expense for the period (including adjustment for service conditions not met) Vested employee share options previously expensed, that lapsed during the period Balance at end of year Notes 16(a) 16(b) 2013 $'000 – 2012 $'000 4 (49,120) (42,726) 4 (4) – – – 4 – – – 4 48 ACRUX LIMITED Notes 2013 $'000 2012 $'000 (42,726) (50,117) – 6,926 – 7,391 (35,800) (42,726) (13,320) (49,120) – (42,726) 2013 $'000 2012 $'000 (b) retained earnings Balance at the beginning of year Vested employee share options that lapsed during the period Net profit attributable to members of Acrux Limited Accumulated profit/(losses) at reporting date Dividends paid Accumulated losses at reporting date Note 17: NoN-coNtroLLiNG iNterests Non-controlling interests comprises: Contributed equity Retained earnings (a) Non-controlling interests in issued and paid-up capital of controlled entities – Cosmeceutic Solutions Pty Ltd - Fully paid ordinary shares (b) retained earnings Opening balance – Deregistration of Cosmeceutic Solutions Pty Ltd Closing balance Notes 17(a) 17(b) – – – – (51) 51 – Non-controlling interest related to subsidiary Cosmeceutic Solutions Pty Ltd, which was deregistered on 8 August 2012. 51 (51) – 51 (51) – (51) 49 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 18: cAsH FLoW iNForMAtioN (a) Reconciliation of the cash flow from operations with profit after income tax: Profit from ordinary activities after income tax 6,926 7,391 2013 $'000 2012 $'000 Non-cash items Depreciation and amortisation Unrealised foreign exchange gains/(losses) changes in assets and liabilities (Decrease)/increase in tax liabilities Increase in trade and other receivables Increase/(Decrease) in payables Increase/(Decrease) in employee entitlements Net cash (outflows)/inflows from operating activities (b) reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position is as follows: – Cash at bank – At call deposits with financial institutions Closing cash balance (c) credit stand-by arrangement and loan facilities 1,423 116 472 (2,952) 335 15 (591) 6,335 349 (2) (7,100) (2,913) (151) (6) (9,823) (2,432) 3,487 19,353 22,840 2,984 27,033 30,017 The consolidated entity has credit card facilities with the National Australia Bank and American Express available to the extent of $81,000 (2012: $81,000). As at 30 June 2013 the consolidated entity had unused facilities of $67,079 (2012: $47,074). Note 19: coMMitMeNts Lease expenditure commitments Operating leases (non-cancellable) (i) Non cancellable operating leases contracted for but not capitalised in the accounts: (ii) Minimum lease payments – Not later than one year – Later than one year and not later than five years Aggregate lease expenditure contracted for at reporting date 2013 $'000 2012 $'000 258 – 258 272 258 530 The operating lease relates to office, laboratory and warehouse facilities for which the lease was renewed by Acrux DDS Pty Ltd for a period of 4 years from 1 June 2010, with an option to extend for a further period of 4 years. The lease contract contains market review clauses in the event that Acrux DDS Pty Ltd exercises its option to renew. The company does not have an option to purchase the leased asset at the expiry of the lease period. 50 ACRUX LIMITED Note 20: KeY MANAGeMeNt persoNNeL coMpeNsAtioN Details of Key Management Personnel Compensation are contained within the Remuneration Report section of the Director’s Report. A breakdown of the aggregate components of Key Management Personnel’s compensation is provided below: compensation by category: Short-term employment benefits Post-employment benefits Termination benefits Equity 2013 $'000 2012 $'000 995 44 – – 1,175 111 – – 1,039 1,286 Note 21: KeY MANAGeMeNt persoNNeL’s eQUitY HoLDiNGs Number of shares held by Key Management Personnel Directors and Executives Balance 1/07/2012 Granted as Remuneration Options Exercised Net Change Other Balance 30/06/2013 Directors R Dobinson B Parncutt1 R Barrow2 executives J Pilcher C Blower total 1,372,593 550,637 – 100,000 – 2,023,230 – – – – – – – – – – – – – 1,372,593 167,500 9,375 718,137 9,375 – – 100,000 – 176,875 2,200,105 1 Appointed Non-Executive Director 30 April 2012. 2 Appointed Non-Executive Director 1 April 2012. Note 22: LoANs to KeY MANAGeMeNt persoNNeL There were no loans made to Key Management Personnel during the reporting period. Note 23: reLAteD pArtY DiscLosUres Wholly-owned group transactions Loans Loans were made by Acrux Limited to its subsidiaries under normal terms and conditions. The aggregate amounts receivable from controlled entities by the parent entity at the end of the reporting period were nil (2012: $193,202). Loans were made by Acrux Commerical Pty Ltd to its subsidiary, Fempharm Pty Ltd, under normal terms and conditions. The aggregate amount receivable from Fempharm Pty Ltd at the end of the reporting period was $6,089,596 (2012: $7,062,206). other transactions with Key Management personnel and their personally-related entities Any payments made to Key Management Personnel during the financial year, other than remuneration entitlements, related to the reimbursement of business expenses incurred on behalf of Acrux Limited and its subsidiaries. 51 AnnuAl RepoRt 2013Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 24: AUDitor’s reMUNerAtioN Amounts paid and payable to Pitcher Partners for: (i) Audit and other assurance services – An audit or review of the financial report of the entity and any other entity in the consolidated entity – Other assurance services 2013 $'000 2012 $'000 101 – 101 99 – 99 Note 25: seGMeNt iNForMAtioN The consolidated entity operates as a single operating segment. Internal management reporting systems present financial information as a single segment. The segment derives its revenue from developing and commercialising products using unique technology to administer drugs through the skin. Additional information on revenue: product/service Axiron Recuvyra Other revenue total revenue country of origin Australia Outside Australia: Switzerland United States Other Revenue from Axiron and Recuvyra was received from a single customer. 2013 $'000 2012 $'000 14,557 – 2,103 7,415 1,500 1,790 16,660 10,705 979 1,668 14,260 407 1,014 6,401 2,613 23 16,660 10,705 52 ACRUX LIMITED Note 26: pAreNt eNtitY DetAiLs Summarised presentation of the parent entity, Acrux Limited, financial statements: (a) Summarised statement of financial position Assets Current assets Non-current assets total assets Liabilities Current liabilities Non-current liabilities total liabilities Net assets equity Share capital Current year earnings Retained earnings Share based payments reserve total equity (b) summarised statement of comprehensive income (Loss)/Profit for the year Other comprehensive income for the year total comprehensive income for the year Parent Entity 2013 $'000 2012 $'000 1,277 21,527 22,804 441 – 441 1,824 21,689 23,513 359 – 359 22,363 23,154 95,873 12,484 95,824 1,796 (85,994) (74,470) – 4 22,363 23,154 12,484 – 12,484 1,796 – 1,796 53 AnnuAl RepoRt 2013 Notes to tHe FiNANciAL stAteMeNts For the year ended 30 June 2013 Note 27: coNtroLLeD eNtities parent entity: Acrux Limited subsidiaries of Acrux Limited Acrux DDS Pty Ltd Acrux Pharma Pty Ltd Acrux Commercial Pty Ltd Cosmeceutic Solutions Pty Ltd Cosmeceutic Solutions Pty Ltd was deregistered on 8 August 2012. subsidiaries of Acrux commercial pty Ltd Fempharm Pty Ltd Note 28: coNtiNGeNcies There were no contingencies at 30 June 2013 (2012: Nil). Country of Incorporation Percentage Owned 2013 2012 Australia Australia Australia Australia Australia 100% 100% 100% – 100% 100% 100% 90% Australia 100% 100% Note 29: sUBseQUeNt eVeNts A total of 1,270,000 options over unissued ordinary shares were granted to employees on 31 July 2013. There has been no other matter or circumstance, which has arisen since 30 June 2013 that has significantly affected or may significantly affect: (a) the operations, in financial years subsequent to 30 June 2013, of the consolidated entity, or (b) the results of those operations, or (c) the state of affairs, in financial years subsequent to 30 June 2013, of the consolidated entity. Note 30: coMpANY DetAiLs The registered office of the company is: Acrux Limited 103 – 113 Stanley Street West Melbourne VIC 3003 54 ACRUX LIMITEDDirectors DecLArAtioN For the year ended 30 June 2013 The directors declare that the financial statements and notes set out on pages 19 to 53 in accordance with the Corporations Act 2001: (a) Comply with Accounting Standards and the Corporations Regulations 2001, and other mandatory professional reporting requirements; (b) As stated in Note 1(a) the consolidated financial statements also comply with International Financial Reporting Standards; and (c) Give a true and fair view of the financial position of the consolidated entity as at 30 June 2013 and of its performance for the year ended on that date. In the directors’ opinion there are reasonable grounds to believe that Acrux Limited will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made by the executive chairman and chief financial officer to the directors in accordance with sections 295A of the Corporations Act 2001 for the financial year ending 30 June 2013. This declaration is made in accordance with a resolution of the directors. r DoBiNsoN Executive Chairman Melbourne B pArNcUtt Director Melbourne Dated this 26th day of August 2013 Dated this 26th day of August 2013 55 AnnuAl RepoRt 2013iNDepeNDeNt AUDitor’s report 56 ACRUX LIMITED24 28 57 AnnuAl RepoRt 2013sHAreHoLDer iNForMAtioN As at 20 September 2013 Additional information required by Australian Securities Exchange Listing Rules and not disclosed elsewhere in this report: sHAreHoLDers The Company has 166,521,711 ordinary fully paid shares on issue, held by 4,969 shareholders and 1,270,000 options outstanding, held by 16 people. The Company does not have any other shares or options or other equity securities on issue. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at shareholders’ meetings. No voting rights attach to the options. All fully paid ordinary shares are quoted on the Australian Securities Exchange. No other equity securities of the Company are quoted on the Australian Securities Exchange. The Company has not had, and neither is there currently, any on-market buy back. DistriBUtioN scHeDULe The following is a distribution schedule of the number of holders of fully paid ordinary shares in the Company within the bands of holding specified by the ASX Listing Rules: Category 1 to 1,000 shares 1,001 to 5,000 shares 5,001 to 10,000 shares 10,001 to 100,000 shares 100,001 shares and over total Number of Shareholders Percentage Shares 1,375 2,037 739 716 102 4,969 0.45% 3.45% 3.55% 12.31% 80.24% 752,540 5,748,165 5,907,574 20,491,558 133,621,874 166,521,711 190 shareholders hold less than a marketable parcel of fully paid ordinary shares (being the Company’s main class of securities), based on the market price at the date set out above. sUBstANtiAL HoLDers (As DiscLoseD iN sUBstANtiAL HoLDiNG Notices) Name Ellerston Capital Limited AMP Limited Fidelity Investment BT Investment Management Limited Number of Equity Securities Held 16,630,037 12,796,720 8,636,252 8,531,574 Under the ASX Listing Rules “Substantial Holder” means, in general terms, a person who either alone or with their associates has an interest in 5% or more of the voting shares of the Company. 58 ACRUX LIMITEDtWeNtY LArGest HoLDers oF FULLY pAiD orDiNArY sHAres iN AcrUX LiMiteD Shareholder Number of Fully Paid Ordinary Shares Percentage of Total Capital 1 NATIONAL NOMINEES LIMITED 30,050,404 2 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 3 4 5 6 7 J P MORGAN NOMINEES AUSTRALIA LIMITED BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED JP MORGAN NOMINEES AUSTRALIA LIMITED AMP LIFE LIMITED 8 DILAN CORP PTY LTD 9 DURBIN SUPERANNUATION PTY LTD 10 DORVELL PTY LTD 11 MR ROSS DOBINSON 12 ASIA UNION INVESTMENTS PTY LTD 13 CITICORP NOMINEES PTY LIMITED 14 C M ABBOTT PTY LIMITED 15 TARNAGULLA NOMINEES PTY LTD 16 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED – A/C 2 17 LOREMELL PTY LIMITED 18 AMADAN PTY LIMITED 19 RAVENSCOURT PTY LTD 20 BOND STREET CUSTODIANS LIMITED 26,712,735 19,741,257 7,122,016 6,321,039 5,828,143 5,161,565 2,045,000 1,600,000 1,479,503 1,372,593 1,200,000 1,167,678 800,000 700,000 671,676 664,716 655,000 600,000 571,532 114,464,857 18.05% 16.04% 11.86% 4.28% 3.80% 3.50% 3.10% 1.23% 0.96% 0.89% 0.82% 0.72% 0.70% 0.48% 0.42% 0.40% 0.40% 0.39% 0.36% 0.34% MArKet ListiNG Acrux Limited is quoted on the Australian Securities Exchange (ASX). Share prices can be obtained from most Australian national newspapers and from the ASX website (www.asx.com.au). The shares of the Company are not quoted on any other stock exchange. The following are the share prices for the end of each quarter of the financial year ending 30 June 2013: Quarter ended 30 September 2012 Quarter ended 31 December 2012 Quarter ended 31 March 2013 Quarter ended 30 June 2013 The closing share price on 20 September 2013 was $3.36 $3.15 $2.80 $3.82 $3.45 59 AnnuAl RepoRt 2013Broadly, Australian resident shareholders who hold the Company’s shares at risk (in accordance with the Tax Act) for 45 days or more may elect to treat franked dividends paid by the Company as assessable income, and claim the tax offset available in respect of the dividend. The tax offset will be equal to the franking credit attaching to the dividend received. Where the tax offset available exceeds the shareholder’s highest marginal tax rate, the shareholder may be entitled to receive a refund of tax in respect of the excess franking credit. Australian corporate tax entities are entitled to benefit from the franking credits attaching to the franked portion of the dividends paid by the Company, irrespective of whether the corporate tax entity treats the dividend as exempt income or elects to treat it as assessable income. Accordingly, an Australian corporate may credit its franking account with franking credits attaching to a dividend from the Company regardless of whether or not they have elected to treat the dividend as exempt or assessable income. Dividends paid by Acrux to non-residents will not be subject to withholding tax regardless of whether or not they are franked or unfranked. Should the Company cease to be a PDF, each shareholder will be deemed to have sold their shares immediately before the Company ceased to be a PDF and to have acquired the shares at their market value immediately after the Company ceased to be a PDF. Any gain or loss realised on the sale after that time, calculated by reference to the deemed acquisition cost, will be subject to the general provisions of the Tax Act and any such gain may be included in the shareholder’s assessable income. sHAreHoLDer iNForMAtioN As at 20 September 2013 pooLeD DeVeLopMeNt FUND The information set out below is of a general nature only and may vary from person to person (dependent on their circumstances). Any shareholder or prospective shareholder should obtain their own taxation advice, rather than relying on this summary. Acrux Limited is a Pooled Development Fund (PDF) that has been registered under the Pooled Development Fund Act 1992 (“the PDF Act”) since 7 July 1999. A PDF is a company that is resident in Australia, and is registered and regulated by the PDF Registration Board in accordance with the PDF Act. Shareholders in the Company will be entitled to concessionary tax treatment in Australia for income and capital gains derived in connection with their shareholding. The concessionary tax treatment should be available to investors that hold their interests directly and indirectly through non-corporate trusts and partnerships. Gains realised by an investor on the disposal of shares in the Company will not be included in the investor’s assessable income in Australia. This is because: – Where the gain on sale would be ordinary income of the investor, the gain will be treated as exempt income; and – Where the gain on sale would be a capital gain it is specifically excluded from the capital gains tax provisions of the Tax Act. Equally, an investor will not be entitled to any deduction or capital loss on the sale of the Company’s shares. Shares held in a PDF cannot be held as trading stock. Accordingly, share traders cannot treat PDF shares as trading stock. Unfranked dividends received by an Australian resident shareholder from the Company will be exempt from tax in the hands of the shareholder. Franked dividends will also be exempt from tax unless the shareholder elects to treat the franked dividend as taxable. 60 ACRUX LIMITEDcorporAte DirectorY Acrux Limited and subsidiary companies 103-113 Stanley Street West Melbourne Victoria 3003 Australia T: + 61 3 8379 0100 F: + 61 3 8379 0101 W: www.acrux.com.au Australian Stock Exchange code “ACR” Information about the Company, including disclosures to the Australian Stock Exchange, can be found on the Company’s website. If you require further information about Acrux, please contact the Chief Financial Officer & Company Secretary, Tony Di Pietro, on +61 3 8379 0100, or tony.dipietro@acrux.com.au. share registry Link Market Services Level 1 333 Collins Street Melbourne Victoria 3000 Australia Locked Bag A14 Sydney South NSW 1235 Australia Toll-free: 1300 554 474 (Australia only) International: +61 1300 554 474 F: (02) 9287 0303 F: (02) 9287 0309 (for proxy voting) E: registrars@linkmarketservices.com.au W: www.linkmarketservices.com.au 61 AnnuAl RepoRt 2013Acrux Limited 103-113 Stanley Street West Melbourne Victoria 3003 Australia T: + 61 3 8379 0100 F: + 61 3 8379 0101 W: www.acrux.com.au 

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