D e s t i n y P h a r m a p l c A n n u a l R e p o r t a n d F i n a n c i a l S t a t e m e n t s 2 0 1 8 Targeting antimicrobial resistance Annual Report and Financial Statements 2018 In this report Strategic report 1 – 20 Highlights Chairman’s statement Investment proposition Commercial opportunity Global government initiatives Business model CEO’s operational and strategic review Risks and uncertainties Financial review Governance 21 – 28 Introduction to corporate governance Board of Directors 1 2 3 4 6 7 10 18 20 21 24 Directors’ remuneration report 26 Directors’ report 28 Financial statements 29 – 45 Statement of Directors’ responsibilities Independent auditor’s report Statement of comprehensive income 29 30 32 Statement of financial position 33 Statement of changes in equity 34 Statement of cash flows 35 Notes to the financial statements 36 Glossary Corporate information 46 48 Destiny Pharma plc We are a clinical stage biotechnology company focused on the development of novel medicines that represent a new approach to the treatment of infectious disease. These potential new medicines are being developed to address the need for new drugs for the prevention and treatment of life‑threatening infections caused by antibiotic resistant bacteria, often referred to as superbugs. Infections caused by antibiotic resistant strains of bacteria continue to rise at an alarming rate and they pose a major threat to public health in the view of the World Health Organization (“WHO”). Visit us online at www.destinypharma.com Follow us on Twitter @DestinyPharma Highlights Destiny Pharma is focused and well funded We are dedicated to the discovery, development and commercialisation of new anti-infectives that improve outcomes for patients and provide more effective medical care. IND opened and Fast Track status confirmed for lead XF-73 programme in March 2018 Research collaboration with Aston University signed in July 2018 Two Phase 1 XF-73 studies completed successfully in July 2018 and January 2019 Management strengthened with appointment of new Chief Medical Officer and new Chief Financial Officer in October 2018 New dermal infection Phase 1 clinical programme commenced in September 2018 Research collaboration with Southampton University announced in November 2018 Lead programme XF-73 Phase 2 clinical programme in 200 patients finalised and ready to start in April 2019 UK-China government AMR non-dilutive funding of up to £1.6 million awarded in January 2019 2018 closing funds of £12 million – Destiny funded through to H2 2020 1 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Chairman’s statement Destiny Pharma has made good progress in 2018 and has an exciting year ahead. Nick Rodgers Chairman Introduction I was delighted to be appointed Chairman at the start of 2019 having joined the Board as a non-executive director in June 2018. I look forward to continuing the excellent work of Sir Nigel Rudd who stepped down at the end of 2018. Everyone at Destiny Pharma is grateful to Sir Nigel for his leadership before and after the IPO in 2017 and he remains a supporter of the company as we move forward into an exciting year. The company made good progress delivering on its targets in 2018 and has now completed the additional clinical work required in advance of starting the key Phase 2 clinical study. The study is due to start in the next few weeks and we are well funded to complete this key trial of our lead XF asset. We are confident that there is significant commercial potential for our XF-73 nasal gel formulation as a novel treatment for the prevention of post-surgical infections. Other products earlier in our pipeline will also be progressed and the potential of the XF platform has been validated by the awards of grants to support collaborations with expert groups at both Aston and Southampton University in 2018 and also the more recent award under a UK-China Antimicrobial Resistance (“AMR”) initiative. The announcement of the UK government five-year AMR programme in January 2019 was further confirmation of the international recognition of the need for new, improved anti-infective drugs and Destiny Pharma is encouraged by increased activity in this sector and the interest from investors, funding bodies and pharma companies in the potential of new treatments. Destiny Pharma believes that our “prophylactic” approach and our XF platform’s “resistance-breaking” profile means we are very well positioned to be amongst a new generation of anti-infective drug developers. There is a clear global need for new anti-infective drugs that are effective and reduce the growing danger of antimicrobial resistance (“AMR”). Destiny Pharma is well funded to complete the important Phase 2 clinical development of its lead asset XF-73 and will also continue to look for opportunities to collaborate and develop its earlier assets. Our strategy is to build Destiny Pharma into a significant business focused on anti-infectives and antimicrobials and we look to expand our portfolio in the future. The Board of Destiny Pharma would like to thank our investors for their continuing support. I would also like to thank our employees, advisers and collaborators for their ongoing efforts to ensure that Destiny Pharma makes progress. We are looking forward to 2019 and are confident in the outlook for Destiny Pharma plc. Nick Rodgers Chairman 8 April 2019 Our strategy is to build Destiny Pharma into a significant business focused on anti-infectives 2 Destiny Pharma plc Annual Report and Financial Statements 2018 Investment proposition Novel approach targeting $ billion global markets The Directors believe Destiny Pharma has the following key strengths which underpin the company’s strategy. Novel patented technology The XF drug platform represents a new range of antimicrobial drug products which kill bacteria rapidly via a novel mechanism of action against which bacteria appear to be unable to build resistance. Significant opportunities in existing and new indications The resistance-breaking profile means that XF drug products have the potential for a long product lifetime. Lower risk, Phase 2 clinical stage lead asset Anti-infective drugs have a high probability of approval following a successful Phase 1 trial compared to many other drug classes. Lead asset XF-73 enters Phase 2 studies in 2019. Access to non-dilutive funding Destiny Pharma has already benefited from the alternative sources of funding available for the development of new anti-infective drugs as an earlier Phase 1 US clinical trial was funded by NIAID. Three grants have also been received in 2018/19 from expert UK and UK-China funds. New US disease indication in large market The FDA’s award of QIDP is confirmation of a new US indication for XF-73 for the “prevention of post-surgical staphylococcal infections.” Updated market research in 2018 confirmed the clinical need and market opportunity. Experienced team The executive team responsible for the management of Destiny Pharma has extensive experience appropriate for an AIM listed development phase biotechnology company. The team was strengthened further in 2018 with the appointment of a new CMO and CFO. XF platform can deliver other clinical assets Phase 1 XF-73 dermal project has started and grants are funding work on earlier research projects involving XF-70 and DPD-207 drug assets. Expert partner in place for China/Asia markets Well funded to deliver strategy to 2020 China Medical Systems collaboration signed in December 2017 shows that the company can negotiate valuable commercial agreements. Destiny Pharma can focus on delivering its key clinical targets. Destiny Pharma plc Annual Report and Financial Statements 2018 3 Strategic reportGovernanceFinancial statements Commercial opportunity The need for new anti-infective drugs Destiny Pharma is focused on the development of novel medicines that represent a new approach to the prevention and treatment of life-threatening infections caused by antibiotic resistant bacteria, often referred to as superbugs. Antibiotic resistant bacteria pose a threat to public health and are of serious concern to the World Health Organization. There is now a global imperative to put in place initiatives at all levels of society (including stewardship, new drug R&D, and diagnostics in both human and animal health) to address antibiotic resistant bacteria in a concerted effort to counter the prediction of ten million deaths (and an estimated $100 trillion cost by 2050). This was set out in Lord O’Neill’s Independent Review on Antimicrobial Resistance (“AMR”), published in May 2016. The US, EU and UK governments continue to provide non-dilutive funding support and regulatory initiatives to support the development of novel anti-infectives especially those addressing key pathogens and AMR. In January 2019 the UK Government confirmed its commitment to continuing support and initiatives to address AMR as part of its 2019-2024 Vision and five-year action plan. This included a commitment for the National Institute for Clinical Excellence (“NICE”) and NHS England to deliver a new pricing and reimbursement model for novel anti-bacterial drugs. In June 2018 the FDA Commissioner, Scott Gottlieb M.D announced the US regulator’s support of new incentives for companies developing novel anti-infectives through both financial reimbursement and further streamlined clinical trial requirements. The US Centers for Disease Control and Prevention confirm that each year in the US at least two million people become infected with bacteria that are resistant to antibiotics and at least 23,000 die each year as a direct result of such infections. Bacteria have been shown to evolve to resist the new drugs that modern medicine uses to combat them. Indeed, this was the case with penicillin, one of the first antibiotics developed almost 100 years ago. However, in recent years, the rise in AMR has been a particular concern, especially with the emergence of many different types of superbug. Methicillin-resistant Staphylococcus aureus (“MRSA”) is one of the most prominent superbugs and a major cause of hospital-associated infection and featured in the WHO’s ‘most dangerous’ list of superbugs published in 2017. The WHO followed US and European guidelines in 2016 by recommending the screening and decolonisation of MRSA and all strains of Staphylococcus aureus in pre-surgical patients undergoing high-risk surgeries in a step designed to help prevent such infections. This is the focus for Destiny Pharma’s lead XF-73 programme. Tackling AMR is now recognised as a high priority at a national and global level. With an increasing number of hospital-based medical procedures being carried out across the world, there is a specific need for improved patient care regarding hospital infections. This should deliver both better outcomes for patients and a reduction in the increasing costs of post-operative care incurred by hospitals, governments and insurance companies. WHO names antibiotic resistance as a top global concern $ billion rewards and incentives to drive new drugs proposed $100 trillion global cost of resistance and 10 million lives lost by 2050 4 Destiny Pharma plc Annual Report and Financial Statements 2018 Steps are already being taken in this direction, particularly in the US, with the Generating Antibiotics Incentives Now (“GAIN”) Act and the 21st Century Cures Act. Both of these propose incentives to spur development of new drugs, including a more streamlined regulatory path, to tackle AMR. Furthermore, the Hospital Acquired Condition reduction programme financially penalises the poorest performing US hospitals in terms of MRSA infection rates. The drive to tackle AMR is receiving global interest and priority with new specific sources of ‘pull’ and ‘push’ incentives, including funding from Innovate UK, the US Department of Defense, IMI, Carb-X, GAMRIF and potential pricing and reimbursement adjustments or market entry rewards to recognise the societal value that anti-bacterial drugs contribute. Destiny Pharma has a strong track record in attracting non-dilutive funding from such sources, with approximately £7 million received to date and will continue to seek similar non-dilutive funding to assist in financing its pipeline. If not tackled, rising AMR could have a devastating impact Resistant infections lead to higher death rates and are more expensive to treat Destiny Pharma’s XF-73 pipeline could contribute to addressing the cost of antibiotic resistant bacteria, and the company has been invited to participate in groups that are discussing the problem and developing solutions. • Dr William Love was appointed by Professor Dame Sally Davies, UK Chief Medical Officer for the Department of Health, to the Expert Advisory Board of the Global Antimicrobial Resistance Innovation Fund in November 2016. • The company is also a founder member of the BEAM Alliance, set up in 2015 and representing and promoting the interests of more than 40 European biotech companies in the area of anti-bacterial drug development. 00:03 By 2050, the death toll could be a staggering one person every three seconds if AMR is not tackled now. Source: The Review on Antimicrobial Resistance: Tackling drug-resistant infections globally: final report and recommendations, May 2016. Mortality rate 24% $35,000 to treat drug-resistant infection (MRSA) Mortality rate 11.5% $16,000 to treat drug-sensitive infection (MSSA) A study in the US in 2010 found that infections caused by the superbug methicillin-resistant Staphylococcus aureus were more than twice as expensive to treat as infections caused by the easier-to-treat methicillin-sensitive Staphylococcus aureus (“MSSA”). Source: Filice GA, Nyman JA, Lexau C et al., Excess costs and utilization associated with methicillin resistance for patients with Staphylococcus aureus infection, Infection Control and Hospital Epidemiology, 2010, 31 (4). 5 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Global government initiatives Supporting novel anti-infective development Infections caused by antibiotic resistant strains of bacteria continue to rise at an alarming rate and are of serious concern to the WHO. Many initiatives to spur the development and approval of new antibiotics/ anti-bacterial drugs are under consideration. The US and UK governments are particularly active in this area. Key initiatives in recent years are set out below: Hospital Times, Issue One, 2019. Generating Antibiotic Incentives Now (“GAIN”) Act, 2012 (US) Qualifying Infectious Disease Products (“QIDPs”), rapid review by FDA and five years of additional US market exclusivity. Independent Review on Antimicrobial Resistance, May 2016 Predicts ten million deaths and $100 trillion cost of AMR globally by 2050 if not addressed. Recommends global fund to drive R&D and $ billion market entry rewards for new drugs. United Nations, September 2016 The UN recognises the threat from AMR and the UN General Assembly has, for only the fourth time in its history, published a directive on a healthcare issue requesting the UN, WHO, FAO, OIE and OECD to report on actions to address this global threat in 2018. 21st Century Cures Act, December 2016 (US) Instructs the FDA to enable approval of QIDPs in Limited Patient Populations which will allow a more efficient clinical trial design and greater ease of drug approval for a limited label population. G20 Declaration, May 2017 Recognised the importance of reactivating the R&D pipeline through incentive mechanisms that avoid the reliance on high price/ volume combinations and the need to promote prudent and responsible use of antimicrobials. In the Hangzhou G20 Leaders’ Communiqué, G20 leaders called on the WHO, FAO, OIE and OECD to collectively report back in 2017. Davos announcement, February 2018 $1 billion rewards proposed at Davos 2018 for new antibiotics: the study, titled “Revitalizing the Antibiotic Pipeline: Stimulating Innovation while Driving Sustainable Use and Global Access”, was produced by an international group made up of 23 partners from big pharma, academic institutions and public health organisations. The complementary measures laid out in the study cover 30 incentives on how to drive antibiotic innovation including an increase of $300 million, or approximately 50%, in government grant funding and R&D co-ordinators are needed to foster collaboration and fundamental research. UK long-term AMR plans updated January 2019 The UK Government announced its 20-year vision and second five-year action plan on AMR which outlines how the government will contribute to the global effort against AMR through optimising use of antimicrobials and investing in innovation, supply and access. “ Preventing infections is essential and our new plan has a strong focus on infection prevention and control.” HM Government Tackling AMR 2019-2024 UK Action Plan Under the AMR Action Plan, the UK Government undertakes to: • work with international partners to agree a co-ordinated global system for incentivising new therapeutics. Establish collaboratives that link UK researchers and industry to make best use of data, information and skills; • support successful and emerging product development partnerships for priority therapeutics; • invest in research in academia and businesses, including SMEs, through UKRI and other funding agencies; and • continue to support the AMR Benchmark to stimulate improved accountability and positive competition in industry. 6 Destiny Pharma plc Annual Report and Financial Statements 2018 Business model Building shareholder value through drug development Using a flexible, virtual model to create novel IP and clinical data packages. Identify clinical candidates Expand IP Focus Collaborate Destiny Pharma is committed to developing new drugs that will be a significant improvement on current anti-infectives and that will be part of the global project to address AMR. Destiny Pharma does not intend to build a sales and marketing infrastructure so will keep its focus as a “drug development engine” in its chosen therapeutic areas. Destiny Pharma has already proven it can develop intellectual property, identify lead candidates and bring selected compounds through early testing to be ready for late stage Phase 2b clinical trials. Research projects Investors Collaborate XF drug platform Funding Clinical programmes Partners/ collaborators Commercialisation with partners Grants and non-dilutive funding Build development packages Collaborations Commercialisation Funding Destiny Pharma owns the XF platform but is committed to reach out and work with sector specialists at all stages of the drug research and clinical development process if such collaborations will advance projects and deliver shareholder value. These currently include grant funded university research partnerships, formulation development and projects examining XF drugs’ interaction with other anti-infectives or potentiation mechanisms. Destiny Pharma is well connected with expert groups across the world and will continue to explore such opportunities. Whilst Destiny Pharma takes great care to assess the needs of the clinician in the anti-infectives sector, it also investigates the commercial markets, looking at potential market volumes and also pricing implications. The reports produced guide the portfolio review and the selection of target indications. Destiny Pharma is looking to partner later stage projects with expert sales and marketing pharma or specialty pharma companies who can advise on the later stage clinical trials and carry out product launches and sales to maximise value creation. These may be territory rather than multi-market/global deals. Destiny Pharma has already completed one regional collaboration with China Medical Systems. Destiny Pharma has a track record of raising funds in both private and public markets. The company has also won grants and other non-dilutive funding awards previously, including three in the last twelve months. Destiny Pharma is well funded through to H2 2020 and will continue to seek non-dilutive funding and partnerships that may generate cash income and/or bring funding support to collaborative projects. If additional projects are defined that need additional funds, then Destiny Pharma can also consider using its listed status to attract funding support. 7 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Business model in action Grant funded collaborations signed in 2018 Research project with Aston University to investigate new XF-platform drug candidates. The research is intended to examine novel compounds from the company’s XF-platform and assess their potential to prevent, control and eradicate dangerous bacteria and biofilms. Serious infections are sometimes caused and exacerbated by biofilms where bacteria can hide and be protected from traditional anti-infective agents. XF compounds have already shown efficacy in biofilm models and this research project will explore that further and look at the mechanisms of action. The collaboration with Aston University will also look at other potential uses of the XF platform in the prevention and treatment of serious, drug resistant infections. Aston University’s Department of Life and Health Sciences has established expertise in in vitro bacterial biofilm models that will be utilised in the collaboration. “ The XF series of compounds have distinctive properties that could provide important advances in the treatment of biofilm‑related infections.” Associate Professor Tony Worthington Reader in Clinical Microbiology at Aston University Collaboration with Southampton University to investigate XF drug platform activity against infections associated with biofilms. Destiny Pharma was jointly awarded a National Biofilms Innovation Centre (“NBIC”) funded research collaboration with the University of Southampton. The project is intended to examine the use of the company’s novel XF compounds to prevent, control, and eradicate chronic clinical infections with underlying biofilm involvement, such as those in diabetic foot ulcers and cystic fibrosis. Destiny Pharma’s XF compounds have already shown the potential to eradicate bacteria, such as MRSA, within a biofilm. The NBIC funded collaboration plans to expand on this data using laboratory and clinical microbial biofilm models and the expertise of the team at the University of Southampton’s Faculty of Environmental and Life Sciences, who have established ex vivo biofilm model systems and access to clinical infection samples from cystic fibrosis sufferers that will be utilised in the collaboration. Biofilms are recognised as a key factor in the inability of antibiotics (and other anti-bacterial agents) to successfully treat infections. The formation of bacterial biofilms is implicated in the development of cystic fibrosis pneumonia, diabetic foot ulcers, dental caries and infections associated with indwelling medical devices, (eg hip implants and catheters). In the US, 1.7 million biofilm-related infections, (eg urinary tract, surgical, respiratory and circulatory infections) are annually reported (Centers for Disease Control and Prevention Report, 2007). The annual estimation of the cost of biofilm infections in the US is $94 billion. “Destiny Pharma’s XF series show exciting promise and activity against bacterial biofilms. The NBIC funding will be used to accelerate the development of these compounds using clinically relevant biofilm models for chronic wound infections, including diabetic foot ulcers and within cystic fibrosis respiratory infection.” Professor Jeremy Webb Co-Director of National Biofilms Innovation Centre (“NBIC”) 8 Destiny Pharma plc Annual Report and Financial Statements 2018 Two-year programme will research novel antimicrobial candidates from the company’s XF drug platform for use against dermal and ocular infections. Collaboration with Cardiff University and Tianjin Medical University will aim to identify safe and efficacious compounds with a reduced resistance profile Destiny Pharma was awarded funding of up to £1.6 million from a collaboration established under the UK-China AMR grant fund, set up by Innovate UK and the Department of Health and Social Care, with the Chinese Ministry of Science and Technology. The two-year project will examine the use of the company’s novel XF drugs to prevent, control, and eradicate life threatening bacteria or “superbugs” without generating resistance. The research work will be carried out by Destiny Pharma’s team in collaboration with expert groups at Cardiff University’s School of Dentistry and College of Biomedical and Life Sciences, led by Professor David Williams, and a team at Tianjin Medical University, China. The new China-UK Industrial Research programme seeks to extend the knowledge base and activity profile of these novel drugs. This will include the study of multi-drug resistant (“MDR”), gram-negative and positive, high priority bacterial pathogens in vitro, within biofilms and within in vivo bacterial infection models for dermal and ocular infections. It will also evaluate combining XF-drugs with existing antibiotics to synergise and/or restore their efficacy against priority antibiotic resistant bacteria. Regional development and commercialisation agreement finalised with China Medical System Holdings Limited (“CMS”) signed in 2017. This important collaboration was signed in December 2017. The parties have held meetings at CMS headquarters in Shenzhen, China and have commenced discussions through the Steering Committee on potential projects that can be progressed under the agreement. CMS is leading discussions with the Chinese regulatory authorities on possible development pathways in China. Highlights • Strategic partnership grants CMS full rights to Destiny Pharma’s pipeline of drug candidates in China and certain other Asian countries (excluding Japan). • CMS will carry out all research and development required, in their territories, and both parties will share data and co-ordinate development plans. • CMS will be responsible for the commercialisation of the drug candidates in their territories. • Destiny Pharma will make a manufacturing margin on any product the company supplies and will also receive a commercial milestone payment subject to the applicable sales milestones being met by CMS. 9 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 CEO’s operational and strategic review Destiny Pharma’s strategic aim is to become one of the world’s leading developers of novel anti-infective drugs. Neil Clark Chief Executive Officer The Board is committed to progressing the Destiny Pharma pipeline with the goal of delivering better drug treatments for patients and creating significant value for shareholders. The company is part of a network of biotech and pharma companies working in this sector and will continue to consider partnerships and licensing opportunities where appropriate. Destiny Pharma plans to generate income and shareholder value by the clinical development and commercial exploitation of its proprietary, highly innovative anti-bacterial drug platform; the XF drug series. The XF drug platform is being developed to prevent and treat existing and emerging superbug infections within and outside of hospitals. Our lead asset XF-73 is entering Phase 2 trials and if the results are positive Destiny Pharma will have a novel drug candidate in a significant market that is ready to move into Phase 3 clinical trials in US. The company’s intellectual property is well established with 95 granted and two pending patents within three patent families, covering composition of matter, novel mechanism of action and bacterial biofilm action. The company has plans to develop and commercialise its earlier pipeline. Therefore, while Destiny Pharma’s strategy is to develop robust clinical packages around its drug candidates that make them attractive to pharmaceutical companies to license, the company believes it can potentially continue to build value through conducting late stage clinical development itself, ensuring a licensing deal need only be struck at the right time and on optimal terms for its shareholders. Additionally, while the market for the lead asset XF-73 is initially in the US, the need for such a new treatment is global and Destiny Pharma has the ability to enter into licensing agreements and collaborations for other territories in due course. We have already established an agreement with CMS to develop and commercialise the company’s assets in the China/Asia market and the company will also look to enter selected partnerships to develop its earlier stage assets. In addition, Destiny Pharma has successfully applied and closed three non-dilutive funding grants in the last twelve months, to assist in the development of its pre-clinical portfolio. Destiny Pharma will continue to look at these alternative sources of funding to finance proposed and future pre-clinical and clinical projects. The Board believes that the increasing governmental pressure and financial incentives that are being implemented now and possibly in the future by leading institutions such as the WHO, UN, FDA and G7/G20 will further increase the options available for profitable commercialisation and the generation of shareholder value. Our market research confirms that XF-73’s target product profile is very attractive to hospital infection experts. There are many millions of hospital operations in the US alone where a new drug is needed to help prevent infections. 10 Destiny Pharma plc Annual Report and Financial Statements 2018 Our platform The XF drug platform has an innovative, ultra-rapid mechanism that reduces the chance of bacteria becoming resistant to its action. Destiny Pharma’s XF platform has advantages over traditional antibiotics Antibiotic XF drug Ultra-rapid bacterial kill/elimination (within minutes) MRSA unable to become resistant to drug action Potential for widespread use Kills all antibiotic resistant gram-positive bacteria tested Kills any stage of bacterial growth – including bacterial biofilms FDA, QIDP & Fast Track status X X X X X The key potential benefits are significant: Ultra-rapid bacteria kill Studies have shown the XF drugs killing bacteria in vitro in less than 15 minutes; faster acting than standard antibiotics currently in use. Active against all gram-positive bacteria tested to date and selected gram-negative bacteria This includes clinically important and infection-causing strains, such as: Ability to kill bacteria in any growth phase This is an important feature as bacteria are not always actively growing. XF drugs are able to kill bacteria even when dormant. Ability to kill bacteria within staphylococcal bacterial biofilms Biofilms are an increasing problem that are poorly treated by current drugs as they act as a protective barrier for bacteria. They are associated with indwelling medical devices (for example, heart valves and joint replacements) and invasive medical devices (for example, catheters and endoscopes). • Staphylococcus aureus; • Listeria monocytogenes; • Propionibacterium acnes; • Group G Streptococcus; • Mycobacterium tuberculosis; • Streptococcus pneumonia; • Bacillus anthracis; • Yersinia pestis; • Acinetobacter baumannii; • Pseudomonas aeruginosa; and • Clostridium difficile. All existing antibiotic resistant strains of gram-positive bacteria tested to date are susceptible to XF drugs, including MRSA. No bacterial (MRSA) resistance is seen to emerge No bacterial (MRSA) resistance was seen to emerge in a landmark in vitro study of bacterial resistance that compared XF-73 to standard antibiotics currently in use. The bacteria (MRSA) did not demonstrate any resistance to XF-73 even after 55 repeat exposures (being the longest repeat exposure study published as far as the company is aware). In contrast, MRSA rapidly developed significant resistance to a range of antibiotics tested. A second study using clinical bacterial samples from a clinical trial of XF-73 provided the first clinical data supporting the same “no resistance profile”. The XF drugs can therefore potentially operate within existing antibiotic markets and may also be able to open new preventative and therapeutic drug markets that are closed to, or restricted for, traditional antibiotics because of the existence and/or threat of AMR. This threat means that antibiotics have to be used sparingly to limit the development of bacterial resistance. 11 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 CEO’s operational and strategic review continued Our pipeline Destiny Pharma is focused on markets restricted or blocked by antibiotic resistance. Destiny Pharma’s XF drug pipeline includes a number of preventative and therapeutic projects at clinical and pre-clinical development stages and a portfolio of additional patent-protected assets available to enter in-house development and/or partnership collaborations. Our lead asset, XF-73, is ready to start the important next stage in its clinical development as it enters Phase 2 trials in 2019. In the last year XF-73 completed the required Phase 1 dermal safety studies very successfully. It is now able to undergo an important Phase 2b clinical study to deliver a “Phase 3 ready” data set. This was the key target for the funds raised at the IPO in September 2017. Earlier pipeline assets will also be developed and the company has announced the start of a new dermal infection project with XF-73 that aims to deliver a to Phase 2 ready programme in 2020. Clinical data from the XF-73 nasal programme is strong Following a review of clinical trial data on XF-73 (exeporfinium chloride), it was awarded Qualifying Infectious Disease Product (“QIDP”) status in October 2015 by the FDA. Within the QIDP award, the FDA also confirmed a new US disease indication for XF-73; namely the “prevention of post-surgical staphylococcal infections”, including MRSA. This represents a new US market for which no existing product is approved. QIDP status identifies XF-73 as a drug that is intended to treat serious or life-threatening infections, including those caused by antibiotic resistant pathogens. The FDA also awarded XF-73 nasal Fast Track Status in March 2018 recognising it as a priority drug for US development. Discovery Pre-clinical Phase 1 Phase 2 Prevention of post-surgical staphylococcal infection(1) Treatment of skin infections of antibiotic resistant bacteria – diabetic foot ulcers/burns wounds(2) Prevention of staphylococcal hospital/ventilator associated pneumonia (“VAP”) infection XF-73 Nasal XF-73 Dermal XF Throat Discovery Programmes Treatment of bacterial biofilm-associated infections (1) New US disease indication, QIDP designated by FDA, October 2015. (2) Gram-negative (A. baumannii, P. aeruginosa) and gram-positive (Staphylococcus aureus). 12 Destiny Pharma plc Annual Report and Financial Statements 2018 Destiny Pharma has now completed seven successful Phase 1/2a clinical trials with XF-73 which included measures of its efficacy in reducing nasal colonisation by Staphylococcal aureus. The last such efficacy trial (as shown in the chart below) was conducted in the US and was funded by the US government’s expert division on antimicrobial drugs, the National Institute for Allergy and Infectious Diseases (“NIAID”), who reported the successful outcome from this trial in September 2016. This study indicates the potential clinical efficacy of XF-73 in reducing the nasal carriage of Staphylococcus aureus in the nose. Under the IND opened in February 2018 the company completed the required additional Phase 1 dermal safety studies in US and the results demonstrated a very good “non-irritant” classification for the XF-73 nasal gel and XF-73 in water solution in standard safety studies examining the drug’s potential to cause irritation when administered dermally. The investigators did not report any XF-73 adverse events during the study and no XF-73 was detected in blood samples taken, confirming earlier dermal and nasal clinical trials which also demonstrated no XF-73 appeared in the bloodstream, and reinforcing its excellent safety profile. In Europe and the US, the company has now completed seven successful Phase 1 studies. These trials have provided the following data supporting an attractive new product profile for XF-73 in both of the targeted nasal and dermal indications: • appropriate clinical safety profile; • non-irritant as dermal gel; • well tolerated at multiple doses; • no drug exposure in the bloodstream; • rapid, anti-staphylococcal action in the nose; and • anti-bacterial efficacy statistically demonstrated over placebo. The Phase 2b design for the important next study of XF-73 for the prevention of post-surgical infections has been finalised after exchanging information with the anti-infective review team at the FDA. The study will be a multi-centre, randomized, placebo-controlled study of multiple applications of a single concentration of XF-73 nasal gel to assess the microbiological effect of XF-73 on commensal Staphylococcal aureus nasal carriage in patients scheduled for surgical procedures deemed to be at high risk of post-operative Staphylococcal aureus infection. This Phase 2b trial will enrol 200 patients in up to 20 sites in the US and Georgia in 2019. 2016 Phase 1 data: Staphylococcus aureus load after 0, 1 and 5 days’ dosing 3.1 ) x o r p p a g o l ( e r o c S Q S n a e M SQ = 1 line 2.3 1.7 3.0 Day 0 Day 1 Day 6 Estimated hospital Staphylococcus aureus assay detection threshold 0.8 0.5 Placebo nasal gel 2mg/g XF-73 nasal gel Source: Data from US clinical trial DMID 11 0007. Press release 5 September 2016. 13 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 CEO’s operational and strategic review continued XF-73 nasal gel can be priced sensibly, delivered one day before surgery, has an excellent safety profile and addresses the key challenge of AMR. The proposed product profile is “commercially viable” in a $ billion market. There are 40 million surgeries per year in the US, half of which are at a high risk of infection The medical need to combat surgical infections is significant Patient carriage of Staphylococcus aureus strains, including MRSA, is recognised as a growing problem and the testing of patients entering hospital for surgery is widespread in many countries, including the US. Landmark outcome studies (Bode et al 2010) have demonstrated that reduction of all strains of Staphylococcus aureus can significantly reduce the post-surgical infection rate by 60% and reduce mortality. In response to these and other findings, in February 2013, the US Surgical Infection Society (“SIS”), the Society for Hospital Epidemiologists of America (“SHEA”), the Infectious Disease Society of America (“IDSA”) and the American Society of Hospital Pharmacists (“ASHP”) published new guidelines recommending that in the US all Staphylococcus aureus (including MRSA) should be decolonised in all cardiovascular and most orthopaedic surgeries. This represents a five to tenfold increase in the market size for Staphylococcus aureus decolonisation in the US. In 2014, AHRQ/IDSA/SHEA recommended an even more aggressive treatment strategy, Universal Decolonisation (“UD”) of all intensive care unit (“ICU”) patients without screening, awarding a Grade I (highest) level of evidence rating. US hospital groups, including the Hospital Corporation of America, are now implementing UD for all patients entering the ICU. This market has a potential patient population of over eight million people in the US alone. UD of ICU patients represents a potentially attractive line extension for XF-73 where its rapid anti-bacterial action and attractive resistance profile could enable this preventative measure into the future. In Europe, similar guidelines exist recommending decolonisation of Staphylococcus aureus positive patients prior to certain surgeries. The antibiotic, mupirocin, is often used off-label in the US for these applications, although it has two key disadvantages in that it is slow acting, requiring five days of dosing, and staphylococcal resistance to mupirocin can develop rapidly and become widespread. Consequently, many guidelines are accompanied with a resistance warning related to mupirocin use. In 2016, the WHO published its Global Guidelines for the Prevention of Surgical Site Infection, which now too recommend the screening and decolonisation of all Staphylococcus aureus strains pre-surgery in high risk surgeries. It is therefore apparent that there has been a move from screening and treatment of just MRSA carriage in patient populations to also now include all Staphylococcus aureus strains (MRSA and MSSA), an approximate five to tenfold increase in the number of patients who can benefit. The commercial opportunity for XF-73 is over a billion dollars There is a significant market for a new drug that can assist in the “prevention of post-surgical staphylococcal infections”, particularly in the US. There are approximately 40 million surgeries per year in the US alone, all of which expose patients to the risk of post-surgical infections. Of these patients, Destiny Pharma estimates that 14 million are at a higher risk of infection as a result of the nature of their surgery and the environment in which they are treated. These estimates are based on a variety of sources including the Office of National Statistics (“ONS”), NHS data and various medical articles and journals. 14 Destiny Pharma plc Annual Report and Financial Statements 2018 Percentage of Staphylococcus aureus infection caused by MRSA USA Europe China Japan Up to 60% 29% Up to 60% Up to 43% 72% 80% 32% “ Bacterial resistance to existing agents is a barrier to preventing post-operative infections.” Latin America Africa Australia US hospital infections expert, 2018 As XF-73 is differentiated from antibiotics due to its superior bacterial resistance profile, it is likely that its use can be widespread, preserving antibiotic use and could potentially be used without the need for bacterial screening. In this respect, XF-73 can be viewed as a preventative pharmaceutical more akin to vaccines than antibiotics. XF-73 has the opportunity to become the first drug approved in the US for the new indication “prevention of post-surgical staphylococcal infections” and will only need to be compared to placebo at Phase 2b and 3 (as no comparator exists) and could become the benchmark against which all future would-be competitors will be measured. This is a major advantage and will help drive the clinical programme and also the commercialisation of XF-73 in the US. In the next 18 months, Destiny Pharma plans to develop its dermal programme towards clinical development, and to conduct earlier stage research work in respect of biofilm action. Therefore, including the potential future use of XF-73 within ICUs the company believes markets totalling at least 20 million patients per annum exist in the US alone. The market analysis undertaken by Destiny Pharma and its specialist consultants supports the view that XF-73 could achieve annual peak sales in the US alone of over $1 billion and peak sales in Europe and the Rest of the World could be $500 million for the initial indication of “prevention of post-surgical staphylococcal infections” alone. In 2018 Destiny Pharma contracted an additional independent market analysis of the product profile of XF-73 as a preventive treatment to reduce post-surgical infections. This project was looking to update the company’s understanding of current US clinical practice, the competitor environment for the proposed XF-73 nasal gel formulation, pricing sensitivities and the payers’ assessment of the target product profile (“TPP”) of XF-73. The study reported that the sample of US treaters (surgeons, infectious disease specialists and ICU specialists) and payers (hospital medical directors, pharmacy services directors, microbiologists and clinical directors) who were consulted, confirmed that XF-73’s target product profile is superior when compared to existing treatments, including off-label use of the antibiotic mupirocin, with the potential to replace mupirocin as the preferred treatment. There was also strong support for a pricing strategy that could be at the higher end of previous assumptions. This latest market research and analysis report built on previous analyses undertaken by the company which also showed that there was clear support for the XF-73 TPP and that if Destiny Pharma can build the appropriate clinical package there is a significant commercial opportunity in the US and also in other territories. Destiny Pharma believes that there is significant demand for the XF-73 product and have identified the following additional drivers for adoption: • current practice guidelines have identified patient populations that can benefit while highlighting that antibiotic resistance is an issue with current products; • from 2017, US general, acute-care and short-term hospitals with the highest MRSA infections will have 1% of their Medicare reimbursements withheld; • on 20 September 2016, the UN General Assembly called for new drugs to tackle antibiotic resistance; • US hospital administrators are keen to reduce infection to ensure high ratings in rankings tables; • XF-73, having QIDP approval, benefits from five years of extra US market exclusivity; • XF-73 could be the first drug approved into a new US indication with first to market advantages; and • XF-73 has both QIDP and Fast Track regulatory status in the US. 15 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 CEO’s operational and strategic review continued The XF platform can deliver additional clinical and pre-clinical projects. XF-73 for the treatment of antibiotic resistant gram-positive and gram-negative bacterial burn wound infections In 2016 the global topical anti-bacterial market was estimated at $6 billion. The company has a strong Phase 1 clinical, pre-clinical, in vitro and in vivo infection model data set which demonstrates the efficacy of topically applied XF drugs against gram-positive and gram-negative bacteria, including MRSA, Pseudomonas aeruginosa and Acinetobacter baumannii. In some cases, unformulated XF drugs have been shown to be as active as existing, marketed antibiotics. Destiny Pharma plans to develop XF-73 as a new dermal drug for the prevention/treatment of infections associated with diabetic foot ulcers. The data that will be generated from this program over the next two years could also support a wide range of indications including impetigo, acne, atopic dermatitis, bacterial infected skin lacerations, candida skin/vaginal infection and treatment of serious bacterial burn wound infections. The company already has data supporting the efficacy in serious bacterial burn wound infection models in studies conducted in association with the US Department of Defense. Work on earlier programmes such as ventilator associated pneumonia (“VAP”), biofilms and other indications carries on as research projects, including academic and/or commercial collaborations and grant funded programmes. In line with this strategy, Destiny Pharma signed a research collaboration agreement with Aston University in July 2018 to examine novel compounds from the XF-platform and assess their potential to prevent, control and eradicate dangerous bacteria in biofilms. Serious infections are sometimes caused and exacerbated by biofilms where bacteria can hide and be protected from traditional anti-infective agents. XF compounds have already shown efficacy in biofilm models and this research project will explore the potential further, including looking at the mechanisms-of-action. A second project was signed with Southampton University in November 2018 as a National Biofilms Innovation Centre (“NBIC”) funded research collaboration. The project will examine the use of the company’s novel XF compounds to prevent, control, and eradicate chronic clinical infections with underlying biofilm involvement, such as those in diabetic foot ulcers and cystic fibrosis. A third grant was awarded in 2019 under the UK-China AMR fund. It will examine the potential for XF drugs to treat dermal and ocular infections. Research programmes Destiny Pharma was granted a US biofilm patent on 3 May 2016. XF-73 and XF-70 have shown the ability to act against Staphylococcus aureus and Staphylococcus epidermis within formed biofilms which are protective against traditional antibiotics. A biofilm is an extra-cellular matrix of exopolysaccharides, which bacteria form when in contact with a host tissue or indwelling medical device. Biofilms are notoriously resistant to antibiotic therapy; they form an impenetrable barrier to antibiotics. Slower growth rate of bacteria in biofilms is fundamental to antibiotic resistance. Bacterial biofilms are implicated in chronic and recurring infections, and there is a growing understanding of their role and the value in developing treatments that can address this issue in tissue and medical device related infections. Destiny Pharma has generated preliminary data on the potential for XF drugs to enhance existing antibiotic activity by co-administration and plans to extend these studies through research collaborations to determine if important antibiotic life can be reinvigorated and bacterial resistance combated. 16 Destiny Pharma plc Annual Report and Financial Statements 2018 The company also plans to extend studies of the XF drug mechanism of action, which may result in further optimisation and the ability to target microbial pathogens beyond bacteria and deliver new intellectual property. The Directors are keen to explore the possibility for accelerating progress on some of these earlier programmes by entering into strategic co-development partnerships with sector experts. Concurrently, Destiny Pharma will continue to apply for additional non-dilutive funding grants when suitable structures are available. It is also the company’s intention to apply for US QIDP status for its other pipeline programmes. Outlook The company’s funds will provide Destiny Pharma with capital to the end of 2020 enabling it to develop its lead drug asset XF-73 through the proposed US clinical Phase 2b programme delivering a robust package for partnering and/or further development into Phase 3, which is the final stage of clinical development. The funds raised will also be used to develop new clinical candidates from its focused, pre-clinical pipeline and to capitalise on the commercial opportunities including partnering and licensing. In the Board’s opinion, XF-73 has the potential to break the commercial paradigm which besets antibiotics. Its ‘no resistance’ characteristic enables widespread use (unlike antibiotics where use is restricted due to the fear of AMR). As about a third of the population carry the infection-causing bacteria Staphylococcus aureus asymptomatically, and XF-73 is designed to kill these bacteria in the patient ahead of surgery (preventing post-surgical infection), a large new market exists. The new indication has been recognised by the FDA through the QIDP status award. Destiny Pharma believes that XF-73’s preventative disease indication is similar to a vaccine approach and could lead to the majority of patients being treated prior to surgery. There are a number of drivers for the adoption of this approach, including new guidelines and financial penalties for US hospitals with high MRSA infection rates. There is also wide support for approaches that adopt the strategy where “prevention is better than cure” in preventing the incidence of infections especially in hospital infections. Additional assets from the XF drug platform will also be progressed in the areas of prevention and treatments for diabetic foot ulcers, staphylococcal pneumonia, serious bacterial burn wound infections and bacterial biofilm associated infections. Destiny Pharma will also establish a number of discovery stage research programmes through existing and new collaborations and where possible seek additional non-dilutive funding support. With the company’s lead asset XF-73 about to start important Phase 2 clinical studies, the outlook for Destiny Pharma is strong and our team is committed to delivering our strategy and building value. Neil Clark Chief Executive Officer 8 April 2019 17 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Risks and uncertainties Destiny Pharma’s business is subject to a number of risks and uncertainties in common with other biotechnology companies operating in the field of drug research and development. The Board manages such risks by maintaining a risk register which identifies risks, prioritises them by likelihood and impact, and records the actions needed to mitigate and monitor those risks. The Board is also prepared to act swiftly to formulate contingency plans to manage the situation if any risk materialises. Key risks are monitored by senior management on an ongoing basis and the risk register is reviewed regularly at Board meetings. The principal risks and uncertainties identified by Destiny Pharma in the year ended 31 December 2018 are set out below: Risk category Description COMMERCIAL OPERATIONAL FINANCIAL C O F Commercial risks which may have an impact on the company’s ability to commercialise its products and deliver value to shareholders. Operational risks which may impact on the company’s ability to deliver on its objectives. Financial risks which may impact on the sustainability or liquidity of the company – affected by internal or external risks. Principal risk Category Mitigation Technical, clinical or regulatory milestones may not be delivered successfully, leading to delays, changes or the abandonment of development programmes. There may also be changes in the regulatory environment that can impact the approval of clinical trials and product filings. Clinical studies may not give the expected results, leading to a requirement to run additional clinical trials (at additional, unexpected cost), or programmes being delayed or abandoned. Inability to raise sufficient capital when needed may lead to delays, reduction or abandoning development programmes. O O F These are inherent risks in drug development. To mitigate the risks the Scientific Advisory Board, expert consultants and management will regularly review project progress, industry guidelines and manage any issues. The company also works with expert regulatory consultants to monitor the latest regulations and planned changes to the regulatory environment. The company plans to develop a range of products to reduce reliance on its lead asset. Clinical trials are designed to ensure that meaningful and relevant data is produced. Trials are closely monitored to manage timelines and cash requirements. The AIM flotation in September 2017 provides a good cash runway through 2020. The Board has put in place investor relations and partnering strategies that should support future cash requirements. The virtual business model maintains a low overhead base which allows some flexibility in managing spending commitments. 18 Destiny Pharma plc Annual Report and Financial Statements 2018 Principal risk Category Mitigation C C O O O A partnering strategy is in place to locate potential partners. The relationship with China Medical Systems represents the first such relationship. Other partnering activities are planned to enable Destiny Pharma to complete the right deal at the right time to deliver shareholder value. Destiny Pharma conducts commercial market analysis to ensure that development activities are directed towards viable markets. Destiny Pharma also has a network of key opinion leaders who assist with this ongoing review. A Scientific Advisory Board has been established to review all proposed projects. External key opinion leaders are regularly consulted. Independent market appraisals for products are conducted to ensure there is a market need. The Board is working to ensure that there is no single point of failure, and that the team has some capacity to provide resilience in such an eventuality. Destiny works with expert intellectual property agents to ensure that the patent portfolio is managed to the highest standards. This includes developing new IP, reviewing any potential competing IP and meeting regularly to discuss a longer-term IP strategy. Destiny Pharma may not be able to enter into partnering relationships for the commercialisation of its drug pipeline assets. Destiny Pharma’s products may not generate market acceptance from the purchasers and decision makers who are the eventual users and buyers of the products and/or more effective and cheaper competing products may enter the market. The lack of an independent review of the research and development programmes to assess the positioning and potential of Destiny Pharma’s pipelines could lead to the company funding projects with limited potential for value creation. Dependence on key personnel, the loss of whom through departure, ill health or death, may cause delays in delivering company strategy. If Destiny Pharma is unable to obtain or maintain patent protection for its technology and products, or if the scope of the patent protection is not sufficiently broad, competitors could develop and commercialise similar technology and products which would materially affect the company’s ability to successfully commercialise its technology and products. Destiny is exposed to additional intellectual property risks, including infringement of intellectual property rights, involvement in lawsuits and the inability to protect the confidentiality of its trade secrets which could have an adverse effect on the success of the company. The strategic report, including the financial review on page 20 has been approved by the Board and signed on its behalf by: Neil Clark Chief Executive Officer 8 April 2019 19 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 The company remains well funded to deliver our key Phase 2 programme. Shaun Claydon Chief Financial Officer The remaining increase over 2017 of £0.6 million (ignoring one-off AIM costs of £0.5 million in 2017) are due to increased staff costs associated with increases in headcount, and other operational costs which were partly offset by foreign exchange gains of £0.1 million during the year. Taxation The company’s research and development activities are eligible for the UK research and development small or medium-sized enterprise (“R&D tax credit”) scheme, which provides additional taxation relief for qualifying expenditure on R&D activities, with an option to surrender a portion of tax losses arising from qualifying activities in return for a cash payment from HM Revenue & Customs (“HMRC”). The company received a repayment of £0.23 million in respect of the R&D tax credit claimed in respect of the year ended 31 December 2017, and the R&D tax credit receivable in the balance sheet of £0.84 million is an estimate of the cash repayment the company expects to qualify for in respect of activities during the year ended 31 December 2018. However, as at the date of this report these amounts have not yet been agreed with HMRC. Loss per share Basic and diluted loss per share for the year was 11.9 pence (2017: 8.4 pence). Cash, cash equivalents and term deposits The company’s cash, cash equivalents and term deposits at the year end totalled £12.1 million (2017: £16.7 million). The net cash outflow from operating activities in 2018 was £4.7 million against an operating loss of £6.0 million, with the major reconciling items being the non-cash charge for share-based payments of £0.7 million, the R&D credit received of £0.2 million and other net movements in working capital of £0.4 million. Outlook The Board believes the company remains well funded to execute on its business strategy and to progress its lead and follow-on programmes in 2019 and 2020. Shaun Claydon Chief Financial Officer 8 April 2019 Financial review Following the company’s successful listing on AIM in September 2017, we increased activity across our scientific and clinical programmes during 2018. Funds raised at IPO were utilised to advance our lead programme toward commencement of Phase 2b trials and to develop our earlier programmes resulting in a significant increase in R&D spend over the prior year. We also increased headcount during the year to support this increase in activity. We were also pleased to announce research collaborations during the year, enabling the company to further develop its earlier programmes. Grant funding associated with these research collaborations will be received from 2019 onwards. Revenue Destiny Pharma is a clinical stage research and development company, and did not generate any revenue during the period. Administrative expenses Administrative expenses, which excludes the share-based payment charge of £0.7 million (2017: £0.7 million) during the period amounted to £5.3 million (2017: £2.5 million). Included within this total are R&D costs totalling £3.5 million (2017: £0.8 million) which reflect the increase in activity with regard to our scientific and clinical programmes particularly during the second half of the year. 20 Destiny Pharma plc Annual Report and Financial Statements 2018 Introduction to corporate governance The Directors support high standards of corporate governance and consider strong governance to be a key element in the development and success of the company. Board of Directors The Board is responsible for the direction and overall performance of the company with emphasis on policy and strategy, financial results and major operational issues. During the year, the Board comprised three Executive Directors and the Non-executive Chairman, and at least two other Non-executive Directors who are independent of management. A full list of the Directors who served during the year, together with their skills and experience, is set out in the Directors’ report on page 28 of this Annual Report. Whilst Joe Eagle and Peter Morgan are shareholders and option holders in the company and have served on the Board for some years, based upon their extensive experience, specialised industry knowledge and personal qualities the Board considers both to be independent. Adoption of the QCA Code Recent changes in the AIM Listing Rules now require companies to formally adopt a corporate governance code. Destiny Pharma considers that the QCA Corporate Governance Code (the “QCA Code”) is the most suitable framework for smaller listed companies and, consequently, formally adopted the QCA Code during the financial year, having informally followed its principles since its IPO in September 2017. The table below shows how the group addresses the ten principles underpinning the QCA Code: 7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement. See this section. 8. Promote a corporate culture that is based on ethical values and behaviours. See this section and the “corporate governance” section of our website www.destinypharma.com. 9. Maintain governance structures and processes that are fit for purpose and support good decision making by the Board. See the “corporate governance” section of our website, www.destinypharma.com. Build trust 10. Communicate how the company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders. See this section and the “corporate governance” section of our website, www.destinypharma.com. The Board considers that it is fully compliant with all the principles of the QCA Code. Deliver growth 1. Establish a strategy and business model which promote long-term value for shareholders. See “business model” on page 7. 2. Seek to understand and meet shareholder needs and expectations. See the “corporate governance” section of our website, www.destinypharma.com. 3. Take into account wider stakeholder and social responsibilities and their implications for long-term success. See the “corporate governance” section of our website, www.destinypharma.com. 4. Embed effective risk management, considering both opportunities and threats, throughout the organisation. See “risks and uncertainties” on page 18 and 19. Maintain a dynamic management framework 5. Maintain the Board as a well-functioning, balanced team led by the Chair. See this section. 6. Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities. See this section and “Board of Directors” on page 24 and 25. 21 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Introduction to corporate governance continued Audit Committee The Board Remuneration Committee Board of Directors continued The Board consider there to be sufficient independence on the Board given the size and stage of development of the company and that all the Non-executive Directors are of sufficient competence and calibre to add strength and objectivity to its activities and bring considerable experience in scientific, operational and financial development of biopharmaceutical products and companies. Appropriate Directors’ and officers’ liability insurance has been arranged by the company. There is a clear separation of the roles of Chief Executive Officer and Chairman. The Chairman is responsible for overseeing the running of the Board and ensuring its effectiveness. The Chairman ensures members of the Board receive timely and appropriate information and that effective communication occurs with institutional shareholders. The Chief Executive Officer has the responsibility for implementing the strategy of the Board and managing the day to day business activities of the company. The Board, led by the Chairman, is responsible to stakeholders for the proper management of the company and meets at least six times a year, after all relevant information has been circulated in good time, to discuss a formal scheduled agenda covering key areas of the company’s affairs including research and development, strategy, and operational and financial performance. Nomination Committee The Board also convenes on an ad hoc basis between scheduled meetings where appropriate, to discuss strategy and activities of the business. Non-executive Directors and part time Executive Directors are required to devote sufficient time and commitment to fulfil their Board duties. The Board is kept appraised of developments in governance and regulations as appropriate including updates and presentations from the company’s Nomad. All Directors are subject to re-election by shareholders at least once every three years. Directors appointed during any year are subject to re-election at the first Annual General Meeting following their appointment. Attendance at Board meetings The Directors attendance at Board and Committee meetings over the course of 2018 was as follows: Director Sir Nigel Rudd(2) Neil Clark Dr William Love Simon Sacerdoti(2) Joe Eagle Peter Morgan Dr Huaizheng Peng Nick Rodgers(1) Shaun Claydon(1) Board meeting Audit Committee Remuneration Committee Nomination Committee 6/6 6/6 6/6 4/4 6/6 6/6 6/6 3/3 2/2 2/2 — — — 2/2 2/2 — — — 2/2 — — — 2/2 2/2 — — — 2/2 — — — 2/2 2/2 — — — (1) Appointed during the year. Please refer to the Directors’ report on page 28 for further details. (2) Resigned during the year. Please refer to the Directors’ report on page 28 for further details. Board performance evaluation The Board has a process for self-evaluation of its performance, committees and individual Directors, including the Chairman. This process is conducted informally on an ongoing basis. During the year members of the Board completed effectiveness questionnaires, the results of which have been shared with the Board and which will assist in the introduction of a formal process which will focus more closely on objectives and targets for improving performance. 22 Destiny Pharma plc Annual Report and Financial Statements 2018 The Board recognises its legal responsibility to ensure the wellbeing, safety and welfare of its employees and to maintain a safe and healthy working environment for them and for its visitors. Investor relations The Board places a high priority on regular communications with its shareholders. The Board as a whole is responsible for ensuring that effective dialogue with shareholders takes place, while the Chairman and Chief Executive Officer ensure that the views of shareholders are communicated to the Board as a whole. The Board communicates with shareholders through the announcement of half-year and full-year results, presentations to analysts and through regular updates to the company’s website, which contains copies of all financial reports and statements. Shareholders are able to attend the company’s AGM which provides an excellent opportunity to engage directly with the Board and discuss the company’s strategy and performance in more detail. Corporate social responsibility The Board recognises the importance of assessing the impact and benefits of the company’s activities on society and the environment and endeavours to consider the interest of shareholders and other stakeholders, including employees, suppliers and business partners when operating its business. UK Bribery Act 2010 The Board has established a bribery policy to achieve compliance with the UK Bribery Act 2010, which came into effect on 1 July 2011. A training programme is in place for all Directors, staff and contractors. Agreements with third parties contain statements that the company and its associates are required to adhere at all times to the UK Bribery Act 2010. None of the Committee members has any day-to-day responsibility for running the company and no Director participates in discussions about his own remuneration. Nomination Committee The Nomination Committee comprises three members all of whom are Non-executive Directors: Nick Rodgers (Chair), Peter Morgan and Joe Eagle. Sir Nigel Rudd stepped down from the Nomination Committee on 31 December 2018 and was replaced by Nick Rodgers. The Nomination Committee meets at least twice a year, is responsible for considering the composition and efficacy of the Board as a whole, and for making recommendations as appropriate. During the year, the Nomination Committee approved the appointment of Nick Rodgers and Shaun Claydon to the Board. Internal control The Board is responsible for the effectiveness of the company’s internal control system and is supplied with information to enable it to discharge its duties. Internal control systems are designed to meet the particular needs of the company and to manage rather than eliminate the risk of failure to meet business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. Employment and corporate culture The company seeks to maintain the highest standards of integrity and probity in the conduct of its operations. These values are embodied in the written policies and working practices adopted by all employees of the company. An open culture is actively encouraged with regular communications to staff regarding progress and staff feedback is regularly sought. The Executive Directors regularly monitor the company’s cultural environment and seeks to address any concerns that may arise, escalating these to Board level as necessary. Board committees The Board has established Audit, Remuneration and Nomination Committees, each with formally delegated duties, responsibilities and written terms of reference. Audit Committee The Audit Committee comprises three members who are all Non-executive Directors: Peter Morgan (Chair), Joe Eagle and Nick Rodgers. Sir Nigel Rudd stood down from the Audit Committee on 31 December 2018. The Audit Committee, which meets at least twice a year, is responsible for keeping under review the scope and results of the audit, its cost effectiveness and the independence and objectivity of the auditor. Due to the size of the company, there is currently no internal audit function, although the Audit Committee has oversight responsibility for public reporting, overall good governance and the company’s internal controls. Other members of the Board, as well as the auditor, are invited to attend the Audit Committee meetings as and when appropriate, and the Chair of the Committee also has a direct line of communication with the auditor. Remuneration Committee The Remuneration Committee comprises three members all of whom are Non-executive Directors: Joe Eagle (Chair), Nick Rodgers and Peter Morgan. Sir Nigel Rudd stood down from the Remuneration Committee on 31 December 2018. The Remuneration Committee, which meets at least twice a year, is responsible for considering the remuneration packages for Executive Directors and the bonus and share option strategy for the company and making recommendations as appropriate. The Remuneration Committee works within the framework of a compensation policy approved by the Board. The Remuneration Committee is also responsible for reviewing the performance of the Executive Directors and ensuring that they are fairly and responsibly rewarded for their individual contributions to the company’s overall performance. The Committee’s scope extends to all remuneration of Directors including bonus and share options. 23 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Board of Directors Strong leadership The Board has a broad range of experience from senior leadership roles in life science, investment and listed companies. Nick Rodgers Chairman Dr William Love Founder and Chief Scientific Officer Mr Rodgers has considerable Board experience in both public and private growth companies, particularly those in the life science sector, as well as a background as a successful corporate financier and investment banker. Mr Rodgers is currently chairman of SEHTA, one of the largest health technology networking organisations in the UK. Prior to this, he was non-executive director and then chairman of fully listed Oxford Biomedica plc, a leading gene-based biopharmaceutical company, from 2004 until 2016. Previously, Mr Rodgers headed up both the Life Science and Corporate Finance department at Evolution Beeson Gregory (now Investec) advising many listed life science companies from 1989 until 2003. Dr Love was a senior scientist at Ciba Geigy/Novartis focused on novel drug delivery technologies and involved in the development of the world’s leading eye-care pharmaceutical, Visudyne. In 1997, Dr Love founded Destiny Pharma and he is the co-inventor of the XF drug platform. Dr Love was a founding member of the BEAM Alliance, an EU SME group focused on promoting antimicrobial drug development. He is an expert advisory board member of Global AMR Innovation Fund, appointed by Professor Dame Sally Davies in October 2016. Dr Love is the named inventor in more than 70 patents. He has experience in drug R&D from discovery and lead identification, through pre-clinical development and into Phase 1/2 clinical development in the UK, EU and US. Neil Clark Chief Executive Officer Shaun Claydon Chief Financial Officer and Company Secretary Mr Clark qualified as an accountant with PwC in Cambridge, UK and worked for over ten years on a variety of national and international assignments in audit, corporate finance and consultancy. In 1997, Mr Clark joined CeNeS Pharmaceuticals plc, a venture capital backed private UK biotech company. Following the successful flotation of CeNeS in 1999, he was appointed CFO. In 2005, he became CEO and led the company through to its sale in 2008. Mr Clark then joined Ergomed in January 2009 and was CFO during its IPO in July 2014 until his move to be full time CEO of PrimeVigilance (Ergomed’s successful drug safety business) in January 2016. Mr Clark is a Fellow of the Institute of Chartered Accountants in England and Wales and has a BSc in Bioscience from the University of Nottingham. Mr Claydon is an accomplished corporate financier and qualified Chartered Accountant with over 16 years’ board level experience, including within the biotechnology sector. He has extensive experience of delivering financial and operating results and from 2015 served as CFO of Creabilis, a venture backed clinical stage specialty pharmaceutical company focused on dermatology treatments, during which he led the $150 million sale of the business to Sienna Biopharmaceuticals. From 2009 to 2014 Mr Claydon was CFO and chief operating officer of Orteq Sports Medicine, a medical device company and world leader in the field of biodegradable polymer technologies. Prior to these positions Mr Claydon held a number of senior financial consultancy and corporate finance roles including at PwC, Evolution Beeson Gregory (now Investec) and HSBC Investment Banking. 24 Destiny Pharma plc Annual Report and Financial Statements 2018 Joe Eagle Non-executive Director Dr Huaizheng Peng Non-executive Director Mr Eagle’s early career was spent in product management and business development at Wellcome Group, Pfizer and Ciba-Geigy, culminating as marketing director at Ciba-Geigy Pharmaceuticals UK between 1981 and 1986. In 1986, he set up PPS Europe Limited, an international pre-launch medical education and publishing services provider to the Pharmaceutical industry, acting as chairman and chief executive officer. Following PPS Europe Ltd’s sale to Parexel US in 1999, Mr Eagle took the position of president of Medical Marketing Services at Parexel and served as a board director of Parexel International. Since 2008, Mr Eagle has been an angel investor in SMEs in various sectors. He has a BSc in Physiology and Biochemistry from the University of Southampton. Dr Peng serves as general manager of International Operations for China Medical System Holdings, a specialty pharmaceutical company listed on the Hong Kong Stock Exchange. He also served as an independent non-executive director of China Medical System Holdings Ltd between 2007 and 2010. Dr Peng was a partner of Northland Bancorp, a private equity firm. Before that, he worked as a head of life sciences and as a director of corporate finance at Seymour Pierce, a London-based investment bank and stockbroker. Earlier in his career Dr Peng was a senior portfolio manager, specialising in global life science and Asian technology investment at Reabourne Technology Investment Management Limited. Peter Morgan Non-executive Director Mr Morgan’s early career was spent in the pharmaceutical industry, working as a product manager in the UK before moving to become managing director of a Ciba-Geigy (now Novartis) subsidiary in Scandinavia. Mr Morgan was a founding director of Beaufort Group Limited, a business services company which provided support to pharmaceutical companies. From 2007 until 2015, Mr Morgan was a non-executive director of Oncimmune Limited, a cancer diagnostics company which floated on AIM in 2016. Mr Morgan has advised many of the world’s top pharmaceutical companies including Amgen, Bayer, GSK, Novartis, Novo Nordisk, Pfizer and Roche as well as Quintiles, the world’s largest clinical research organisation. He has a BSc from the University of Nottingham and an MBA from London Business School. 25 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Directors’ remuneration report The Remuneration Committee of the Board of Directors is responsible for determining and reviewing compensation arrangements for all key management personnel, regarded as the Executive Directors and officers of the company. Introduction The Remuneration Committee of the Board of Directors is responsible for determining and reviewing compensation arrangements for all key management personnel, regarded as the Executive Directors and officers of the company. The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis and is guided by an approved remuneration policy and takes into account relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high-quality Board and executive team. The Remuneration Committee additionally links part of key management remuneration to the company’s financial and operational performance. Emoluments of Directors Details of the nature and amount of each element of the emoluments of each Director who served during the year ended 31 December 2018 were as follows: Sir Nigel Rudd(2) Neil Clark Dr William Love Simon Sacerdoti(2) Joe Eagle Peter Morgan Dr Huaizheng Peng Nick Rodgers(1) Shaun Claydon(1) Total Short-term employee benefits £ 80,000 209,000 177,650 117,924 40,000 40,000 40,000 21,231 21,061 746,866 Post- employment benefits £ — 20,900 17,765 11,286 — — — — 1,850 51,801 Other benefits £ — 3,000 3,201 4,000 — — — — — Total 2018 £ 80,000 232,900 198,616 133,210 40,000 40,000 40,000 21,231 22,911 Total 2017 £ 26,667 226,324 211,390 165,831 45,333 23,813 3,333 — — 10,201 808,868 742,816 (1) Appointed during the year. Please refer to the Directors’ report on page 28 for further details. (2) Resigned during the year. Please refer to the Directors’ report on page 28 for further details. 26 Destiny Pharma plc Annual Report and Financial Statements 2018 Directors’ interests The interests of the Directors holding office at 31 December 2018 in the shares of the company are set out below: Ordinary shares of £0.01 each Sir Nigel Rudd(1) Neil Clark Dr William Love(2) Shaun Claydon Joe Eagle Peter Morgan Dr Huaizheng Peng Nick Rodgers 31 December 2018 31 December 2017 1,155,000 1,155,000 — — 6,859,500 6,859,500 — — 2,269,000 2,269,000 1,025,500 1,025,500 — — — — (1) 463,000 of these ordinary shares are held by Sir Nigel directly and 35,000 are held by Sir Nigel’s wife, Lady Lesley Rudd. In addition, Sir Nigel is the beneficial holder of 175,000 ordinary shares registered to Rock (Nominees) Limited and 469,000 ordinary shares in the name of City Partnership Nominee Limited. Lady Lesley Rudd is the beneficial owner of a further 13,000 ordinary shares registered to Rock (Nominees) Limited. (2) 3,667,700 of these ordinary shares are held by Dr Love directly and 3,191,800 are held by his wife, Carole Love. Options in the company’s shares held by the Directors holding office at 31 December 2018 are set out below: Share options Sir Nigel Rudd Neil Clark Dr William Love Shaun Claydon Joe Eagle Peter Morgan Dr Huaizheng Peng Nick Rodgers 31 December 2018 31 December 2017 486,677 344,305 765,394 300,000 486,677 344,305 765,394 — 1,446,476 1,446,476 719,962 719,962 — — — — The options are exercisable at various dates up to October 2028. The company’s shares were admitted to trading on AIM on 4 September 2017. The market price of the company’s shares at the end of the reporting period was 62.0 pence (2017: 142.5 pence) and the range during the period from admission to the end of the reporting period was 61.5 pence to 235.0 pence (2017: 114.5 pence to 235.0 pence) per share. 27 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Directors’ report The Directors present their report together with the audited accounts of Destiny Pharma plc. Directors Those who served as Directors during the year are: • Nick Rodgers, Non-executive Chairman, (appointed 21 June 2018); • Neil Clark, Chief Executive Officer; • Dr William Love, Founder and Chief Scientific Officer; • Shaun Claydon, Chief Financial Officer (appointed 26 October 2018); • Joe Eagle, Non-executive Director; • Peter Morgan, Non-executive Director; • Dr Huaizheng Peng, Non-executive Director; • Sir Nigel Rudd, Non-executive Chairman (resigned 31 December 2018); and • Simon Sacerdoti, Chief Financial Officer (resigned 26 October 2018). Results and dividends The loss after taxation for the year ended 31 December 2018 was £5.2 million (2017: £3.0 million). Directors’ interests Directors’ interests at 31 December 2018 in the shares and share options of the company are shown in the Directors’ remuneration report on page 26. Financial instruments The company’s principal financial instruments comprise cash balances, term deposits, and other payables and receivables that arise in the normal course of business. The risks associated with these financial instruments are disclosed in note 14 to the financial statements. Disclosure of information to the auditor So far as each person who was a Director at the date of approving this report is aware, there is no relevant audit information, being information needed by the auditor in connection with preparing its report, of which the auditor is unaware. Having made enquiries of fellow Directors, each Director has taken all the steps that he ought to have taken as a Director in order to have made himself aware of any relevant audit information and to establish that the auditor is aware of that information. Research and development For details of the company’s research and development, please refer to the strategic report, which forms part of this Annual Report. Future developments Further information regarding the future developments of the company is contained in the strategic report, which forms part of this Annual Report. Directors’ liabilities Subject to the conditions set out in the Companies Act 2006, the company has arranged appropriate Directors’ and officers’ liability insurance to indemnify the Directors against liability in respect of proceedings brought by third parties. Such provisions remain in force at the date of this report. Re-appointment of the auditor In accordance with section 489 of the Companies Act 2006, a resolution to re-appoint Crowe U.K. LLP will be proposed at the next Annual General Meeting. Board committees Information on the Audit, Remuneration and Nomination Committees is included in the corporate governance section of the Annual Report on pages 21 to 23. Annual General Meeting The Annual General Meeting will be held on 4 June 2019 as stated in the notice that accompanies this Annual Report. By order of the Board. Shaun Claydon Company Secretary 8 April 2019 28 Destiny Pharma plc Annual Report and Financial Statements 2018 Statement of Directors’ responsibilities The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the EU and applicable law. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. They are further responsible for ensuring that the strategic report and Directors’ report, and other information included in the Annual Report and Financial Statements are prepared in accordance with applicable law in the United Kingdom. The maintenance and integrity of the Destiny Pharma plc website is the responsibility of the Directors; the work carried out by the auditor does not involve the consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred in the accounts since they were initially presented on the website. Legislation in the United Kingdom governing the preparation and dissemination of the accounts and the other information included in annual reports may differ from legislation in other jurisdictions. 29 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Independent auditor’s report to the shareholders of Destiny Pharma plc We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or • the Directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date the financial statements are authorised for issue. Overview of our audit approach Materiality In planning and performing our audit we applied the concept of materiality. An item is considered material if it could reasonably be expected to change the economic decisions of a user of the financial statements. We used the concept of materiality to both focus our testing and to evaluate the impact of misstatements identified. Based on our professional judgement, we determined overall materiality for the company financial statements as a whole to be £300,000 based on 5% of normalised loss before tax (2017: £84,000). We use a different level of materiality (“performance materiality”) to determine the extent of our testing for the audit of the financial statements. Performance materiality is set based on the audit materiality as adjusted for the judgements made as to the entity risk and our evaluation of the specific risk of each audit area having regard to the internal control environment. Where considered appropriate performance materiality may be reduced to a lower level, such as, for related party transactions and Directors’ remuneration. We agreed with the Audit Committee to report to it all identified errors in excess of £6,000. Errors below that threshold would also be reported to it if, in our opinion as auditor, disclosure was required on qualitative grounds. Overview of the scope of our audit The company’s operations are based in the UK at a one central operating location. The audit team visited this location and performed a full scope audit on the company. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit. Our audit procedures in relation to these matters were designed in the context of our audit opinion as a whole. They were not designed to enable us to express an opinion on these matters individually and we express no such opinion. Key audit matter There were no matters which we consider should be separately reported as key audit matters. Opinion We have audited the financial statements of Destiny Pharma plc for the year ended 31 December 2018, which comprise: • the statement of comprehensive income for the year ended 31 December 2018; • the statement of financial position as at 31 December 2018; • the statement of cash flows and statement of changes in equity for the year ended 31 December 2018; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. The financial reporting framework that has been applied in the preparation of the company financial statements is applicable law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. In our opinion the financial statements: • give a true and fair view of the state of the company’s affairs as at 31 December 2018 and of the company’s loss for the period then ended; • have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 30 Destiny Pharma plc Annual Report and Financial Statements 2018 Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinion on other matters prescribed by the Companies Act 2006 In our opinion based on the work undertaken in the course of our audit: • the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Directors’ report and strategic report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception: In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of the Directors for the financial statements As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Stephen Bullock (Senior Statutory Auditor) for and on behalf of Crowe U.K. LLP Statutory Auditor, London 8 April 2019 31 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Statement of comprehensive income For the year ended 31 December 2018 Continuing operations Revenue Administrative expenses Share option charge Operating loss Finance income Loss before tax Taxation Loss and total comprehensive loss for the year from continuing operations Loss per share – pence Basic Diluted Year ended 31 December 2018 £ Notes — Year ended 31 December 2017 £ — 6 (5,346,170) (2,511,871) (737,687) (709,979) (6,083,857) (3,221,850) 75,999 10,459 (6,007,858) (3,211,391) 841,144 233,908 (5,166,714) (2,977,483) (11.9)p (11.9)p (8.4)p (8.4)p 3 5 7 7 32 Destiny Pharma plc Annual Report and Financial Statements 2018 Statement of financial position As at 31 December 2018 Assets Non-current assets Property, plant and equipment Non-current assets Current assets Trade and other receivables Cash and cash equivalents Other financial assets Prepayments Current assets Total assets Equity and liabilities Equity Called-up share capital Share premium Retained earnings Shareholders’ equity Current liabilities Trade and other payables Current liabilities Total equity and liabilities As at 31 December 2018 £ As at 31 December 2017 £ Notes 8 9 10 11 30,421 30,421 22,313 22,313 930,759 277,126 7,060,821 11,724,037 5,000,000 5,000,000 36,406 59,641 13,027,986 17,060,804 13,058,407 17,083,117 12 435,626 435,626 17,292,284 17,292,284 (5,471,295) (1,042,268) 12,256,615 16,685,642 13 801,792 801,792 397,475 397,475 13,058,407 17,083,117 The financial statements, accompanying policies and notes 1 to 18 (forming an integral part of these financial statements), were approved and authorised for issue by the Board on 8 April 2019 and were signed on its behalf by: Neil Clark Chief Executive Officer Shaun Claydon Chief Financial Officer 33 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Statement of changes in equity For the year ended 31 December 2018 Called-up share capital £ Share premium £ Retained earnings £ Total £ 638 18,335,074 (16,791,296) 1,544,416 — (18,016,532) 18,016,532 — — 18,282,019 (873,289) — — — 318,542 (318,542) 116,446 18,165,573 (873,289) — — — — — (2,977,483) (2,977,483) 709,979 709,979 435,626 17,292,284 (1,042,268) 16,685,642 — — — — (5,166,714) (5,166,714) 737,687 737,687 435,626 17,292,284 (5,471,295) 12,256,615 1 January 2017 Reduction of capital (note 18) Bonus issue of shares (note 18) Issue of share capital Cost of share issue Total comprehensive loss Share option charge 31 December 2017 Total comprehensive loss Share option charge 31 December 2018 34 Destiny Pharma plc Annual Report and Financial Statements 2018 Statement of cash flows For the year ended 31 December 2018 Cash flows from operating activities Loss before income tax Depreciation charges Share option charge Finance income Increase in trade and other receivables and prepayments Increase in trade and other payables Tax received Year ended 31 December 2018 £ Year ended 31 December 2017 £ (6,007,858) (3,211,391) 9,663 737,687 (75,999) (23,162) 404,317 233,908 2,077 709,979 (10,459) (77,935) 242,736 191,578 Net cash outflow from operating activities (4,721,444) (2,153,415) Cash flows from investing activities Purchase of tangible fixed assets Purchase of other financial assets Interest received Net cash inflow/(outflow) from investing activities Cash flows from financing activities New shares issued net of issue costs Net cash inflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year (17,771) (23,230) — (5,000,000) 75,999 58,228 10,459 (5,012,771) — — 17,408,730 17,408,730 (4,663,216) 10,242,544 11,724,037 1,481,493 7,060,821 11,724,037 35 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Notes to the financial statements For the year ended 31 December 2018 1. Accounting policies General information Destiny Pharma plc (the “company”) was incorporated and domiciled in the UK on 4 March 1996 with registration number 03167025. The company’s registered office is located at Unit 36, Sussex Innovation Centre, Science Park Square, Falmer, Brighton BN1 9SB. The company is engaged in the discovery, development and commercialisation of new antimicrobials that have unique properties to improve outcomes for patients and the delivery of medical care into the future. Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union. The financial statements have been prepared under the historical cost convention. The company’s financial statements have been presented in pounds sterling (“GBP”), being the functional and presentation currency of the company. Standards and interpretations issued but not yet applied At the date of authorisation of the company’s financial statements, certain new standards, amendments and interpretations to existing standards have been published by the International Accounting Standards Board but are not yet effective and have not been adopted early by the company. All relevant standards, amendments and interpretations to existing standards will be adopted in the company’s accounting policies in the first period beginning on or after the effective date of the relevant pronouncement. The Directors do not anticipate that the adoption of these standards, amendments and interpretations will have a material impact on the company’s financial statements in the periods of initial application. Segment reporting The chief operating decision-maker is considered to be the Board of Directors of the company. The chief operating decision-maker allocates resources and assesses performance of the business and other activities at the operating segment level. The chief operating decision-maker has determined that the company has one operating segment, the development and commercialisation of pharmaceutical formulations. All activities take place in the United Kingdom. Financial instruments Financial assets and financial liabilities are recognised when the company becomes a party to the contractual provisions of the instrument. The company currently does not use derivative financial instruments to manage or hedge financial exposures or liabilities. Cash and cash equivalents Bank balances and cash in the statement of financial position comprise cash at banks and on hand. Financial assets Financial assets are initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. The group holds the financial assets with the objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Trade and other payables Trade and other payables are initially recognised at fair value. Fair value is considered to be the original invoice amount, discounted where material, for short-term payables. Long-term payables are measured at amortised cost using the effective interest rate method. Derecognition of financial assets and liabilities a) Financial assets A financial asset is derecognised where: • the right to receive cash flows from the asset has expired; • the company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or • the company has transferred the rights to receive cash flows from the asset; and i. either has transferred substantially all the risks and rewards of the asset; or ii. has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. b) Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statement of comprehensive income. Impairment of financial assets Financial assets are assessed for indicators of impairment at the end of the reporting period. The company recognises an allowance for expected credit losses (“ECLs”) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the company expects to receive, discounted at an approximation of the original effective interest rate. 36 Destiny Pharma plc Annual Report and Financial Statements 2018 For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next twelve months (a twelve-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a “lifetime ECL”). Share-based payments Employees (including Directors and senior executives) of the company receive remuneration in the form of share-based payment transactions, whereby these individuals render services as consideration for equity instruments (“equity-settled transactions”). These individuals are granted share option rights approved by the Board. No cash-settled awards have been made or are planned. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant individuals become fully entitled to the award (“vesting point”). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the company’s best estimate of the number of equity instruments and value that will ultimately vest. The statement of comprehensive income charge for the year represents the movement in the cumulative expense recognised as at the beginning and end of that period. The fair value of share-based remuneration is determined at the date of grant and recognised as an expense in the statement of comprehensive income on a straight-line basis over the vesting period, taking account of the estimated number of shares that will vest. The fair value is determined by use of a Black-Scholes model. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses, if any. The cost of an asset comprises its purchase price and any directly attributable costs of bringing the asset to its present working condition and location for its intended use. Depreciation is provided at the following annual rates in order to write off each asset over its estimated useful life: • plant and machinery – between two and ten years. Taxation Current taxes are based on the results shown in the financial statements and are calculated according to local tax rules, using tax rates enacted or substantially enacted by the statement of financial position date. R&D tax credits are recognised on an accruals basis and are included as a current asset within trade and other receivables. Research and development Development costs and expenditure on pure and applied research are charged to the profit and loss account in the year in which they are incurred. Expenditure incurred on the development of internally generated products is capitalised when Phase 3 trials are completed and regulatory approval is obtained. Foreign currency Transactions in foreign currencies are initially recorded using the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated at the functional currency rate of exchange ruling at the statement of financial position date. Any resulting exchange differences are included in the statement of comprehensive income. Pension costs Contributions are made to the personal pension plans of certain employees. The expenditure is charged to the profit and loss account in the period to which it relates. Going concern The company has not yet recorded any revenues and funds its operations through periodic capital issues. Management prepares detailed working capital forecasts which are reviewed by the Board on a regular basis. Cash flow forecasts and projections take into account sensitivities on receipts, and costs. Having made relevant and appropriate enquiries, including consideration of the company’s current cash resources and the working capital forecasts, the Directors have a reasonable expectation that the company will have adequate cash resources to continue to meet the requirements of the business for at least the next twelve months. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements. Critical accounting judgements and key sources of estimation uncertainty In the application of the company’s accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following critical judgements have been made by the Directors. Share-based payments The Directors have to make judgements when deciding on the variables to apply in arriving at an appropriate valuation of share-based compensation and similar awards including appropriate factors for volatility, risk free interest rate and applicable future performance conditions and exercise patterns. Further details of these factors can be found in note 12. 37 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Notes to the financial statements continued For the year ended 31 December 2018 2. Directors and employees The average number of persons employed by the company, including Executive and Non-Executive Directors, during the year was as follows: Research and development Corporate and administration Non-executive Directors Their aggregate remuneration, including Directors, comprised: Wages and salaries Social security costs Other benefits Pension costs Share-based payment costs 31 December 2018 31 December 2017 5 5 10 5 15 5 4 9 3 12 31 December 2018 £ 1,287,907 149,274 53,704 90,660 696,573 2,278,118 31 December 2017 £ 846,595 106,522 29,026 29,080 709,978 1,721,201 Details of Directors’ remuneration can be found in the remuneration report and are summarised below: Directors’ remuneration Pension costs Other benefits Share option expense The number of Directors to whom retirement benefits were accruing was as follows: Defined contribution schemes 31 December 2018 £ 31 December 2017 £ 746,866 705,542 51,801 10,201 591,171 23,524 13,750 644,682 31 December 2018 31 December 2017 3 3 The company defines key management personnel as the Directors of the company. Included in the above Directors’ remuneration, amounts were paid to third parties for Directors’ services which are disclosed in note 17. The company makes payments into both occupational pension and personal pension funds held by staff. The pension cost charge represents contributions payable by the company to the funds. The amount due to the funds at 31 December 2018 was £3,091 (2017: £15,532). 3. Net finance income Finance income Deposit account interest 38 31 December 2018 £ 31 December 2017 £ 75,999 10,459 Destiny Pharma plc Annual Report and Financial Statements 2018 4. Auditor’s remuneration Fees payable to the company’s auditor for: Audit of the company’s annual accounts Audit related assurance services Tax services Total 5. Income tax 31 December 2018 £ 31 December 2017 £ 23,500 2,750 2,500 28,750 22,500 2,500 2,500 27,500 31 December 2018 £ 31 December 2017 £ Research and development tax credits based on costs in the financial year (841,144) (233,908) Tax reconciliation Loss before tax 31 December 2018 £ 31 December 2017 £ (6,007,858) (3,221,850) Loss before tax multiplied by the UK corporation tax rate of 19% (2017: 20%) (1,141,493) (644,370) Effects of: Non-deductible expenditure R&D enhanced expenditure Lower tax rate on R&D losses Tax losses carried forward Total tax credit on loss 148,637 99,969 (622,976) (132,210) 261,044 513,644 38,576 404,127 (841,144) (233,908) There were no tax charges in the period. There are tax losses available to carry forward amounting to approximately £13.7 million (2017: £12.8 million), which includes £0.7 million (2017: £1.5 million) in respect of tax deductions on share options. A deferred tax asset on losses is not recognised in the accounts due to the uncertainty of future profits against which they will be utilised. 6. Administrative expenses Administrative expenses include: Staff costs – research and development – other Research and development costs Costs of AIM admission not taken to equity Depreciation Foreign exchange differences 31 December 2018 £ 31 December 2017 £ 724,678 856,867 2,749,034 — 9,663 (122,305) 432,866 578,357 387,455 497,762 2,077 913 39 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Notes to the financial statements continued For the year ended 31 December 2018 7. Loss per ordinary share The calculation for loss per ordinary share (basic and diluted) for the relevant period is based on the earnings after income tax attributable to equity shareholders for the period. As the company made losses during the period, there are no dilutive potential ordinary shares in issue, and therefore basic and diluted loss per share are identical. The calculation is as follows: Loss for the year attributable to shareholders Weighted average number of shares Loss per share – pence – Basic and diluted 8. Property, plant and equipment Cost At 1 January 2017 Additions At 31 December 2017 Additions At 31 December 2018 Depreciation At 1 January 2017 Charge for the year At 31 December 2017 Charge for the year At 31 December 2018 Net book value At 1 January 2017 At 31 December 2017 At 31 December 2018 31 December 2018 £ 31 December 2017 £ (5,166,714) (2,977,483) 43,562,598 35,253,765 (11.9)p (8.4)p Plant and machinery £ 56,147 23,229 79,376 17,771 97,147 54,986 2,077 57,063 9,663 66,726 1,161 22,313 30,421 9. Trade and other receivables Other debtors Research and development tax repayment 31 December 2018 £ 31 December 2017 £ 89,615 841,144 930,759 43,218 233,908 277,126 40 Destiny Pharma plc Annual Report and Financial Statements 2018 10. Cash and cash equivalents Cash and bank balances 11. Other financial assets Term deposits with maturities greater than three months 12. Share capital Ordinary shares of £0.01 each Authorised(1) Allotted and fully paid At 1 January Bonus issue of shares during the year (see note 18) Issued for cash during the year At 31 December 31 December 2018 £ 31 December 2017 £ 7,060,821 11,724,037 31 December 2018 £ 31 December 2017 £ 5,000,000 5,000,000 31 December 2018 Number 31 December 2017 Number n/a n/a 43,562,598 63,836 — — 31,854,164 11,644,598 43,562,598 43,562,598 (1) During the year ended 31 December 2017 the company adopted new Articles of Association, which do not require the company to have authorised share capital. Authorised Allotted and fully paid Share premium account 31 December 2018 £ n/a 31 December 2017 £ n/a 435,626 435,626 31 December 2018 £ 31 December 2017 £ 17,292,284 17,292,284 Each ordinary share ranks pari passu for voting rights, dividends and distributions and return of capital on winding up. Share options The expense arising from share-based payment transactions recognised in the year ended 31 December 2018 was £737,687 (year ended 31 December 2017: £709,979). The company’s share-based payment arrangements are summarised below. 41 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Notes to the financial statements continued For the year ended 31 December 2018 12. Share capital continued Share option schemes As part of its strategy for executive and key employee remuneration, the company issued share options under two schemes established on 15 November 2000 – an Unapproved Scheme and an EMI Scheme (the “Old Schemes”). During 2017, the company established two new share option schemes – the LTIP Employee Scheme and the LTIP Non-Employee Scheme, both of which were established on 18 April 2017 (the “New Schemes”). Awards under the LTIP Employee Scheme are made to qualifying employees and in accordance with Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 so that, provided awards are within the qualifying limits, the awards qualify as EMI options. Any awards under the LTIP Employee Scheme which do not fall within the qualifying limits do not qualify as EMI options. Awards under the LTIP Non-Employee Scheme do not qualify as EMI options. The principal terms of the company’s share option schemes are as follows: Unapproved Scheme Options are granted at the discretion of the Directors. The price per share to be paid on exercise of an option will be the market value as agreed with the Share Valuation Division of HM Revenue & Customs at the time of the grant of the option and as detailed in the option certificate. Options may be exercised three years from the date of grant and lapse on the expiry of ten years from the date of grant of the option. EMI Scheme Options granted under the EMI Scheme are on substantially the same terms as options granted under the Unapproved Scheme, save that the EMI Scheme rules comply with the terms of the enterprise management incentive as set out in Schedule 14 of the Finance Act 2000. Employee LTIP Scheme Options are granted at the discretion of the Directors to eligible employees in accordance with Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 up to the limits set out therein. The price per share to be paid on exercise of an Employee LTIP Option will be the market value as agreed with HMRC at the time of the grant of the option. Options lapse on the expiry of ten years from the date of grant, the date specified in any leaver provisions or any other lapse date specified in the relevant option agreement. Non‑Employee LTIP Scheme Options are granted on substantially similar terms to the Employee LTIP Scheme except that the EMI and/or employment related provisions and requirements do not apply. These options can be granted to any Director of, or individual providing consultancy or other services to, the company. Balance outstanding at beginning of year Granted during year Options outstanding at end of year Options exercisable at the end of the year 31 December 2018 31 December 2017 Number of options 6,748,823 350,000 7,098,823 6,585,823 Weighted average exercise price £0.062 £0.334 £0.075 £0.035 Number of options 6,079,518(1) 669,305 6,748,823 681,000 Weighted average exercise price £0.068 £0.01 £0.062 £0.068 (1) On 23 January 2017 the company undertook a bonus issue of shares whereby 499 new ordinary shares were issued fully paid to the holders of each ordinary share by way of a partial capitalisation of share premium account. In addition, as explained below, some existing options where modified to reduce the number of options outstanding. Modification of existing share option schemes During May and June 2017, modifications were made to the Old Schemes by issuing replacement options in the New Schemes to participants in the Old Schemes and new awards were subsequently made to individuals under the New Schemes. Options over 741,000 shares granted under the Old EMI Scheme and over 103,000 shares granted under the Old Unapproved Scheme were unchanged. The remaining options over 7,004,000 shares issued under the Old Schemes were modified so that, to exercise, the holders of such options now have the right to subscribe instead for an aggregate of 5,235,518 shares in the company. The number of such options and the exercise price of such options were determined by reference to the closing fair value of the ordinary shares on the day of modification. The modification of these options as described had a neutral effect on the option holders immediately before and after the amendment of the options. After adjusting for the bonus issue on 23 January 2017, 7,848,000 share options had been issued prior to the modification at adjusted weighted average exercise prices of between £0.2484 and £1.4522. The estimated fair value of all share options at the modification date was calculated by applying a Black-Scholes option pricing model. In the absence of a liquid market for the share capital of the company, the expected volatility of its share price is difficult to calculate. Therefore, the Directors considered the expected volatility used by listed entities in similar operating environments to calculate the expected volatility. The resulting incremental fair value was £nil. 42 Destiny Pharma plc Annual Report and Financial Statements 2018 Grants of options On 5 June 2018, 50,000 Employee LTIP EMI Options were granted to certain senior employees at an exercise price of £0.01 per ordinary share and are exercisable on or after the third anniversary of the date of grant. On 25 October 2018, 300,000 Employee LTIP EMI Options were granted to Shaun Claydon. Of these options, 50,000 are exercisable at £0.01 per ordinary share on 31 January 2019, 100,000 are exercisable at £0.01 on 31 January 2020 and 150,000 are exercisable at an exercise price of £0.765 on the third anniversary of the date of grant. The estimated fair value of share options granted during the period has been calculated by applying a Black-Scholes option pricing model. In the absence of a liquid market for the share capital of the company, the expected volatility of its share price is difficult to calculate. Therefore, the Directors have considered the expected volatility used by listed entities in similar operating environments to calculate the expected volatility. The weighted average fair value of options granted in the period was £0.68 (2017: £1.44). The model inputs were: Share price Exercise price Expected volatility Expected option life Risk free rate Expected dividends 13. Trade and other payables Trade creditors Social security and other taxes Accrued expenses Pension contributions payable 2018 £0.765/£1.115 £0.01/£0.765 49% 2017 £1.4522 £0.01 49% 10 years 10 years 1.5%/1.55% £nil 1.4% £nil 31 December 2018 £ 403,552 50,874 344,275 3,091 801,792 31 December 2017 £ 151,582 41,110 189,251 15,532 397,475 14. Financial instruments – risk management The company is exposed through its operations to credit risk, liquidity risk and foreign exchange risk. In common with all other businesses, the company is exposed to risks that arise from its use of financial instruments. This note describes the Directors’ objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. Financial instruments Categories of financial instruments Financial assets – Loans and receivables Financial liabilities 31 December 2018 £ 31 December 2017 £ 12,150,436 16,725,402 – Financial liabilities measured at amortised cost 747,827 340,825 43 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Notes to the financial statements continued For the year ended 31 December 2018 14. Financial instruments – risk management continued Credit risk The company’s credit risk arises from cash and cash equivalents with banks and financial institutions. For banks and financial institutions, only independently rated parties with minimum rating A-/A3 or equivalent are accepted. Liquidity risk Liquidity risk arises from the Directors’ management of working capital and is the risk that the company will encounter difficulty in meeting its financial obligations as they fall due. Further details on the going concern basis of preparation are provided in note 1. Foreign exchange risk Foreign exchange risk arises when the company enters into transactions denominated in a currency other than its functional currency. The main trading currencies of the company are pounds sterling, the US dollar and the euro. The exposure to foreign exchange is monitored by the company’s finance function and exposures are generally managed through hedging via the currency denomination of cash and any realised impact currently is not material to the company. The company’s exposure to foreign currency risk at 31 December 2018 and 31 December 2017 was as follows: 31 December 2018 Cash and cash equivalents Trade and other payables Net exposure 31 December 2017 Cash and cash equivalents Trade and other payables Net exposure Sterling £ 11,123,132 US dollar £ 937,042 Euros £ Total £ 647 12,060,821 (764,133) (36,869) (790) (801,792) 10,358,999 900,173 (143) 11,259,029 Sterling £ US dollar £ 16,723,398 (393,901) 16,329,497 — (2,927) (2,927) Euros £ 639 Total £ 16,724,037 (647) (397,475) (8) 16,326,562 The following table considers the impact of a change to the pound sterling/euro and US dollar exchange rates of +/– 10% at 31 December 2018 and 31 December 2017, assuming all other variables, in particular other exchange rates and interest rates remain constant. If these changes were to occur, the figures in the table below reflect the impact on loss before tax. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. 31 December 2018 £ 31 December 2017 £ (81,834) 81,834 13 (13) 266 (266) 1 (1) 10% increase in US dollar 10% decrease in US dollar 10% increase in euro 10% decrease in euro 44 Destiny Pharma plc Annual Report and Financial Statements 2018 15. Capital risk management The Directors’ objectives when managing capital are to safeguard the company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. At the date of these financial statements, the company had been financed from shareholders. In the future, the capital structure of the company is expected to consist of equity attributable to equity holders of the company, comprising issued share capital and reserves. The company is not subject to any externally imposed capital requirements. 16. Ultimate controlling party As no shareholder owns in excess of 50% of the total share capital of the company, the Directors consider there to be no ultimate controlling party. 17. Related party transactions Sacerdoti Consulting Limited During the period from the start of the year until his resignation as a Director of the company on 26 October 2018, £nil (2017: £80,000) was paid to Sacerdoti Consulting Limited for the services of Simon Sacerdoti as a Director of the company. The amount due to Sacerdoti Consulting Limited at 31 December 2018 was £nil (2017: £nil). For details of Directors’ remuneration, please see the Directors’ remuneration report. 18. Bonus issue of shares and capital reduction In January 2017, the company undertook a bonus issue of shares whereby, in respect of each ordinary share in issue, 499 ordinary shares were issued fully paid, resulting in a transfer of £318,542 from share premium to called-up share capital. On 26 January 2017, the company effected a reduction of capital whereby the outstanding balance on the share premium account amounting to £18,016,550 was transferred to the profit and loss reserve. 45 Strategic reportGovernanceFinancial statementsDestiny Pharma plc Annual Report and Financial Statements 2018 Glossary AIM The market of that name operated by the London Stock Exchange EU The European Union AMR Antimicrobial resistance ASHP American Society of Hospital Pharmacists BARDA Biomedical Advanced Research and Development Authority Carb-X A biopharmaceutical accelerator created as a partnership between a number of governmental and non-governmental organisations, to spur product development in the anti-bacterial field FAO The Food and Agriculture Organization of the United States FDA US Food and Drug Administration GAAP UK Generally Accepted Accounting Practice as published by the FRC, applicable for periods prior to 1 January 2015 GAIN Generating Antibiotics Incentives Now GAMRIF The Global Antimicrobial Resistance Innovation Fund CDC Centers for Disease Control GBP Pounds sterling CMS China Medical System Holdings Limited The Code/Corporate Governance Code The UK Corporate Governance Code published by the Financial Reporting Council, as the same may be varied or amended The company Destiny Pharma plc EMA European Medicines Agency EMI Enterprise Management Incentive G20 The G20 is an international forum for the governments and central bank governors which includes the EU and 19 other countries HAP Hospital-acquired pneumonia HMRC Her Majesty’s Revenue and Customs ICU Intensive care unit IDSA Infectious Disease Society of America IFRS International Financial Reporting Standards (including International Accounting Standards) IMI The Innovative Medicines Initiative IND Investigational new drug – a temporary exemption from the FDA’s requirement that a drug be the subject of an approved marketing application before being shipped across state lines IPO Initial public offering London Stock Exchange London Stock Exchange plc LTIP Long-term incentive plan LTIP EMI Options The EMI approved options granted pursuant to the LTIP Employee Scheme LTIP Employee Scheme The LTIP (EMI and non-tax advantaged (non-EMI)) share options scheme adopted by the company on 18 April 2017 for the benefit of Directors and employees LTIP (NTA) Employee Options The non-tax advantaged options granted pursuant to the LTIP Employee Scheme MRSA Methicillin-resistant Staphylococcus aureus MSSA Methicillin-sensitive Staphylococcus aureus 46 Destiny Pharma plc Annual Report and Financial Statements 2018 NHS National Health Service NICE National Institute for Clinical Excellence NIAID National Institute for Allergy and Infectious Diseases NTAP New Technologies Add-on Payment OECD The Organisation for Economic Co-operation and Development, an intergovernmental economic organisation with 35 member countries R&D Research and development SHEA Society for Hospital Epidemiologists of America SIS Surgical Infection Society UD Universal Decolonisation UN United Nations VAP Ventilator-associated pneumonia WHO World Health Organization OIE Office Internationale des Epizooties, also known as the World Organisation for Animal Health WT Wellcome Trust ONS Office of National Statistics XF-70 A molecule from the XF drug platform, distinct from XF-73 Ordinary shares The ordinary shares of £0.01 each in the capital of the company XF-73 Exeporfinium chloride QIDP Qualifying Infectious Disease Product status granted by the FDA 47 Destiny Pharma plc Annual Report and Financial Statements 2018 Corporate information Registered office Destiny Pharma plc Unit 36 Sussex Innovation Centre Science Park Square Falmer Brighton BN1 9SB Nominated adviser and joint broker Cantor Fitzgerald Europe One Churchill Place London E14 5RB Registrar Link Market Services Limited The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Company number 03167025 Website www.destinypharma.com Company Secretary Shaun Claydon Joint broker FinnCap Limited 60 New Broad Street London EC2M 1JJ Solicitor Irwin Mitchell LLP 40 Holborn Viaduct London EC1N 2PZ Auditor Crowe U.K. LLP St Bride’s House 10 Salisbury Square London EC4Y 8EH Public relations FTI Consulting 200 Aldersgate Aldersgate Street London EC1A 4HD 48 Destiny Pharma plc Annual Report and Financial Statements 2018 Printed by Pureprint Group, a CarbonNeutral®Company, on Image Indigo FSC®certified paper. 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