A N N U A L
R E P O R T
2018
Pushing boundaries to save Lives
Contents
fa ron pharmaceut ic als
corpor ate g overnance
Saving Lives
Endothelial Barrier is Everything
Highlights 2018
strat egi c report
Introduction
Chairman’s Statement
Chief Executive Officer’s Review
Financial Review
Risks and Uncertainties
pipe lin e
Overview
Traumakine
Clevegen
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6
7
10
11
13
18
21
24
27
35
Chairman’s Introduction to Governance
Compliance with the Principles
of the QCA Code
Board of Directors
Remuneration Report
Corporate Governance Statement
Directors’ Report
finan cial repo rt
Statement of Comprehensive Income
Balance Sheet
Parent Company Statement of
Changes in Equity
Group Statement of Changes in Equity
Statement of Cash Flows
Notes to the Financial Statements
Results and Dividends
Auditor’s Report
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Endothelial barrier controls
fluid and cell balance
between circulation and tissues
Faron’s pipeline is based on endothelial receptors involved in regulation of immune
responses. Faron has mastered control of this response in both directions; slowing
down immune escalation, and removal of immune suppression.
CD73 controls capillary
leakage and escalation
of inflammation
Clever-1
regulates
tissue
immune
status
AOC3 enhances
inflammation and
causes vascular
damage*
* AOC3 inhibitor currently on hold
3
3
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Fluid Balance
intact
capillary
oxygenation
l
i
f
e
h
t
a
e
d
hypoxis
capillary
breach
Faron’s two drug development programs, Traumakine and Clevegen, aim to tackle
life-threatening medical conditions, such as organ damage and solid cancers. We
are a group of highly committed people determined to make a difference in science,
to people and ultimately to save lives.
Cell Balance
immune
response
"good"
cell traffic
l
i
f
e
h
t
a
e
d
harmfull
cell traffic
immune
suppression
Drug
development
to save lives
- We see
barriers as
opportunities
Faron (AIM:FARN) is a clinical stage
biopharmaceutical company develop-
ing novel treatments for medical condi-
tions with significant unmet needs. The
Company currently has a pipeline focus-
ing on acute organ traumas, vascular
damage and cancer immunotherapy.
The Company's first candidate Trau-
makine, to prevent vascular leakage and
organ failures, has completed a Phase III
clinical trial in Acute Respiratory Distress
Syndrome
(ARDS). An additional
European Phase II Traumakine trial is
underway for the Rupture of Abdomi-
nal Aorta Aneurysm ("RAAA"). Faron's
second candidate Clevegen is a ground
breaking early clinical anti-Clever-1 anti-
body. Clevegen has the ability to switch
immune suppression to immune activa-
tion in various conditions, with potential
across oncology,
infectious disease
and vaccine development. This novel
macrophage-directed
immuno-oncol-
ogy switch called Turn-on-your-Immunity
or Turn-It may be used alone or in combi-
nation with other immune checkpoint
molecules for the treatment of cancer
patients. Faron is based in Turku, Finland.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 faron pharmace ut ic als
Endothelial Barrier Is Everything
Imagine cars speeding in a dark tunnel,
100,000 kilometers long, without lights, at
a speed of 700–800 km/h, navigating their
way to their destinations. The situation
described above applies to cells, which
migrate in our vasculature system and
need to move around.
This movement is part of the normal
surveillance system to detect any harmful
event that would put our existence at risk.
This is our innate defence system, but it
also provides the initial immuno logical
reaction against any foreign material
entering the body.
The “GPS” for these moving cells is a
molecular recognition system consist-
ing of special molecules on the surface
of migrating cells and their counterparts
on the surface of vascular endothe-
lial cells. These “homing” molecules
form an essential cellular trafficking
guidance system, which we all need to
maintain our normal physiology. Unfortu-
nately, many diseases utilise this system
as well. This calls for ways to control the
guidance system in order to prevent or
heal diseases. Among these diseases the
most harmful ones are extended inflam-
mations and cancer spread.
Our vascular system also includes a
drainage system called lymphatics. The
same guidance system also operates
there but the recognition molecules
are unique. In both of these capillary
networks the endothelial cells control the
entry of migrating cells and maintain
a barrier between circulation and tissues.
Without this barrier, we encounter a
catastrophic situation, which can lead
to life- threatening conditions.
Faron is targeting several endothe-
lial molecules involved in this guidance
system and the maintenance of the
endothelial barrier. We believe that the
control of these molecules provides
a unique way of treating many life-
threate n ing conditions with high unmet
need. Our lead indications – acute
respiratory distress syndrome (ARDS),
multi-organ failure (MOF) and control of
tumour immunity – are both based on the
malfunction of the endothelial barrier, both
of which we have learned to control (see
page 3).
We hope that our 2018 Annual Report
inspires you to explore our technologies,
which have originated from world-class
academic laboratories and developed by
Faron as novel proprietary treatments
for ARDS, MOF, and tumour immune
suppression.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 faron pharmace ut ic als
Highlights
Operational (including post period-end)
Traumakine®
- in development for the treatment of organ failures
• The Company continued to analyse INTEREST trial data following the finding that
Traumakine treatment produced inconsistent interferon-beta (IFN-beta) bioactivity
across the treatment group.
− Data showing that concomitant use of corticosteroids and Traumakine appeared
to affect both the mortality and biomarker appearance in the INTEREST study
was presented at the ESICM (European Society for Intensive Care Medicine)
conference.
− Genetic testing identified a subgroup of ARDS patients for Traumakine treatment
in the trial showing substantial reduction in mortality among INTEREST trial pa-
tients. Approximately 35% of Europeans carry this genetic polymorphism (C/T).
− Interim results from the YODA study indicated that IFN-beta, regardless of the
method of solubilisation, produced the expected level of bioactivity suggesting
that drug formulation was not affecting the outcome of the INTEREST trial.
− Further YODA results are expected in Q2 2019 to confirm, in vivo, the observed in-
terference of corticosteroids on IFN-beta bioactivity in the INTEREST study and
ex vivo in lung samples.
− Top-line data from the Phase III ARDS trial with Japanese partner Maruishi
Pharmaceutical Co., Ltd were, as expected, consistent with the INTEREST study
results, showing that treatment with Traumakine, in a study group where there
was high concomitant glucocorticoid use (77%), did not result in reduced mor-
tality or increased number of ventilator-free survival days when compared to
placebo.
• Plans announced in March 2019 for a new global phase III trial of Traumakine in the
treatment of ARDS (CALIBER), subject to external funding. The Company is seeking
feedback from both the FDA and EMA.
• EMA approved paediatric development plan for Traumakine in paediatric ARDS and
updated orphan definition of orphan status in Europe, in which the patient popula-
tion is now defined according to the Berlin classification of ARDS patients.
• Further recommendations were received from the Independent Data Monitoring
Committee (IDMC) to continue the Phase II INFORAAA study for the prevention of
Multi-Organ Failure (MOF) and associated mortality of surgically operated Ruptured
Abdominal Aorta Aneurysm (RAAA). Advanced interim analysis is expected to take
place in Q2 2019.
• Patents to use certain biomarkers to measure the severity and treatment efficacy of
ARDS patients were granted in Europe, Japan and Canada. The intravenous (IV) for-
mulation patent of IFN-beta were also approved in Europe and US, and could protect
IV use of IFN-beta upto 2035-37 in various territories.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Clevegen®
- wholly-owned novel cancer immunotherapy in development
• Completion of successful preclinical toxicity studies which showed good safety
profile and potential of Clevegen to block Clever-1 on circulating monocytes.
• Following Clinical Trial Application (CTA) approval from the Finnish Medicines
Agency (FIMEA), the first patient was successfully dosed in the phase I/II MATINS
study in December 2018. A subsequent approval from the UK’s MHRA saw the trial
expand with two further sites opened in the UK.
• Encouraging early observations in the MATINS study on immunity and clinical re-
sponse indicated potential early clinical benefits in dosed patients together with
a switch in their immune profile towards more immune stimulatory function. No
safety concerns were seen in the four subjects dosed at 0.3 and 1.0 mg/kg.
• A tumour imaging report from a patient with colorectal cancer indicated signifi-
cant shrinkage of lung metastasis, classified as a partial response according to
the RECIST classification. The same patient also showed a decrease in tumour
load marker CEA (carcinoembryonic antigen) and an increase in circulating
B-cells which could indicate an antibody-mediated response against the tumour.
This patient had previously been treated with six different anti-cancer drugs, which
all had failed.
• Colorectal cancer was selected as a first expansion
• Bexmarilimab confirmed by WHO as proposed International nonproprietary (INN)
name
• New experimental data supporting the immunotherapeutic blockade of Clever-1
as an alternative to, or in combination with, PD-1 checkpoint inhibition to reactivate
immunity against immunosuppressive tumours was published in Clinical Cancer
Research, a journal of the American Association for Cancer Research.
• Patent granted by the European Patent Office for the use of Clever-1 antibodies, the
mechanism behind Clevegen, for the treatment of cancer, extending the existing
patent estate for Clevegen until 2030. Further protection for Clevegen epitope itself
has been applied that would protect Clevegen use until 2039-40.
• Clever-1 control of B-cell mediated antibody formation in vivo was published by
Frontiers in Immunology, re-enforcing the importance of the Company's program
investigating the switching of immune suppression to immune activation in condi-
tions beyond immuno-oncology.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 financial
• On 31 December 2018, the Company held cash balances of €4.1 million (2017:
€9.3 million).
• Loss for the period for the financial year ended 31 December 2018 was €20.1
million (2017: €21.1 million loss).
• Net assets on 31 December 2018 were €0.4 million (2017: €4.7 million). The net
assets at end March 2019 were €0.7 million.
• Cash preservation program implemented to reduce cash burn and preserve exist-
ing resources in order to deliver value to shareholders.
• Raised £15.0 million (net €15.9 million) in February 2018 intended to support
preparations for the commercialisation of Traumakine and to advance the clinical
development of Clevegen in several indications.
• Post accounting period raised net €2.9 million through placing and subscription
in March 2019 by way of new shares at the issue price of 70.2 cents (60 pence)
per share. The placing and subscription were supported by the participation of
existing and new institutional shareholders. The proceeds will be used to further
the clinical development of both Traumakine and Clevegen. The net proceeds of
the fundraise are expected to provide the Company with working capital into Q3
2019. The cash position at the end of March 2019 was €4.9 million.
corporate
• Faron now has registered subsidiaries in the United States of America and in
Switzerland.
• Dr Jonathan Knowles resigned from the Board to take up a position as Chair of the
newly formed Clevegen Scientific Advisory Board and Dr Huaihzeng Peng resigned
from the Board but will continue as an invited Board Observer.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 str ategic re port
Addressing
significant
unmet
medical
needs
Strategy
Faron’s strategy is to maximise the
potential of its pipeline of drug candi-
dates and to progress the development of
its two major programmes - Traumakine
and Clevegen. Faron targets several
endothelial molecules involved in the
maintenance of the endothelial barrier
which is a thin layer (membrane) of cells
that lines blood and lymphatic vessels
to separate blood content from tissue.
The Company believes that the control
of these molecules provides a unique
way to treat many life-threatening condi-
tions with no efficient treatment options.
Faron collaborates with its strategic
in research, manufacturing
partners
and drug development to bring new
pharmaceutical products
to market
in a timely and cost-effective manner
and has formed a core team of lead-
ing scientists in capillary biology and
diseases arising from vascular leakage.
The Company has established links with
leading laboratories and clinics based at
University of Turku in Finland, University
of Birmingham Medical School in the UK
and other institutions.
To date, Faron has operated on a rela-
tively low cost basis by employing only
key members of staff and outsourcing
where possible. Typically, all develop-
ment work up to the proof-of-concept
stage of drug development is carried
out in the innovators’ laboratories. The
Company outsources all of its manu-
facturing activities in relation to its
products to third parties and collaborates
with Contract Research Organisations
(CROs) to carry out the clinical develop-
ment programmes. Faron monitors and
evaluates potential commercial oppor-
tunities for its established drug candi-
dates, such as Traumakine and Cleve-
gen and its technologies as and when
they arise, and will consider how best
to crystallise as much value as possi-
ble for shareholders, which may include
holding rights in main territories for as
long as it is feasible or, in certain circum-
stances, up to the marketing stage.
The Company plan to discuss with the
FDA and the EMA on the next steps
for Traumakine,
feedback
on design of a phase III trial, and is
also advancing partnering discussions
in respect of both Traumakine and
Clevegen.
including
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 str ategic re port
Chairman’s statement
2018 was a year of challenge for Faron
but also one of significant progress, as
the Company executed its strategy to
progress the delivery of its novel pipe-
line. The Company continued to make
rapid progress on its Clevegen cancer
immunotherapy programme and estab-
lished a path forward for Traumakine
in ARDS after better understanding the
disappointing INTEREST trial results.
Faron’s wholly-owned novel preci-
sion cancer immunotherapy candidate,
completed
successfully
Clevegen,
preclinical studies and, in agreement
with regulatory authorities and accord-
ing to an ambitious schedule, advanced
into the clinic by year end. This was a
significant milestone for the Company
and I am delighted that we are making
such rapid progress with the develop-
ment programme.
Immuno-oncology
therapies have
transformed cancer treatment in recent
years. Antibody-based
immunothera-
pies are now well established as effec-
tive therapeutic options and Clevegen
has a novel mechanism for removing
immune suppression from the tumour
environment by switching immune-sup-
pressive (M2) macrophages to immune-
active (M1) macrophages.
The MATINS clinical study of Cleve-
gen is designed to determine the poten-
tial of this novel immunotherapy and we
are encouraged by initial data from the
study, showing potential early clinical
benefits in dosed patients. Clevegen,
may ultimately be used as a standalone
therapy or in combination with other
immunotherapies like PD-1/PD-L1 inhib-
itors and offers a potential new treat-
ment option for patients with cancer.
We were obviously very disappointed
with the surprising results from the
Traumakine INTEREST trial
in 2018.
Throughout the remainder of the year
the Company worked hard, alongside
the investigators, to undertake further
analyses that would help us to better
understand the results and determine a
path forward.
As a consequence of the INTER-
EST results, management took swift
action, executing a significant savings
programme throughout the Company,
including management and Board
members. This
is never easy, and
we regret that a number of talented
colleagues had to leave the Company.
I am proud of how every member of the
organisation responded with profes-
sionalism and continued commitment
to the development of our products and
future of our business.
Following a detailed interrogation of
INTEREST we have now determined the
factors which led to the study’s mixed
results, including a higher than antic-
ipated placebo response due to high
pneumonia cases, interference of corti-
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 costeroids on IFN-beta bioactivity and
the impact of a subgroup of patients'
single nucleotide polymorphism C/T
mutation in their interferon alpha and
beta receptor gene. Patients with this
genetic profile showed the greatest
reduction in mortality when treated with
Traumakine.
The conclusions from the review of
the INTEREST data have allowed us to
plan a new phase III trial of Traumakine
in ARDS patients – CALIBER – and we
are seeking guidance from regulatory
authorities in the EU and US in 2019 on
its design and preparations for its start.
During the year we continued to
benefit from our Board’s wealth of expe-
rience. As part of the Company's re-fo-
cus following INTEREST, Dr Jonathan
Knowles resigned from the Board to
take up a position as Chair of the newly
formed Clevegen Scientific Advisory
Board and Dr Huaihzeng Peng resigned
from the Board but continues to support
Faron as an invited Board Observer.
Both Jonathan and Huaizheng have
been invaluable to Faron and I would
like to recognise them for their time
and commitment to the Company.
I am pleased that we continue to benefit
from their expertise in their current advi-
sory roles.
The Company’s key priority for 2019
is to advance, expand and accelerate
the clinical development of Clevegen
and Traumakine. The Board was
pleased to receive the support from
new and existing shareholders, employ-
ees and Company directors during the
successful share placing and subscrip-
tion in March 2019. This allows us to
further the clinical programmes for
these two medicines which offer signifi-
cant potential.
The Company will continue to pursue
financing, co-development and future
commercialisation models to secure the
long-term capabilities of the Company,
to give the pipeline its greatest chances
of success and to best deliver value to
shareholders.
On behalf of the Board I would like to
thank the management team and staff
for their hard work and resilience in 2018;
our partners and steering committee
members who have provided support
and expertise to our programmes; and
the investigators and patients who are
part of our clinical studies.
Dr Frank Armstrong
Chairman
May 3, 2019
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 str ategic re port
Chief Executive Officer’s Review
Overview
Faron is highly focused on developing
novel treatments for
life-threatening
medical conditions with significant
unmet need for both individuals and
society. All our development work is
based on scientific understanding of
those life-threatening conditions at the
molecular level, to most effectively influ-
ence their underlying causes.
Our focus for 2018 has been two-fold:
further analysing and understanding
data from the phase III INTEREST trial
Dr Markku Jalkanen
Chief Executive Officer
May 3, 2019
with Traumakine in ARDS, and also
progressing our wholly-owned novel
precision cancer immunotherapy candi-
date, Clevegen, into first in-human trials.
Traumakine Development
this finding, showing that in a study
group where there was high concom-
itant glucocorticoid use (77%), treat-
ment with Traumakine did not result in
reduced mortality or increased number
of ventilator-free survival days when
compared to placebo.
Following the announcement in May
2018 that the INTEREST trial did not
meet the primary endpoint in ARDS we
have been conducting investigations to
further understand the outcome and
determine a way forward for the treat-
ment’s continued development.
Soon after the initial announcement,
the Company conducted analysis of
certain biomarker
indicators which
showed that the treatment did not
produce the expected interferon-beta
(IFN-beta) bioactivity
in Traumakine
treated patients that was previously
seen in Faron's Phase I/II trial. Further
detailed analysis carried out by the
trial investigators and presented at the
ESICM (European Society for Intensive
Care Medicine) conference in October
2018, determined that unexpectedly
high corticosteroid use in the INTEREST
trial may have masked the treatment
benefit of Traumakine in ARDS patients,
affecting both
the mortality and
biomarker appearance in the INTEREST
study patients.
Results from the phase III Japa-
nese Traumakine study undertaken by
our partner Maruishi also supported
The concomitant administration of
corticosteroids to ARDS patients is a
controversial topic and there is an ongo-
ing debate as to whether corticosteroids
have any beneficial role, early, late or for
more severe un-resolving cases. These
findings from the INTEREST study, in
which some patients were also given
corticosteroids as part of their treat-
ment, suggest that we should consider
controlling or excluding corticosteroids
from future clinical research in ARDS
patients. They also present wider impli-
cations for the medical community and
how ARDS patients are currently treated.
IFN-beta secretion by our own defence
system is a key element to control viral
infections such as lung pneumonia and
so corticosteroid use could be detrimen-
tal in ARDS patients as physicians try to
limit viral expansion and organ damage.
the
reduced biomarker response seen in
the INTEREST study, we initiated a
new pharmacokinetic/dynamic study,
YODA, to examine various formulations
of IFN-beta in around 50 healthy volun-
teers. We announced interim results
from the first 30 subjects in December
To understand still
further
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 2018, which indicated that IFN-beta,
regardless of the method of solubili-
sation, produced the expected level of
bioactivity, confirming that drug formu-
lation was not a factor in the lowered
bioactivity seen during the INTEREST
trial. This study remains ongoing and is
examining concomitant administration
of prednisolone and Traumakine in order
to confirm, in vivo, the observed inter-
ference of corticosteroids on IFN-beta
bioactivity in the INTEREST study and ex
vivo lung samples. These YODA results
are expected during Q2 2019. However,
we already know from ex vivo human
lung studies that, in those settings, corti-
sone blocks completely INF-beta signal-
ling pathways – an effect also seen in
human primary lung endothelial cells.
Further interrogation of the INTER-
EST data continued through 2018 and
in December we announced the results
of genetic testing which had identified
an optimal subgroup of ARDS patients
for Traumakine treatment. The data indi-
cated that patients carrying the single
nucleotide polymorphism rs9984273
(C/T) in subunit 2 of the interferon alpha
and beta receptor (INFAR2) showed a
substantial reduction in mortality during
the INTEREST trial, suggesting that this
C/T mutation and Traumakine treat-
ment is the most favourable combina-
tion for patient outcome and interferon
treatment efficacy. Around one third of
the Caucasian population carries this
single nucleotide polymorphism.
As a result of these analyses, we
believe we can now confidently make a
number of assumptions:
• The drug product used in the INTER-
EST study was safe, robust and
effective
• Corticosteroids could
interference
with IFN-beta action and mask the
treatment benefit of Traumakine for
ARDS patients
• There is an optimal subgroup of ARDS
patients for Traumakine treatment
This increased understanding led us
to announce plans for a new phase III
trial of Traumakine in the treatment of
ARDS. The CALIBER study will allow
corticosteroid use within the standard
of care (SOC) arm, but not if the ARDS
patient is on Traumakine. This double
dummy structure will allow physicians
to choose their preference while creat-
ing a blinded readout between Traumak-
ine and SOC patients. We are seeking
guidance from both FDA and EMA on
trial design and anticipate receiving
feedback during Q3 2019. CALIBER will
be a global trial, supported by one of
the Company’s partnering candidates
currently engaged in negotiations.
Phase II INFORAAA
Beyond ARDS, we continue to believe
that Traumakine has the potential for
application in additional disease areas
and, as such, have been conducting the
INFORAAA trial with Traumakine for the
prevention of multi-organ failure (MOF)
and death after the surgical repair of a
ruptured abdominal aortic aneurysm
(RAAA).
RAAA
reperfusion
is a surgical emergency
with an overall mortality of 70 to 80%
and requires immediate surgery and
aortic repair. The main cause of death
for these patients is MOF following a
post-operative
injury of
ischemic organs including kidneys, liver,
brain and intestines. We believe that
Traumakine has the potential to offer
significantly
improved outcomes for
patients following surgery for RAAA. We
also believe that the clinical data from
the INFORAAA trial could provide us
with valuable information on the recov-
ery of ischemic single organ injuries and
are planning further trials to treat these
injuries.
In July 2018, the Company received a
second recommendation from the Inde-
pendent Monitoring Committee (IDMC)
to continue the INFORAAA trial and we
are taking the study to the advanced
interim analysis point expected to take
place in Q2 2019.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
Clevegen Development
Progress into the clinic
2018 was a year of significant progress
for Faron's second product, Clevegen,
as it advanced into the clinic. Cleve-
gen is our wholly-owned novel preci-
sion cancer immunotherapy candidate,
which causes conversion of the immune
environment around a tumour from
immune-suppressive to immune-stimu-
lating by reducing the number and func-
tion of tumour-associated macrophages
(TAMs). Recent developments in the
exciting field of cancer immunother-
apy have been well documented with a
number of important indications of clin-
ical success. Clevegen is differentiated
from other immunotherapies through
its specific targeting of M2 TAMs which
facilitate tumour growth, while
leav-
ing intact the M1 TAMs that support
immune activation against tumours. We
believe it has the potential to function as
a novel macrophage checkpoint immu-
notherapy either as a monotherapy or in
combination.
In June 2018 we announced
successful preclinical toxicity studies
which showed, not only a good safety
profile, but also the potential of Cleve-
gen to block Clever-1 on circulating
monocytes. Based on these data, we
filed a Clinical Trial Application (CTA)
in September 2018 which was subse-
quently approved by the Finnish Medi-
cines Agency (FIMEA) to initiate the
MATINS
(Macrophage Antibody To
INhibit immune Suppression) trial, in
December 2018.
The MATINS study is a first-in-human
open label phase I/II clinical trial to
investigate the safety and efficacy of
Clevegen in selected metastatic or inop-
erable solid tumours. In December 2018,
we announced that the first patient had
been successfully dosed, on schedule
with previous guidance, at Helsinki and
Oulu University Hospitals in Finland.
The trial quickly expanded with two
further sites opening in the UK at the
Royal Marsden Hospital in London and
the Queen Elizabeth Hospital in Birming-
ham. We were very encouraged by early
observations which showed substan-
tial immune activation in patients post
Clevegen administration and in Febru-
ary 2019 announced that dosing had
moved to the second level with no signs
of toxicity. Subsequent tumour imag-
ing of a trial participant with colorectal
cancer, indicating a partial response,
reaffirmed our belief in the potential
clinical benefit Clevegen may provide to
late stage cancer patients. This patient
had previously been treated with six
different anti-cancer drugs, which had
all failed.
Based on these early data, in April
we announced that late-stage colorec-
tal cancer has been chosen for the first
expansion cohort for the second part
of the trial, which is expected to begin
as soon as the optimal dose has been
determined.
We are also continuing to seek
pre-IND advice from the FDA to open
sites in the US prior to entering the
cohort expansion part of the trial.
Due to high interest in the potential
for new combination therapies in the
immuno-oncology field, we are currently
engaged in partnering discussions with
several parties and hope for a posi-
tive outcome from these negotiations
during 2019.
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15
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Corporate
Financial
Outlook
In March 2019, we successfully raised
€3.12 million from new and existing
shareholders, employees and Company
directors. The proceeds will be used to
advance Clevegen through the MATINS
trial, further Traumakine development
through the design and preparation of
the global Phase III CALIBER clinical
trial and advance partnering discus-
sions in respect of both Traumakine
and Clevegen.
In February 2018 I was very proud to
host the Company’s R&D Day in London
to discuss our strategy and pipeline
developments, with a particular focus
on the potential of Clevegen. Members
of the Executive Leadership and senior
management teams were
joined by
external experts
including Professor
Geoff Bellingan, Medical Director, Univer-
sity College London Hospital, Assistant
Professor Maija-Leena Hollmén, Medi-
city Laboratory, University of Turku and
Dr. Shishir Shetty, Honorary Consultant
Hepatologist, University of Birmingham.
This was an exciting opportunity to
profile the company’s future potential.
Our immediate focus in 2019 will be to
submit the body of data for Traumakine
to the FDA and EMA in order to gain feed-
back on the CALIBER trial design and
to accelerate Clevegen’s clinical devel-
opment and to explore further funding
opportunities to enable the Company
to realise the value in its products. The
management team and I are optimistic
about the year ahead and, with a future
development plan now determined
for Traumakine and Clevegen studies
progressing well, believe we have built
a strong investment case for Faron with
clear opportunities for success. We look
forward to updating the market on our
progress throughout the year.
Board of Directors
Huaizheng Peng and Jonathan Knowles resigned from Board on 12 Sep 2018
16
16
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 The Board anticipates the following pipeline progress
and catalysts during 2019:
Traumakine:
Clevegen:
• Approval from the FDA and EMA on
CALIBER trial design during H2 2019
• Further results from the YODA study
are expected during Q2 2019
• INFORAAA first interim analysis point
• Further dose escalation data from the
MATINS trial expected in Q2 2019
• Enrolment of patients into additional
UK cohort sites in the MATINS trial
• File US IND for MATINS trial post
expected in Q2 2019
pre-IND feedback
• Prepare and execute a plan to include
US study sites to MATINS trial latest in
part III (cohort escalation)
• Partnering update during 2019
Management team
17
17
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
The Company continued Clevegen devel-
opment which in turn increased costs of
R&D materials and services with €2.6
million from €4.7 million to €7.3 million
costs. The part-time lay-offs of the
whole R&D personnel reduced the R&D
employee costs by €0.9 million from
€2.7 million to €1.8 million despite the
increase in R&D personnel employed.
most of these during the years 2020
to 2028 by offsetting them against
future profits. In addition, Faron has
€49.1 million of R&D costs incurred in
the financial years 2010 to 2018 that
have not yet been deducted in its taxa-
tion. This amount can be deducted over
an indefinite period at the Company’s
discretion.
General and
administration costs
Losses
str ategic re port
Financial Review
Key Performance Indicator
As a clinical stage drug development
intercon-
company, Faron’s primary
nected KPIs are cash burn and cash
position. The Company conducted a
successful fundraising in February 2018,
nevertheless the Company’s net cash
flow showed €5.3 million negative due
to an increase in R&D spending. The
Board will consider the appropriateness
of monitoring additional KPIs as the
Company’s operations advance.
Revenue and Other
Operating Income
The Company’s revenue was €0.0 million
for the year ended 31 December 2018
(2017: €nil).
The Company recorded €0.2 million
(2017: €1.5 million) of other operational
income. This comprised income recog-
nised from the European Commission
FP7 grant in support of the Traumakine
programme.
Administrative expenses increased by
€0.7 million from €3.1 million in 2017 to
€3.7 million in 2018. The increase was
mainly due to the €1.2 million increase
in external costs related to the develop-
ment of internal financial and reporting
processes during 1H2018. This was
partly counterweighted by a €0.3 million
decrease in G&A employee costs and
€0.2 million reduction in communication
costs.
Taxation
Research and
development costs
The R&D costs decreased by €2.6 million
from €19.1 million in 2017 to €16.5
million in 2018. The costs of outsourced
clinical trial services were reduced by
€4.1 million from €9.4 to €5.3 million as
a result of rapid cost reduction after the
disappointing Traumakine trial results.
tax credit for
The Company’s
the
fiscal year 2018 can be recorded only
after the Finnish tax authorities have
approved the tax report and confirmed
the amount of tax-deductible losses for
2018. The total amount of cumulative
tax losses carried forward approved by
tax authorities on 31 December 2018
was €11.2 million (2017: €25.9 million).
The Company estimates that it can utilise
Loss before
income tax was €20.1
million (2017: €21.1 million). Net loss for
the year was €20.1 million (2017: €21.1
million), representing a loss of €0.65 per
share (2017: €0.76 per share) (adjusted
for the changes in number of issued
shares).
Cash Flows
Net cash outflow was €5.3 million nega-
tive for the year ended 31 December
2018 (2017: €1.9 million negative). Cash
used for operating activities increased by
€2.1 million to €20.5 million for the year,
compared to €18.4 million for the year
ended 31 December 2017. This increase
was mostly driven by an increase in R&D
investments.
inflow
Net cash
from financing
activities was €15.5 million (2017: €16.6
million) due to the successful equity
placing completed in February 2018.
18
18
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Fundraising
Going Concern
Faron raised £15million (net €15.9
million) via an oversubscribed financ-
ing round in February 2018 by issuing
1,863,350 new ordinary shares at a price
of 805 pence per share. The proceeds
are being used to support preparations
for the commercialization of Traumakine
and to advance the clinical develop-
ment of Clevegen in several indications.
After this round, at the end of February
2018, the total number of outstanding
shares was 31,027,894. Post the period
end, Faron also raised net €2.9 million
in March 2019 via a financing round by
issuing 864,164 new ordinary shares
at a price of 60.0 pence per share and
3,584,461 shares at a price of €70.2
cents per share to support preparations
to expedite Clevegen's clinical program.
After this round, at the end of March
2019, the total number of outstanding
shares was 35,476,519.
Financial Position
As at 31 December 2018, total cash and
cash equivalents held were €4.1 million
(2017: €9.3 million). This excludes the
funds raised in the financing round
announced on 26 March 2019. The cash
at end of March 2019 was €4.9 million.
The Company continues tight cost
control to keep the cash burn as low
as possible for preservation of existing
resources.
As part of their going concern review
the Directors have followed the Finnish
Limited Liability Companies Act, the
Finnish Accounting Act and the guide-
lines published by the Financial Report-
ing Council entitled “Guidance on the
Going Concern Basis of Accounting and
Reporting on Solvency Risks – Guid-
ance for directors of companies that do
not apply the UK Corporate Governance
Code”.
The Group and Parent Company are
subject to a number of risks similar to
those of other development stage phar-
maceutical companies. These risks
include, amongst others, generation of
revenues in due course from the devel-
opment portfolio and risks associated
with research, development, testing and
obtaining related regulatory approvals
of its pipeline products. Ultimately, the
attainment of profitable operations is
dependent on future uncertain events
which
include obtaining adequate
financing to fulfil the Group’s commer-
cial and development activities and
generating a level of revenue adequate
to support the Group’s cost structure.
The Group made a net loss of EUR
20.1 million during the year ended 31
December 2018. It had total equity of
EUR 0.4 million including an accumu-
lated deficit of EUR 66.8 million. As at
that date, the Group had cash and cash
equivalents of EUR 4.1 million. In March
2019, the Company raised net proceeds
of approximately EUR 2.9 million
through a directed share issue and at
31 March 2019 it had EUR 4.9 million
cash and an unaudited equity of EUR 0.7
million.
The Directors have prepared detailed
financial forecasts and cash flows look-
ing beyond 12 months from the date of
the approval of these financial state-
ments. In developing these forecasts,
the Directors have made assumptions
based upon their view of the current
and future economic conditions that
are expected to prevail over the forecast
period. The Directors estimate that the
cash held by the Group together with
known receivables will be sufficient to
support the current level of activities
into the third quarter of 2019. The Direc-
tors are continuing to explore sources
of finance available to the Group and
based upon initial discussions with a
number of existing and potential inves-
tors they have a reasonable expectation
that they will be able to secure sufficient
cash inflows for the Group to continue
its activities for not less than 12 months
from the date of approval of these finan-
cial statements; they have therefore
prepared the financial statements on a
going concern basis.
Because the additional finance is
not committed at the date of approval
of these financial statements, these
circumstances represent an uncertainty
as to the Group’s ability to continue as
19
19
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 a going concern. Should the Group be
unable to obtain further finance such
that the going concern basis of prepara-
tion were no longer appropriate, adjust-
ments would be required including to
reduce balance sheet values of assets
to their recoverable amounts, to provide
for further liabilities that might arise.
Headcount
Average headcount of the Company
for the year was 25 (2017: 18). The
increase in headcount is attributable to
the expansion of the Traumakine and
Clevegen programs.
Shares and Share Capital
Using the share authorities granted at
the Annual General Meetings held on 16
May 2017 and on 5 May 2018, in Febru-
ary 2017 the Company issued 1,422,340
new ordinary shares at a subscription
price of £3.50 pursuant to a fundraising
and in October 2017 issued 1,250,000
new ordinary shares at a price of £8.00
per share pursuant to a further fund-
raise. On February 2018 the Company
issued 1,863,350 new ordinary shares
at a subscription price of £805 pence
per piece. Post the period end, on Febru-
ary 2019 the Company issued 1,863,350
new ordinary shares of which 864,164
shares at a subscription price of £60.0
pence per piece and 3,584,461 shares
at a subscription price of €70.2 cents
per piece. The subscription price was
credited in full to the Company’s reserve
for invested unrestricted equity, and the
share capital of the Company was not
increased.
The Company has no shares in treasury;
therefore at the end of 2018 the total
number of voting rights was 31,027,894
Money Raised to Date
To date, the Company has been funded
with a total of approximately €64 million,
made up of a combination of equity,
debt and grant funding, which has
been used to develop the Company’s
products and intellectual property. The
Company has also generated cash reve-
nues of €3.8 million to date through the
receipt of milestone payments pursuant
to certain of its licensing arrangements
and the sale of surplus raw materials.
Yrjö E K Wichmann
Chief Financial Officer
May 3, 2019
20
20
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 str ategic re port
Risks and Uncertainties
Faron is a late clinical stage biopharmaceutical
company and, in common with other companies
operating in this field, is subject to a number of risks
and uncertainties. The principal risks and uncertainties
identified by Faron for the year ended 31 December
2018 are below.
Research and Development
Faron’s main products are in clinical
development; however, they may not be
successful in the clinical trials and the
Company may not be able to develop
approved or marketable products. Tech-
nical risk is also present at each stage of
the discovery and development process
of other, earlier stage products with chal-
lenges in biology (including the ability to
produce candidate drugs with appropri-
ate safety, efficacy and usability char-
acteristics). Conversion of cutting-edge
scientific research into clinical develop-
ment programs of novel compounds
and drugs where there is limited amount
of guidance and no previous examples
involves a high degree of uncertainty.
This uncertainty combined with Faron’s
lean organisation could result in situ-
ations, where the Company needs to
make rapid alterations to its develop-
ment projects without full visibility to all
the downstream consequences of such
decisions. Additionally, drug develop-
ment is a highly regulated environment
which
itself presents technical risk
through the need for study designs and
data to be accepted by regulatory agen-
cies. As part of the development risk the
manufacturing of the Company's intended
products would become
impossible
or products would be supplied in lower
quantities than needed.
tageous for the Company to, monetize
the value of its intellectual property
through entering into licensing or other
co-operation deals with pharmaceutical
companies.
Commercial products
and manufacturing
Faron’s industry, being biotechnology
and pharmaceutical industries, is very
competitive. The Company’s compet-
itors
include major multinational
pharmaceutical companies, biotech-
nology companies and research insti-
tutions. Many of its competitors have
substantially greater financial, techni-
cal and other resources, such as larger
research and development resources
and staff. The Company’s competitors
may succeed in developing, acquiring or
licensing drug product candidates that
are more effective or less costly than
any of the product candidates which
the Company is currently developing
or which it may develop, which may
have a material adverse impact on the
Company. Furthermore, there can be no
guarantee that the Company will be able
to, or that it will be commercially advan-
Dependence on key
personnel and scientific
and clinical collaborators
The Company’s success
is highly
dependent on the expertise and expe-
rience of the Directors and the key
management. Whilst the Company has
entered
into employment and other
agreements with each of these key
personnel, the retention of such person-
nel cannot be guaranteed. Should key
personnel leave or no longer be party
to agreements or collaborations with
the Company, the Company’s business
prospects, financial conditions and/or
results of operations may be materi-
ally adversely affected. To develop new
products and commercialise its current
pipeline of products, the Company relies,
in part, on the recruitment of appro-
priately qualified personnel, including
personnel with a high level of scien-
tific and technical expertise. There is
21
21
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 currently a shortage of such personnel
in the pharmaceutical industry, mean-
ing that the Company is likely to face
significant competition in recruitment.
The Company may be unable to find
a sufficient number of appropriately
highly trained individuals to satisfy its
growth rate, which could affect its ability
to develop as planned.
team
Further, the Company’s development
and prospects depend to a significant
degree on the experience, performance
its senior
and continued service of
management team including the Direc-
tors. The Company has invested in its
management team at all levels. The
Directors also believe that the senior
management
is appropriately
structured for the Company’s size and is
not overly dependent upon any particu-
lar individual. The Company has entered
into contractual arrangements with
these individuals with the aim of secur-
ing the services of each of them. Reten-
tion of these services or the identifica-
tion of suitable replacements, however,
cannot be guaranteed. The
loss of
the services of any of the Directors or
other members of the senior manage-
ment team and the costs of recruiting
replacements may have a material
adverse effect on the Company and its
commercial and financial performance
and reduce the value of an investment
in the shares of the Company.
Regulatory environment
The Company operates in a highly regu-
lated environment. Whilst the Company
will take every effort to ensure that the
Company and its partners comply with
all applicable regulations and reporting
requirements, there can be no guarantee
of this. Failure to comply with applicable
regulations could result in the Company
being unable to successfully commer-
cialise its products and/or result in legal
action being taken against the Company,
which could have a material adverse
effect on the Company.
The Company will need to obtain
various regulatory approvals (including
from the FDA and the EMA) and comply
with extensive regulations regarding
safety, quality and efficacy standards
in order to market its products. While
efforts have been and will be made to
ensure compliance with governmen-
tal standards and regulations, there is
no guarantee that any product will be
able to achieve the necessary regula-
tory approvals to promote that product
in any of the targeted markets and any
such regulatory approval may include
significant restrictions for which the
Company’s products can be used. In
addition, the Company may be required
to incur significant costs in obtaining
or maintaining its regulatory approvals.
Delays or failure in obtaining regulatory
approval for products would likely have
a serious adverse effect on the value of
the Company and have a consequent
impact on its financial performance.
Intellectual property and
proprietary technology
The Company relies and will rely on
laws and third
intellectual property
party non-disclosure agreements to
protect its patents and other proprietary
rights. The IPR on which the Compa-
ny’s business is based is a combination
of patents, patent applications, confi-
dential business know-how and trade
secrets, and trademarks. No assurance
can be given that any currently pend-
ing patent applications or any future
patent applications will result in patents
being granted. In addition, there can be
no guarantee that the patents will be
granted on a timely basis, that the scope
of any patent protection will exclude
competitors or provide competitive
advantages to the Company, that any of
the Company’s patents will be held valid
if challenged, or that third parties will
not claim rights in, or ownership of, the
patents and other proprietary rights held
by the Company.
Despite precautions taken by the
Company to protect its products, unau-
thorized third parties may attempt to
copy, or obtain and use the Compa-
ny’s IPR and other technology that
is incorporated into its pharmaceuti-
cal products. In addition, alternative
technological solutions similar to the
Company’s products may become
available to competitors or prospective
competitors of the Company. It should
be noted that once granted, a patent
could be challenged both in the relevant
patent office and in the courts by third
parties. Third parties can bring material
and arguments, which the patent office
granting the patent may not have seen
at the time of granting the patent. There-
fore, whilst a patent may be granted to
the Company it could in the future be
found by a court of law or by the patent
office to be invalid or unenforceable or
in need of further restriction. Should
the Company be required to assert its
22
22
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 IPR, including any patents, against third
parties it is likely to use a significant
amount of the Company’s resources as
patent litigation can be both costly and
time consuming. No assurance can be
given that the Company will be in a posi-
tion to devote sufficient resources to
pursue such litigation. Any unfavour able
outcomes in respect of patent litiga-
tion could limit the Company’s IPR and
activities moving forward.
The Directors do not believe that its
lead pharmaceutical drug candidates,
future drug candidates in development,
and proprietary processes for gener-
ating
those candidate compounds
infringe the IPR of any third parties.
However, it is impossible to be aware
of all third party intellectual property.
The Company’s research has included
searching and reviewing certain publicly
available resources, which are examined
by senior levels of management in order
to keep abreast of developments in the
field.
Financial
Other risks related
to operations
The Company has incurred significant
losses since its inception and does not
have any approved or revenue-generat-
ing products. The Company expects to
incur losses for the foreseeable future,
and there is no certainty that the busi-
ness will generate a profit. The Company
is highly dependent on equity and public
grant financing. The Company may not
be able to raise additional funds that will
be needed to support its product devel-
opment programs or commercialisation
efforts, and any additional funds that are
raised could cause dilution to existing
investors. The Company operates inter-
nationally, and it thus exposed in various
currencies and fluctuation in their rela-
tive values. Even though the Company
seeks to hedge currency positions there
is no guarantee that it will be successful.
delivers
While operating with multiple vendors
the
and other external suppliers,
Company
and
regularly
receives information and data through
multiple channels. Some of these are
trade secrets or of confidential nature.
Even though the Company uses all
reasonably available means to secure
the data and the channels used, there
is no certainty that full data security can
be obtained.
The Company is publicly listed and as
such subject to various securities laws
in multiple jurisdictions. The Company
uses significant amount of both internal
and external resources to secure that
all its operations and external commu-
nication is conducted in accordance to
these regulations. Whilst the Company
will take every effort to ensure that
the Company and its partners comply
with all applicable securities laws and
requirements, there can be no guarantee
of this.
This report was approved by the Board
on 3 May 2019 and signed on its behalf.
23
23
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 PIPE LINE
Revolutionising the
treatment of ARDS and
breaking tumor immunity
Faron has identified several molecular mechanisms
involved in the control of endothelial functions as a
source of innovation. The company currently has a
pipeline focusing on acute organ traumas, cancer
immunotherapy and vascular damage.
The
fast evolving Faron pipeline
consists of drug candidates (FP-1201-
lyo and FP-1305) from two major Faron
programmes – Traumakine® and
Clevegen®, respectively. The lead indi-
cation of the Traumakine programme is
Acute Respiratory Distress Syndrome
(ARDS). This and the other indications
(Rupture of Abdominal Aortic Aneurysm
RAAA) are all based on the same Chem-
istry and Manufacturing Controls (CMC)
dossier sections, allowing fast protocol
adjusted filing for indication expansion.
Similarly, Clevegen indications utilise
one common dossier with a protocol
adapted to each indication.
Therapeutic areas
”Endothelial barrier is everything” - The
endothelial surface of exhaustive capil-
lary networks of central organs controls
the fluid and cell balance between circu-
lation and tissues. The endothelium is
also a critical factor in many devastat-
ing diseases, such as organ failure and
cancer metastasis. Faron’s pipeline is
based on endothelial receptors involved
in the regulation of immune responses
and cell signalling.
Faron develops novel treatments for
life-threatening medical conditions with
significant unmet needs. Faron's core
therapeutic areas are Acute Respiratory
Syndrome (ARDS), organ protection and
modulation of the immune system.
24
24
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 25
25
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 26
26
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Acute
Resp iratory
Distress
Syndrome
(A RDS)
Approximately 35% of us carry
a genetic polymorphism (C/T)
that make us responsive to
Traumakine treatment and, can
resist the detrimental effect that
streroids have on our interferon
response
PIPELINE: TRAUMAKINE ®
Faron’s first candidate, Traumakine, addresses the
treatment of Acute Respiratory Distress Syndrome
(ARDS), a severe, orphan lung disease. Currently there
is no pharmaceutical treatment for this condition with
a reported mortality rate of 30 to 45%. The scientific
rationale for Traumakine treatment is based on the use
of interferon-beta for the restoration of the endothelial
barrier function in ARDS patients.
is a
life-threatening medical
ARDS
condition characterised by widespread
inflammation in the lungs and sudden
failure of the respiratory system. ARDS
causes inflammation of the alveoli in the
lungs which become unable to perform
the normal oxygenation of blood. It is
characterized by rapid breathing, diffi-
culty getting enough air into the lungs
and low blood oxygen levels. Common
causes of ARDS include sepsis, pneu-
monia, aspiration of fumes, food or
stomach contents going into the lung
or significant trauma. The condition was
firs described in 1967 and gained wide
attention during the Vietnam War when
it was nicknamed white lung” as X-rays
presented the lungs of the patients as
white.
ARDS is the leading cause of respira-
tory failure in intensive care unit patients
requiring mechanical ventilation. Despite
progress in critical care medicine, ARDS
is currently associated with a mortality
rate of 30 to 45% depending on the
severity of the condition. Although
ARDS mortality has decreased in the
last decade due to improvements in
supportive care and in the treatment of
the underlying conditions, it still remains
high. Currently, patients
suffering
from ARDS are generally treated with
lung-protective mechanical ventilation.
This treatment is accompanied by ancil-
lary support such as positioning, fluid
management and food restrictions. Extra
corporeal support may also be provided
depending on the severity of the condi-
tion. Complications which can also arise
whilst a patient is being treated for ARDS
include the development of infections,
pneumothorax, lung scarring and blood
clots which can develop into a pulmonary
embolism. Patients who recover from
ARDS often suffer other consequences
of the condition after being discharged
from the intensive care unit. A recovering
patient’s quality of life may be adversely
affected by permanent damage to the
lungs, respiratory problems, scar tissue,
muscle weakness, depression and
post-traumatic distress syndrome, all of
which can have an adverse effect on the
patient’s quality of life.
”ARDS is the leading cause of
respiratory failure in intensive care
unit patients requiring mechanical
ventilation.”
ARDS
• A severe, life-threatening
medical condition, most
often as a result of sepsis,
pneumonia or significant
trauma
• Orphan lung disease with
no available drug treatment
• The leading cause of respira-
tory failure in intensive care
unit patients who require
mechanical ventilation
• Annual ARDS incidence in
Europe is c. 125,000 and in
the US c. 200,000 patients
• High mortality rate of 30
to 45% and survivors suffer
long-term mental and
physical problems
28
28
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 CD73 ectoenzyme produces local
anti-inflammatory adenosine
Interferon-beta upregulates expression
CD73
Loss of CD73 results in high amounts
of proinflammatory ATP
Inflammation reduces CD73 amounts
and its adenosine production
29
29
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 ARDS lung
Normal lung
Widely used X-ray pictures can reveal
lungs filled with blood material. This
shows up as white dense material in lung
air space and for this reason the lungs
of these patients are often called “white
lungs”. Typically this picture confirms
that the patient has a condition called
Acute Respiratory Distress Syndrome
(ARDS) and has a life-threatening disease.
Normally functioning lung X-ray shows
no “white” material, indicating that lung
air space is free of blood material, in
contrast to the ARDS lungs above. Long
term exposure to a respiratory syndrome
like ARDS, can also cause permanent
loss of lung capacity due to a fibrotic
process that replaces lung alveoli with
scar tissue. This serious side effect of
ARDS results in permanently reduced
respiratory capacity.
30
30
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 ”Traumakine (FP-1201-lyo) is
based on a patent-protected
use of interferon-beta to prevent
leakage of vascular beds in acute
lung injuries.”
Treating ARDS
Supply of oxygen and nutrients to indi-
vidual cells of various organs are main-
tained by vasculature and especially by
the long and thin blood vessels called
capillaries. Their integrity is sustained
by endothelial cells covering the inner
surfaces of these vessels forming a
barrier between circulation and tissues.
The breakdown of this barrier results in
leakage of blood content to tissues. If
this happens in lungs, the lung air space
is filled with protein rich fluid and blood
cells preventing normal gas exchange.
The key molecule involved in main-
taining endothelial barrier and lung func-
tion is CD73, an endothelial ectoenzyme,
local adenosine.
which can produce
Traumakine’s active pharmaceutical-
ingredient,
increases
interferon-beta,
CD73 expression resulting in increased
local adenosine. Subsequently, high
local adenosine levels reduce capillary
leakage and increase lung function by
allowing normal gas exchange to return.
Mechanism of Action
The scientific rationale for Traumakine
treatment is based on the use of inter-
feron beta for the restoration of the
endothelial barrier function in ARDS
patients. Traumakine (FP-1201-lyo) is
based on a patent-protected use of
interferon-beta to prevent leakage of
vascular beds in acute lung injuries.
The active pharmaceutical ingredient in
Traumakine is recombinant human IFN
beta-1a.
The mechanism behind Traumakine’s
action was invented by scientists at
Turku University during the period 1995
to 2003. Through extensive research
and ex vivo studies, it was identified
that a molecule called CD73 is essential
in maintaining the endothelial barrier
function. CD73 is an ectoenzyme capa-
ble of breaking down extracellular AMP
to produce
locally active adenosine.
Adenosine maintains the endothelial
barrier and downregulates inflamma-
tion escalation, preventing both early
vascular
leakage and escalation of
inflammation, which are the two early
patho- physiological events leading to
ARDS. One of the key findings that led
to the development of Traumakine, was
a discovery that interferon-beta could
enhance CD73 expression and could
therefore, be used to treat a range of
vascular leakage conditions including
ARDS. Traumakine works by enhanc-
ing CD73 expression in the lungs and
increasing production of anti-inflam-
matory adenosine such that vascular
leaking and escalation of inflammation
are reduced.
The mode of action of FP-1201-lyo is
described in a video found on Faron’s
website: www.faron.com
31
31
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 PIPELINE: TRAUMAKINE ®
Traumakine®
Clinical
Programme
The first indication that Traumakine
addresses is the treatment of ARDS.
The first clinical trial in the Traumakine
programme was a phase I/II open-label
study to assess the safety, tolerability
and preliminary efficacy of interferon
beta in the treatment of patients with
ARDS. Interferon beta was found to be
safe and well tolerated in ARDS patients
and the optimal tolerated dose was
established. The selected pharmacody-
namic marker for interferon beta bioac-
tivity showed clear dose response and
the treatment target molecule (CD73)
levels were induced during the dosing
period. Most
interferon
beta treatment significantly reduced the
all-cause mortality at day 28, the primary
end point of the study, compared to the
control cohort1. Traumakine was asso-
ciated with an 81% reduction in odds of
28-day mortality.
importantly,
The INTEREST Study
Study
INTEREST
The
(protocol
FPCLI002) was a double-blinded and
randomised Phase
III clinical study
to investigate efficacy and safety of
FP-1201-lyo (recombinant human inter-
feron- beta-1a) compared to placebo in
patients with moderate or severe ARDS.
The study, which recruited 300 patients,
was conducted in 64 hospital intensive
care units (ICU) in Belgium, the Czech
Republic, Finland, France, Germany,
Italy, Spain and the UK. Patients were
treated daily with either FP-1201-lyo 10
µg or placebo for 6 days and underwent
daily assessments while in the ICU for a
maximum of 28 days. The patients were
followed up at 3, 6 and 12 months after
enrolment. Information on the need for
32
32
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 ventilator support, as well as the need
for hospital and ICU care was collected
during this follow-up period. Other
collected data included e.g. respiratory
and neurological functions and quality
of life.
Top line data showed that the study
did not meet the Day 28 primary effi-
cacy composite endpoint of ventilator
free days and survival with Traumakine
treatment.
Biomarker analysis confirmed that
Traumakine treatment did not produce
consistent
interferon-beta bioactivity
across the treatment group. A retro-
spective stratification of Traumakine
treated patients was conducted, based
on subjects in the INTEREST trial who
demonstrated a defined biomarker
response. These were defined as
patients with a 2-fold increase in CD73
serum levels during the first seven days
of treatment and 3-fold MxA activation
(during the first four days of treatment)
in peripheral blood cells.
This sub-group of patients (n=48)
demonstrated a reduced D28 all-cause
mortality, with a mortality rate of 14.6%
compared to 32.3% in the remaining
patients (n=96) in the Traumakine treat-
ment arm (p=0.02). In addition, this
sub-group of patients demonstrated
a trend toward an increase in ventila-
tor free days at D28, with 16 ventilator
free days (VFDs) compared to 6.5 days
(p=0.06).
Further Analysis
To better understand the INTEREST
data, Faron has conducted further
analysis, particularly with regard to the
administration of corticosteroids used
in parallel to Traumakine treatment and
their effect on Traumakine efficacy.
Key findings showed
that:
• Corticosteroid use was
high among INTEREST trial
patients (176/296, 59.5%)
• Concomitant corticosteroid
treatment had a significant
impact on mortality in
the Traumakine treatment
group. Mortality was 10.6%
(7/66) for those receiving
Traumakine and not on
corticosteroids, versus
39.7% (31/78) for those
receiving Traumakine and
on concomitant corticos-
teroids. This outcome is
highly statistically significant
(p<0.0001) and was a similar
mortality to the treatment
group in the phase I/II study
• Concomitant corticosteroid
use with Traumakine was
also associated with worse
outcomes measured by ven-
tilator free days (VFD) com-
pared to non-users (median
6 VFDs vs. 14 VFDs, p=0.03)
• IFN-beta had previously
been demonstrated to
increase CD73 expression in
lung capillaries which was
associated with reduced
mortality in ARDS patients in
the phase I/II trial. However,
concomitant exposure of
human lung tissue samples
to hydrocortisone in ex vivo
culture conditions prevented
Traumakine induced CD73
expression in lung capillaries
in
Of note, we also observed that
the use of corticosteroids
the
placebo group was associated with an
increased mortality of 27.6% compared
to no use of corticosteroids of 14.8%
(p=0.075). In the group receiving corti-
costeroids there was a significantly
higher APACHE II (acute physiology
and chronic health evaluation) score
(23.4 versus 20.4, p=0.0007) and SOFA
(sequential organ failure assessment)
score (10.4 vs 9.5, p=0.0428) but this
difference did not explain the scale of
mortality difference associated with
corticosteroid use versus non-use.
The Company believed that the
inconsistent FP-1201-lyo bioactivity
observed in the INTEREST trial may
well, in part, have been due to corticos-
teroid interference of IFN-beta action.
Therefore, further in vitro and ex vivo
experiments with human endothelial
HUVEC cells and human lung tissue
samples were conducted. Based on
these results, no issues were detected
in the formulation of FP-1201-lyo used
in the INTEREST trial and the formula-
tion was as active as the formulation
used in the phase I/II trial. In lung tissue
samples, the concomitant corticos-
teroids prevented the CD73 induction
by Traumakine, which indicated simi-
lar interference of corticosteroids on
IFN-beta bioactivity as observed in the
INTEREST study.
To
the
understand
reduced
biomarker response to Traumakine
administration, even where corticos-
teroids were not administered in the
INTEREST study, a new FP-1201-lyo
pharmacokinetic/dynamic study, YODA,
is being conducted in approximately
50 healthy volunteers to determine the
optimum mechanism of administration
to achieve a full biomarker response.
that
indicated
Interim results from the first 30
subjects
IFN-beta,
regardless of the method of solubili-
sation, produced the expected level of
bioactivity suggesting that drug formu-
lation was not a factor in the outcome
of the INTEREST trial. The YODA study
33
33
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 is continuing and is now examining
concomitant administration of pred-
nisolone and Traumakine in order to
confirm, in vivo, the observed interfer-
ence of corticosteroids on IFN-beta
bioactivity in the INTEREST study and
ex vivo lung samples.
Additionally, by genetic testing, Faron
has identified an optimal subgroup of
ARDS patients for Traumakine treatment
who showed a substantial reduction in
mortality during the INTEREST trial.
Multivariate regression analyses that
adjust for disease severity indicated that
patients receiving
interferon beta-1a
treatment (Traumakine) and carrying
the single nucleotide polymorphism
rs9984273 (C/T) in subunit 2 of the inter-
feron alpha and beta receptor (INFAR2)
(n=46) had 5.7 times greater likelihood
of survival at Day 28 (p=0.0057) than
patients without this mutation (n=58).
No similar survival effect was seen for the
C/T polymorphism in the placebo group.
This suggests that together the C/T
mutation and Traumakine treatment
is the most favorable combination for
patient outcome and interferon treat-
ment efficacy. The D28 overall mortality
of this group was 11.1% despite receiving,
or not receiving, concurrent steroids. In
patients with the C/T polymorphism who
received Traumakine but not concurrent
steroid treatment, mortality was only
4.2% (n=25).
CALIBER
Based on these findings, the Company
has designed a new phase III trial with
Traumakine for the treatment of ARDS.
The CALIBER study will allow corticos-
teroid use within the standard of care
(SOC) arm, but not if the ARDS patient
is on Traumakine. This double dummy
structure will allow physicians to choose
their preference whilst creating a blinded
readout between Traumakine and SOC
patients. We are seeking guidance from
both the FDA and the EMA on the trial
design and anticipate feedback during
Q3 2019. CALIBER will be a global trial.
The company is seeking support for
the trial from a licensing partner and is
currently engaged in discussions with
potential partners.
example, during the Traumakine phase
I/II study, there was a reduced need
indication of
for haemodialysis (an
improved kidney function) among the
ARDS patients Traumakine.
INFORAAA trial
Ruptured Abdominal Aortic Aneurysm
(RAAA) is a surgical emergency with an
overall mortality of up to 80%. It requires
immediate surgery and aortic repair.
Approximately half of the deaths of
RAAA patients are due to not reaching
the hospital in time, and, despite imme-
diate surgery and intensive care treat-
ment, the second half die in hospital
within 30 days post-operatively, mostly
due to multi-organ failure. The cause of
high post-operative mortality is mainly
due to prolonged hypotension/hypoxia
from the ruptured aorta and the after-
math of restoring blood flow: reperfu-
sion, vascular leakage and failure of
vital organs. Currently, there are an esti-
mated 20,000 US and European patients
per annum eligible for treatment.
The high mortality rate of RAAA,
which accounts for 4-5 deaths per
100,000 population2, requires new treat-
ments to prevent post-operative reper-
fusion injury leading to the death of
RAAA patients, which exhibits a 30-50%
mortality rate post-operatively. RAAA
accounts for 13-14/100,000 hospital
admissions annually3, and is the second
indication for Traumakine targeted by
Faron.
Open surgical aortic repair to treat
RAAA patients is associated with a
Response
Inflammatory
Systemic
Syndrome (SIRS) affecting vital organs,
especially the heart, lungs, kidneys, and
intestines. The death of approximately
80% of the operated RAAA patients is
caused by MOF, similar to patients with
ARDS. The Directors consider that data
seen to date supports the rationale for
extending the use of Traumakine in
similar conditions to potentially treat
single, and multiple, organ failures. For
The INFORAAA trial is a European
Phase II multi-center double blinded
placebo-controlled trial with Traumak-
ine underway for the prevention of MOF
and death after the surgical repair of a
RAAA. The study aims to recruit 160
patients and currently has open sites in
Finland, Lithuania and Estonia and sites
in the UK are planned to open. In July
2018, the Company received a second
recommendation from the IDMC to
continue the INFORAAA trial and will
take the study to the first interim point.
INTEREST Study
Analysis
• The drug product used in
the INTEREST study was
safe, robust and effective.
• Corticosteroids could
interfere with IFN-beta
action and mask the treat-
ment benefit of Traumakine
for ARDS patients
• There is an optimal
subgroup of ARDS patients
for Traumakine treatment
1 Bellingan et al., 2014
2 Karthikesalingam et al., 2014
3 Anjum et al., 2012
34
34
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Clevegen can sw itch
immune suppres sion to
immune activation
35
35
PI PE LI NE: CLEVEGEN ®
One of Faron’s key areas of focus is to develop a cancer treatment which supports
the hosts’ immune defences against tumours, as these are often suppressed in
cancer patients. Our second most advanced drug development project, Clevegen,
revolves around a common lymphatic endothelial and vascular endothelial receptor-1
(CLEVER-1).
Clever-1: an immuno switch molecule
CLEVER-1, also known as Stabilin-1, is
a large glycoprotein, which originally
was described to function as a scav-
enging receptor and an adhesion mole-
cule. Its intracellular part regulates the
recycling of the receptor between the
cell surface and intracellular compart-
ments. CLEVER-1
is present on
lymphatic vessels and is induced on a
subpopulation of type 2 (immunosup-
pressive) macrophages during their
polarization. It is induced on cancer
vasculature. Moreover, its expression
on
tumour-associated macrophages
is a sign of poor prognosis in colorec-
tal cancers of advanced stage. More
recently, it has become very clear that
CLEVER-1 maintains the immunosup-
pressive phenotype of tumour associ-
ated macrophages (TAMs). Blocking
or silencing of CLEVER-1 on human
macrophages induces MHC expression
and promotes IFN-y leukocyte cultures.
Genetic disruption or pharmaceuti-
cal inhibition of CLEVER-1 attenuates
tumour progression in mice. The active
pharmaceutical ingredient of Clevegen
is a humanised anti-Clever-1 antibody,
which modulate Clever-1 function to
immunosuppressive M2
switch
macrophages to immune stimulating
M1 macrophages.
the
Mechanism of Action
All tumours are infiltrated by immune
cells, for example macrophages, neutro-
phils, T cells, dendritic cells, mast cells,
myeloid derived suppressor cells and
natural killer cells. Depending on the
immune cell content and the activa-
tion status of the immune cells, they
can either protect the host through
suppression of tumour growth and
elimination of tumour or harm the host
by promoting tumour growth, invasion,
metastasis and angiogenesis. Tumour
associated macrophages (TAMs) have
emerged as an essential constituent
of the tumour environment. TAMs can
promote tumour progression directly
by inducing cancer cell proliferation
and survival as well as indirectly via the
surrounding elements by stimulating
angiogenesis or help in escaping from
antitumour specific
immunity. When
TAMs populate a tumour, one of the
very significant influences they expert
over it is a strong increase in immuno
Clever-1-positive TAMs
represent one major
macrophage population
involved in the elimination
of host immune activity
against the tumour cells.
Clevegen switches
immune suppressive
type 2 (M2) macrophages
to immune stimulating
(M1) macrophages
and provides new ways
to stimulate host immune
system to fight cancer.
36
36
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 suppression. Clever-1-positive TAMs
represent a major macrophage popula-
tion involved in the elimination of host
immune activity against the tumour
cells. Clevegen is an anti-Clever-1 anti-
body which targets Clever-1-positive
TAMs in cancer patients and converts
these highly immunosuppressive type
2 “healing” macrophages (M2) to type 1
“pro-inflammatory” macrophages (M1).
Clevegen also prevents TAM infiltra-
tion into a tumour and therefore blocks
their accumulation at tumour sites and
can, therefore, also control the tumour
content of regulatory T-cells, which
are dependent on M2 macrophage
support. Inhibition of CLEVER-1 alters
IFN-gamma production in immune cells
and reduces the number of regulatory
T-cells within the tumour. Expansion of
Clevegen’s use, to include removal of
local immune suppression in chronic
infections and vaccination sites, are
also being explored alongside tumours.
These platforms are called CIRT, VRET
and TIET, respectively and are all based
on the same anti- Clever-1 antibody.
Blocking TAM infiltration
into a Tumour
Tumour endothelial cells are Clever-1
positive and when anti-Clever-1 antibodies
bind to the Clever-1 receptor, the infiltra-
tion of TAMs is prevented. Through block-
ing the infiltration of TAMs into the tumour,
the ability of the tumour to suppress the
hosts’ immune system is reduced.
Change in Tumour
Immunity
Anti-Clever-1 antibodies change the
tumour immunity by lowering the pres-
ence of tumour supportive TAMs in the
tumour. This will allow other immune
cells to attack tumour cells and drive
them to programmed cell death (apop-
tosis). In some tumours up to 50% of
the tumour mass may contain immuno-
suppressive TAMs and the only way to
eliminate this dominance is remove
Anti-Clever-1 antibodies switch innate immune system to adaptive one and allow other
immune cells to attack tumour cells and drive them to programmed cell death (apoptosis).
them from tumours and/or convert
them to stimulate other cells of the
immune system.
is these highly
It
immunosuppressive CLEVER-1 positive
TAM cells that are the main target of the
Clevegen programme.
About Tumor Immunity
Enabling Technology (TIET)
technology could provide a significant
boost for the efficacy of other immune
checkpoint molecules, as its target is
unique and represents a completely
separate control of immunity.
The TIET technology is built around
the humanised anti-Clever-1 antibody
FP-1305, which binds to a specific
Clever-1 proprietary epitope. Cleve-
gen binds to this epitope, activating
conversion of type 2 tumour associated
macrophages to type 1 macrophages,
resulting in the transformation of the
immu-
tumour
nosuppression to
activation of the
immune system. As the TIET technol-
ogy is based on a humanized antibody,
the Faron Directors believe it can be
combined with a number of other immu-
notherapies without a significant risk
of increased adverse events. The TIET
environment
from
37
37
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Clevegen
mode of
action
1
2
3
4
5
6
7
8
9
Clevegen blocks CLEVER-1
on circulating monocytes1
Programming of
monocytes to M1
polarization in circulation2
Clevegen blocks CLEVER-1
on vascular endothelium3
T-reg infiltration to tumour
is diminished4
TAM polarisation from
immunosuppressive M2
to immunostimulatory M1
in tumour5
Altered antigen handling6
Induced TNF-alpha and
IFN-gamma production7
Cancelling local
immunosuppression8
Antigen presentation to
direct adaptive immune
system against tumour cells9
10
Lymphocytes kill tumour
cells with cytotoxic proteins10
9
1
2
3
4
5
6
7
8
10
M2
M1
Vascular
endothelium
Lymphocytes
CD8, NK, Th1
T-reg
Cancer cell /
apoptosis
Clevegen
Clever-1
Cancelling
immunosuppression
TNF α
Cytotoxic proteins
Interferon γ
References: 1. Clevegen blocks CLEVER-1 on circulating monocytes (Palani et al. 2016). 2. Programming of monocytes to M1 polarization in circulation (Palani et al. 2016). 3. Clevegen blocks CLEVER-1 on vascular
endothelium (Irjala et al 2003; Shetty et al 2011). 4. T-reg infiltration to tumour is diminished (Shetty et al 2011; Karikoski et al 2014). 5. TAM polarisation from immunosuppressive M2 to immunostimulatory M1 in tumour
(Karikoski et al 2014; Palani et al 2016). 6. Altered antigen handling (Palani et al 2016). 7. Induced TNF-alpha and IFN-gamma production (Palani et al 2016). 8. Cancelling local immunosuppression (Karikoski et al 2014;
Palani et al 2016). 9. Antigen presentation to direct adaptive immune system against tumour cells (Karikoski et al 2014; Palani et al 2016). 10. Lymphocytes kill tumour cells with cytotoxic proteins (Karikoski et al 2014).
MATINS Study
The MATINS study is Faron’s first-in-human
open label Phase I/II adaptive clinical trial
in selected metastatic or inoperable solid
tumours to investigate the safety and effi-
cacy of Clevegen (FP-1305). The selected
tumours are cutaneous melanoma, hepa-
tobiliary, pancreatic, ovarian or colorectal
cancer, which are all known to contain high
amounts of Clever-1 positive TAMs. The
trial is being run in three parts. Part I, to
determine the safe and tolerable dose of
Clevegen, which will then be used in Part II
to expand the cohorts of individual tumour
types. Part III of the trial aims to confirm
the efficacy of Clevegen with the cohorts
selected based on Part II.
The Company filed a Clinical Trial
Application (CTA) in September 2018
which was subsequently approved by
the Finnish Medicines Agency (FIMEA).
The first patient was dosed in December
2018 at Helsinki and Oulu University
Hospitals in Finland.
MATINS update
Early data from MATINS have been
encouraging with all dosed patients,
thus far, showing a switch
in their
immune profile towards more immune
activation, observed as an increase in
CD8+ cells, an increased CD8/CD4 ratio,
decreased regulatory T-cells (T-regs) and
a high appearance of mobile NK cells in
the blood.
Late-stage colorectal cancer has been
selected as the first cohort expansion
phase (Part 2), which will commence once
the optimal dosing has been determined.
Faron has also received a tumour
imaging report on a patient with colorectal
cancer, which indicates significant shrink-
age of lung metastasis (classified as a
partial response). Positively, the patient
has also shown a decrease in the tumour
load marker CEA (carcinoembryonic anti-
gen) and an increase in circulating B-cells,
which could indicate an antibody- mediated
response against the tumour. This patient,
whose tumour has been classified as
MSI-low (microsatellite
instability) had
previously been treated with six different
anti-cancer drugs, which had all failed.
The Company believes these findings are
encouraging and is confident it has identified
a group of patients who are thought to be
most likely to respond to treatment.
Furthermore,
the Company has
expanded the trial to two sites in the UK
following CTA
(London, Birmingham)
approval by the UK regulator, the Medi-
cines & Healthcare products Regulatory
Agency (MHRA). The Company also
intends to seek pre-IND advice from the
US Food and Drug Administration (FDA)
to open sites in USA prior to entering the
cohort expansion part of the trial.
Due to high interest in potential new
therapies in the immuno-oncology field,
either as monotherapy or in combina-
tion, the Company is currently engaged
in partnering discussions with several
parties and hopes for a positive outcome
from these negotiations during 2019.
Full control of immune
mechanisms may help
us to convert lethal
cancers to treatable
conditions. Removal
of immunosuppressive
elements like type 2
macrophages help to
conquer this aim.
interval
toxicity studies,
Successful preclinical
designed to fulfil regulatory requirements
intravenous admin-
for 3-week
istration of Clevegen, showed no toxico-
logically relevant changes in any subject
and no major changes after treatment
with FP-1305 in T lymphocytes subsets.
The binding of Clevegen to its receptor
on circulating CD14+ monocytes was
confirmed by investigating the receptor
occupancy, the recovery of which occurred
between 3 to 20 days after dosing in a
dose- dependent manner. No
relevant
in cytokines
changes were present
(ADA)
and no anti-drug antibodies
were detected in any subject. There-
fore, the highest dose of 100 mg/kg
was considered the no-observed- adverse -
effect-level (NOAEL).
39
39
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Corporate Governance
Chairman’s Introduction to Governance
The Board of Faron emphasises the importance of good corporate governance and
is aware of its responsibility for overall corporate governance and for supervising the
general affairs and business of the Company.
As the Chairman of the Board, I oversee the adoption, delivery and communication
of Faron’s corporate governance model. In this role I endeavour to foster a positive
governance culture throughout the Company, seeing that ultimate responsibility for
the quality of, and Faron’s approach to, corporate governance lies with me.
Faron is not required to comply with the UK Corporate Governance Code by
virtue of being an AIM quoted company. The Board does, however, seek to apply the
QCA Corporate Governance Code (as devised by the Quoted Companies Alliance
in consultation with a number of significant institutional small company investors).
In 2018, the Board of Faron confirmed the Company’s continued commitment
to the QCA Code in its updated form, and the terms of reference of the Board
committees were reviewed and revised accordingly. As part of the Company’s
re-focus, Dr Jonathan Knowles resigned from the Board to take up a position as
Chair of the newly formed Clevegen Scientific Advisory Board and Dr Huaizheng
Peng resigned from the Board but will continue as an invited observer. Otherwise, no
significant changes in governance arrangements occurred during the year.
As described below, the Board continues to promote a healthy corporate culture
that is based on ethical values and behaviours and consistent with the Company’s
objectives, strategy and business model described in the strategic report and with
the description of principal risks and uncertainties. As good corporate governance
is fundamentally about culture, rather than procedure, the state of Faron’s corporate
culture is monitored on a regular basis, and appropriate action is taken if and to the
extent deemed necessary.
40
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Compliance with the Principles
of the QCA Code
The Principles of the QCA Code
1. Establish a strategy and business model which promote
long-term value for shareholders
2. Seek to understand and meet shareholder needs and
expectations
3. Take into account wider stakeholder and social
responsibilities and their implications for long-term success
4. Embed effective risk management, considering both
opportunities and threats, throughout the organisation
5. Maintain the board as a well-functioning, balanced team led
by the chair
6. Ensure that between them the directors have the necessary
up-to-date experience, skills and capabilities
7. Evaluate board performance based on clear and relevant
objectives, seeking continuous improvement
8. Promote a corporate culture that is based on ethical values
and behaviours
9. Maintain governance structures and processes that are fit
for purpose and support good decision-making by the board
10. Communicate how the company is governed and is
performing by maintaining a dialogue with shareholders
and other relevant stakeholders
Comply/
Explain
Comply
Comply
Comply
Comply
Disclosure in the 2018 Report
Pages 2 to 6 and 10
Page 55
Page 56
Pages 21 to 23 and 55
Comply
Pages 47 to 48 and 58 to 59
Comply
Comply
Comply
Comply
Pages 42 to 47
Page 47
Page 40
Pages 40 and 42
Comply
Pages 47 and 49 to 54
41
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Board of Directors
On 31 May 2018, Frank Armstrong, Markku Jalkanen, Jonathan
Knowles, Matti Manner, Huaizheng Peng, Yrjö Wichmann,
Leopoldo Zambeletti, Gregory Brown and John Poulos were
elected to the Board for a term that ends at the end of the
next Annual General Meeting. The elected Board comprised
seven Non-Executive Directors and two Executive Directors. At
the meeting of the Board held following the AGM held in 31
May 2018, Frank Armstrong was re-elected Chairman of the
Board and Matti Manner was re-elected Deputy Chairman of
the Board. During 2018, the Board held 15 meetings.
As part of the Company’s re-focus, Faron announced on 13
September 2018 that Dr Jonathan Knowles had resigned from
the Board to take up a position as Chair of the newly formed
Clevegen Scientific Advisory Board and Dr Huaihzeng Peng
resigned from the Board but will continue as an invited Board
Observer. Brief biographical details for the remaining Directors
can be found on pages 43 to 46.
The Board is responsible to the shareholders for the prop-
er management of the Company and meets regularly to set
the overall direction and strategy of the Company, to review
scientific, operational and financial performance, to review the
strategy and activities of the business, and to advise on man-
agement appointments. The Board sees to the administration
of the Company and the appropriate organisation of its oper-
ations, being responsible for the appropriate arrangement of
the control of the Company accounts and finances. Faron’s
strategy is explained fully within its Strategic Report section
on page 10.
All key operational and investment decisions are subject
to full Board approval. The management of the Company pre-
pares a monthly management and financial accounts pack,
which is distributed to the Board every month and in advance
of Board meetings. In individual cases the Board may decide
in a matter falling within the general competence of the Chief
Executive Officer.
The roles of Chief Executive Officer and Non-Executive
Chairman are well defined and clearly separated. The Chair-
man oversees the Board’s work, ensures that the Board’s deci-
sion-making is balanced and that the Non-Executive Directors
have all relevant information on matters to be decided. The
Chairman sees to it that the Board meets when necessary.
The Chief Executive Officer is responsible for implementing
the strategy of the Board and managing the day-to-day
business activities of the Company. The Chief Executive
Officer, reviewing the operating results regularly to make
decisions about the allocation of resources and to assess
overall performance, is the chief operating decision-maker.
The Board considers there to be sufficient independence
of the Board and that all the Non-Executive Directors are
of sufficient competence and calibre to add strength and
objectivity to the Board, and to bring considerable experience
in terms of their knowledge of the scientific, operational and
financial development of biopharmaceutical products and
companies. Where necessary, the Company facilitates that
Non-Executive Directors obtain specialist external advice
from appropriate advisers.
The term of office of each Director expires on the closing
of the AGM immediately following his/her appointment to
the Board. Under the Finnish Limited Liability Companies Act
and the Company’s Articles of Association, the Directors are
elected by the shareholders at General Meetings annually.
Under the Act, Directors may be removed from office at any
time, with or without cause, by a majority of votes cast at a
General Meeting. Vacancies on the Board may only be filled
by a majority of shareholder votes cast at a General Meeting.
42
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Dr Frank Armstrong
Non-Executive Chairman
Matti Manner
Non-Executive Vice- Chairman
Dr Armstrong has held Chief Executive roles with five bio-
technology companies (both public and private) including
FulcrumPharma PLC (AIM). He led Medical Science and
Innovation at Merck Serono and was previously Executive
Vice President of Product Development at Bayer and Senior
Vice President of Medical Research and Communications at
Zeneca. Dr Armstrong is currently the Chairman of Summit
Therapeutics (AIM and NASDAQ) and Caldan Therapeutics
and a Non-Executive Director of and Mereo BioPharma (AIM).
He is a member of the Senior Advisory Board at Healthcare
Royalty Partners and an SAB Member at Epidarex Capital. Dr
Armstrong is a Member of the Court of the University of Edin-
burgh. Dr Armstrong is a physician and a Fellow of the Royal
College of Physicians (Edinburgh).
He was appointed as a Non-Executive Director of the
Company in September 2015.
Mr Matti Manner was appointed as a partner of Brander &
Manner Attorneys Ltd in 1980 having previously sat as a
judge at Turku Appeal Courts. He has significant experience
in national and international business deals, corporate law
and mergers and acquisitions having held a number of board
memberships throughout his career. Mr Manner joined the
Board of the Company as Chairman in 2007, Vice-Chairman
since October 2015, having previously been the Chairman of
Faron Ventures Oy from 2002.
He is currently Chairman of Turun Osuuskauppa and Ruis-
salo Foundation and a member of the board of Marva Media
Ltd, Satatuote Ltd, YH VS-Rakennuttajat Ltd, Kauppakeskus
Mylly Ltd and Nurmi-Yhtiöt Oy. Mr Manner has experience of
several trustee posts including the Presidency of the Finnish
Bar (Lawyers) Association during the period of 1998 to 2004.
Mr Manner obtained a Master of Laws from the University of
Turku. He became an honorary Chief Justice in Finland in 2013.
43
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Dr Markku Jalkanen
Chief Executive Officer
Dr Gregory B. Brown
Non-Executive Director
investing
Dr. Gregory B. Brown has more than 35 years of experience
in healthcare and investment. Most recently, Greg founded
HealthCare Royalty Partners, a healthcare-focused private
asset management firm
in biopharmaceutical
and medical products, where he currently serves as Vice
Chairman. In addition, Greg is currently a director of Caladrius
Biosciences Inc (NASDAQ), Cambrex Corporation (NYSE) and
Aquestive Therapeutics (NASDAQ) and previously acted as a
director of Invuity Inc (NASDAQ) between October 2014 and
December 2015. Prior to this, he was a Managing Director at
Paul Capital Partners in New York, Co-Head of Investment
Banking at Adams, Harkness & Hill, and VP of Corporate
Finance at Vector Securities International.
He was appointed as a Non-Executive Director of the
Company in May 2017.
Dr Jalkanen has more than 25 years of experience within bio-
medical research, biotech development and the biopharma-
ceutical industry. He was a founding member of the Company
and is the Company’s CEO. In addition to his role as CEO of the
Company, Dr Jalkanen is an advisor for the only active Finnish
life sciences fund – Inveni Capital. Between 1996 and 2002,
Dr Jalkanen was the founding CEO and President of BioTie
Therapies Corp which has since become the first publicly
traded Finnish biotech company to have listed on NASDAQ.
Dr Jalkanen has published over 130 peer reviewed scientific
publications in various highly ranked international journals
and has held several board memberships for both public and
private companies.
Dr Jalkanen obtained a Masters in Medical Biochemistry
from the University of Kuopio and subsequently received a
PhD in Medical Biochemistry from the University of Turku. He
completed a side-laudatur examination in Molecular Biology
from the University of Turku and completed his post-doctoral
training at Stanford University, California between 1983 and
1986.
Dr Jalkanen obtained the position of docent in Biochemistry
from University of Helsinki and the same qualification in
Molecular and Cell Biology from the University of Turku. He
became a Professor at the University of Turku in 1992 as well
as Head of Turku Centre for Biotechnology.
44
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 John Poulos
Non-Executive Director
Leopoldo Zambeletti
Non-Executive Director
Mr. John Poulos has a wealth of expertise in global corporate
life sciences, having spent 38 years working for AbbVie
and Abbott. Mr. Poulos served as Vice President, Head of
Business Development and Acquisitions for AbbVie from
2013 until 2016. John was also Group Vice President, Head
of Pharmaceutical Licensing and Acquisitions for Abbott
from 2005 until 2012. During his career with AbbVie and
Abbott, John was instrumental in the negotiation of numerous
acquisitions, including Knoll/BASF Pharma in 2001 for $6.9
billion, Kos Pharmaceuticals in 2006 for $3.7 billion, Solvay in
2010 for $6.2 billion and Pharmacyclics in 2015 for $21 billion.
Mr. Poulos is currently an Operating Partner with Linden
Capital Partners, a private equity firm focused exclusively on
healthcare.
He was appointed as a Non-Executive Director of the
Company in May 2017.
During a 19-year career as an
investment banker, Mr
Zambeletti led the European Healthcare Investment Banking
team at JP Morgan for eight years before taking up the same
position at Credit Suisse for a further five years. Since 2013
he has been an independent strategic advisor to life science
companies on merger and acquisitions, out-licencing deals
and financing strategy.
He is a Non-Executive Director of Philogen, Qardio Inc.,
Summit Therapeutics PLC (NASDAQ and AIM), Nogra
Pharmaand Tiziana Life Sciences (Nasdaq and AIM), OKYO
(AIM). Mr Zambeletti started his career at KPMG as an auditor.
Mr Zambeletti received a BA in Business from Bocconi
University in Milan, Italy. Mr Zambeletti was appointed as a
Non-Executive Director of the Company in September 2015.
45
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Yrjö E K Wichmann
Chief Financial Officer
Mr Wichmann has a career spanning close to 25 years in
financing and investment banking. He was appointed as a
Chief Financial Officer of the Company in 2014. Prior to his
appointment at the Company, Mr Wichmann held a number
of senior positions within the life sciences and biotechnolo-
gy sector, most recently at IP Finland Oy, Biohit Oyj (NASDAQ
OMX Helsinki), Capman Oyj, FibroGen Europe Oyj (NASDAQ)
and D. Carnegie & Co AB. Whilst carrying out these roles Mr
Wichmann has participated in healthcare IPOs on the London,
Stockholm and Helsinki stock exchanges as both an invest-
ment banker and as a member of the board. Mr Wichmann is
a member of the Investment Committee at Dasos Timberland
Fund I and II.
Mr Wichmann obtained a Masters in Economics from
Helsinki University.
He was appointed as an Executive Director of the Company
in 2015.
46
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Performance Evaluation
Remuneration Committee
The Board has a process for evaluation of its own perfor-
mance and that of its committees and individual Directors,
including the Chairman. These evaluations are carried out at
least annually.
In the Board performance evaluation process adopted by
the Company, Board, Committee and individual effectiveness
is considered against the criteria of creating and running an
effective Board, professional development, strategic foresight,
stewardship, managing management, value creation and cor-
porate culture.
In the most recent Board assessment, succession planning,
setting clear collective objectives for the Board, opportunities
for Board members to engage in professional development
and greater use of scenario planning in the evaluation of stra-
tegic risks were identified as areas meriting further discussion
by the Board.
As a result of the evaluation process, the following practi-
cal changes have been implemented to increase the effective-
ness of the Board: sending Board meeting material earlier so
that all Board members have a chance to familiarise them-
selves with the material prior to the meeting, maximising
physical participation in Board meetings and setting aside
time in Board meetings to discuss emerging issues that could
affect the organisation in the future.
Board Committees
In conjunction with being admitted to trading on AIM, the
Company has established audit, nomination and remunera-
tion committees of the Board with formally delegated duties
and responsibilities.
Generally speaking, Board committees do not have a formal
legal status or independent decision-making powers under
the Finnish Limited Liability Companies Act; rather, their role is
to provide support in the preparation of the decision-making.
The responsibility for the decisions remains with the Board
even if the preparation of a matter has been delegated to a
Committee.
At the meeting of the Board held following the Annual
General Meeting of 31 May 2018, the Board of Directors
re-elected the Chairmen and other members to the Board
committees.
The Remuneration Committee comprises Frank Armstrong
as Chairman together with John Poulos since 13 September
2018. The Remuneration Committee has the task of advising
on and making recommendations to the Board in relation to
the remuneration paid to the Directors and supervising the
development of any other remuneration or reward systems
of the Company. During 2018, the Remuneration Committee
held two meetings.
Audit Committee
The Audit Committee, which comprises Leopoldo Zambeletti
as Chairman together with Matti Manner and Gregory Brown,
meets not less than twice a year. The Audit Committee has
the task of supervising and developing the internal audit of the
Company and advising and making recommendations to the
Board of Directors on issues related to the same. During 2018,
the Audit Committee held four meetings.
Nomination Committee
The Nomination Committee comprises Matti Manner as
Chairman together with Frank Armstrong since 13 September
2018. The Nomination Committee has the task, in co-operation
with the Board, of advising on and making recommendations
to the Board on issues relating to the composition and
nomination of the Board. During 2018, the Nomination
Committee held one meeting.
The Nomination Committee considers succession planning
for Directors and other senior executives in the course of
its work, bearing in mind the challenges and opportunities
facing the Company and the skills and expertise needed on
the Board in the future, and makes recommendations to the
Board concerning formulating plans for succession for both
Executive and Non-Executive Directors and in particular for
the key roles of Chairman and Chief Executive Officer.
47
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
Attendance at Board meetings
During 2018 the Board held 15 meetings. The table below
lists the Directors’ attendance to the Board and Committee
meetings during the year:
The Directors’ attendance during the year ended 31 December 2018
Board
Audit Committee
Remuneration
Committee
Nomination
Committee
Executive directors
Jalkanen Markku
Wichmann Yrjö
Non-executive directors
Armstrong Frank
Manner Matti
Brown Gregory B
Knowles Jonathan*
Peng Huaizheng*
Poulos John
Zambeletti Leopoldo
* Resigned from Board on 12 September 2018
15
15
15
14
13
7(12)
10(12)
14
12
2(2)
0(1)
2(2)
3(4)
4(4)
4(4)
1(1)
1(1)
1(1)
48
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Remuneration Report
Audited Information
Remuneration policy for Directors
The Remuneration Committee sets the remuneration
policy that aims to align Director remuneration
with shareholders’ interests and attract and retain
the best talent for the benefit of the Company.
The remuneration of the Directors during the year
ended 31 December 2018 is set out below:
This report sets out Faron’s remuneration policy for the Exec-
utive and Non-Executive Directors. No Director is involved in
discussions relating to their own remuneration.
Basic salary
Basic salaries are reviewed annually. The review process is
managed by the Remuneration Committee with reference to
market salary data, the Executive Director’s performance and
contribution to the Company during the year.
Longer term incentives
In order to further incentivise the Executive Directors and
employees, and align their interests with Shareholders, the
Extraordinary General Meeting of the Company on 15 Sep-
tember 2015 approved a share option plan and granted share
options to the members of the Board under this option plan.
Details of the option plan are on a page 51. The Company’s
policy is to maintain an incentive policy also in the future.
Bonuses
Annual bonuses are based on the achievement of Compa-
ny strategic and financial targets and personal performance
objectives. The Non-Executive Directors believe that bonuses
are an incentive to achieve the targets and objectives, and
represent an important element of the total compensation of
the Executive Directors; they have established that the annual
bonus potential will be up to 50% for the Executive Directors.
On 20 February 2018 the Chief Executive Officer was
awarded a bonus representing 50% of their 2017 gross basic
salaries.
Pension
Faron has a law-defined contribution plan under which it pays
fixed contributions into a separate entity. The plan covers
all the employees of Faron including the Executive Directors.
Faron has no legal or constructive obligations to pay further
contributions if the fund does not hold sufficient assets to pay
all employees the benefits relating to employee service in the
current and prior periods.
Other benefits
Some employees have the possibility to take a company car
allowance, which is part of their gross salary. All employees
have a company mobile phone that constitutes a company
mobile phone allowance.
49
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Executive Directors’ service contracts and termination
provisions
The service contracts of Executive Directors are approved by the Board and are con-
cluded for an indefinite period of time.
The details of the Executive Directors’ contracts are summarised below:
Markku Jalkanen
Yrjö E K Wichmann
CEO
CFO
16.09.2015
6 months
16.09.2015
6 months
Date of contract
Notice period
Non-Executive Directors’ service contracts and
remuneration
The remuneration and compensation payable to the members of the Board including
the Non-Executive Directors shall be approved by the Shareholders at the AGM. Any
Non-Executive Director who, by request, goes or resides abroad for any purposes of
the Company or who performs services which in the opinion of the Board go beyond
the ordinary duties of a Director may be paid extra remuneration or may receive
such other benefits as the remuneration Committee may approve. Non-Executive
Directors are entitled to be reimbursed in respect of their reasonably and proper-
ly incurred travelling, accommodation and incidental expenses for attending and
returning from meetings of the Board, Committee meetings or the general meetings
of Shareholders.
The Non-Executive Directors do not receive any pension, bonus or benefit from
the Company. The contracts of the Non-Executive Directors, excluding remuneration
and compensation, are reviewed by the Board annually.
Current contracts are summarised below:
Non-Executive Directors'
Contracts
Independence
Contract
Date of
Contract
Frank Armstrong
Independent
Chairman
16.09.2015
Matti Manner
Non-independent
Vice-chairman
16.09.2015
Gregory Brown
Independent
Member
16.05.2017
John Poulos
Independent
Member
16.05.2017
Leopoldo Zambeletti
Independent
Member
16.09.2015
The appointments of Non-Executive Directors are terminable with immediate effect
in accordance with the Articles of Association and pursuant to the Finnish Compa-
nies Act, through a resolution of Shareholders at a General Meeting on any grounds.
The Non-Executive Directors may resign as a director by delivering three months’
notice to the Registered Office of the Company or through tendering such resigna-
tion at a meeting of the Board.
50
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
The Directors received the following remuneration during the year:
Salaries and fees
Bonus 2018
Taxable benefits
Total
221,078.73
123,641.00
15,900.00
360,619.73
163,588.26
52,322.40
1,018.10
216,928.76
€
Executive
Markku Jalkanen
Yrjö E K Wichmann
Non-Executive
Frank Armstrong
Matti Manner
Jonathan Knowles*
Huaizheng Peng*
Leopoldo Zambeletti
Gregory Brown
John Poulos
77,790.36
44,421.57
33,691.22
36,198.04
43,139.38
46,695.81
48,213.62
*Resigned from Board on 12 September 2018
Directors’ share options
Aggregate remunerations disclosed above do not include any amounts for the value
of options to acquire Ordinary Shares in the Company granted to or held by the Direc-
tors. A share option plan was adopted by the Company at the Extraordinary General
Meeting held on 15 September 2015 and amended in Annual shareholders Meeting
on 16 May 2017. The option plan allows the Company to offer options for subscrip-
tion free of charge to members of the Board, and to such officers and employees of
the Company as the Board sees fit. Each option will entitle the holder of the option
to subscribe for one Ordinary Share. Under the terms of the option plan, an aggre-
gate maximum number of 1,800,000 options may be granted, such aggregate being
made up of a maximum of 400,000 “A” options, the subscription period for which
ended on 9 June 2016 (such options exercisable between 2 November 2015 and 30
September 2021), a maximum of 400,000 “B” options to be subscribed for between 8
October 2016 and 30 September 2019 (exercisable between 8 October 2016 and 30
September 2021), a maximum of 500,000 “C” options to be subscribed for between
8 October 2017 and 30 September 2019 (exercisable between 8 October 2017 and
30 September 2021), and a maximum of 500,000 “D” options to be subscribed for
between 8 October 2018 and 30 September 2019 (exercisable between 8 October
2018 and 30 September 2021).
The exercise price for Ordinary Shares based on “A” options shall be €3.71. The
exercise price for Ordinary Shares based on “B” options shall be €2.90. The exercise
price for Ordinary Shares based on “C” options shall be €8.39. The exercise price for
Ordinary Shares based on “D” options shall be €1,09.
77,790.36
44,421.57
33,691.22
36,198.38
43,139.38
46,695.81
48,213.62
51
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
Details of these options are as follows:
2015A Options
Date of
grant of A
options1)
At 1
January
2018
Granted
during
the
period
Cancelled
during
the period
At 31
December
2018
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date of
A options
Markku Jalkanen
16.09.2015
80,000
Yrjö E K Wichmann
16.09.2015
30,000
Frank Armstrong
16.09.2015
40,000
Matti Manner
16.09.2015
20,000
Jonathan Knowles
16.09.2015
20,000
Huaizheng Peng
16.09.2015
20,000
Leopoldo Zambeletti 16.09.2015
20,000
Gregory Brown
John Poulos
-
-
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
30,000
40,000
20,000
20,000
20,000
20,000
0
0
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
3.71
02.11.2015 30.09.2021
-
-
-
-
-
-
230,000
230,000
2015B Options
Date of
grant of B
options1)
At 1
January
2018
Granted
during
the
period
Cancelled
during
the period
At 31
December
2018
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date of
B options
Markku Jalkanen
18.11.2016
80,000
Yrjö E K Wichmann
18.11.2016
30,000
Frank Armstrong
18.11.2016
40,000
Matti Manner
18.11.2016
20,000
Jonathan Knowles
18.11.2016
20,000
Huaizheng Peng
18.11.2016
20,000
Leopoldo Zambeletti 18.11.2016
20,000
Gregory Brown
John Poulos
-
-
0
0
230,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
30,000
40,000
20,000
20,000
20,000
20,000
0
0
230,000
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
2.90
08.10.2016 30.09.2021
-
-
-
-
-
-
52
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 2015C Options
Date of
grant of C
options1)
At 1
January
2018
Granted
during
the
period
Cancelled
during
the period
At 31
December
2018
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date of
C options
Markku Jalkanen
4.10.2017
80,000
Yrjö E K Wichmann
4.10.2017
30,000
Frank Armstrong
4.10.2017
40,000
Matti Manner
4.10.2017
20,000
Jonathan Knowles
20.10.2017
20,000
Huaizheng Peng
8.11.2017
20,000
Leopoldo Zambeletti 14.11.2017
20,000
Gregory Brown
13.10.2017
20,000
John Poulos
4.10.2017
20,000
270,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
30,000
40,000
20,000
20,000
20,000
20,000
20,000
20,000
270,000
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
8.39
08.10.2017 30.09.2021
Total Options
Markku Jalkanen
Yrjö E K Wichmann
Frank Armstrong
Matti Manner
Jonathan Knowles
Huaizheng Peng
Leopoldo Zambeletti
Gregory Brown
John Poulos
At 1 January
2018
Granted
during
the period
Cancelled
during
the period
At 31 December
2018
Average subs.
price per shares,
€
240,000
90,000
120,000
60,000
60,000
60,000
60,000
20,000
20,000
730,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
240,000
90,000
120,000
60,000
60,000
60,000
60,000
20,000
20,000
730,000
5.00
5.00
5.00
5.00
5.00
5.00
5.00
8.39
8.39
53
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 At 31 December
2018
Executive
Markku Jalkanen 1)
Matti Manner 2)
Jonathan Knowles*
Yrjö Wichmann
Leopoldo Zambeletti
Frank Armstrong
Huaizheng Peng*
Gregory Brown
John Poulos
Issued Share Capital
Share Options
Ordinary shares
Percentage held
Ordinary shares
Average exercise
price, € cent
2,909,390
508,300
119,212
74,640
17,461
22,396
4,000
18,000
0
9.4%
1.6%
0.4%
0.2%
0.1%
0.1%
0.0%
0.1%
0.0%
3,649,399
11.8%
240,000
60,000
60,000
90,000
60,000
120,000
60,000
20,000
20,000
730,000
5.00
5.00
5.00
5.00
5.00
5.00
5.00
8.39
8.39
8.39
*Resigned from Board on 12 September 2018
1) of which, 1,794,890 are held by Markku Jalkanen directly, and 1,078,500 are held by Markku Jalkanen’s wife being Sirpa Jalkanen and her
related party.
2) of which 500,400 are held by Matti Manner directly and 7,900 are held by his spouse.
54
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Corporate governance statement
For the year ended 31 December 2018.
Communicating with Shareholders
The Company acknowledges that effective communication
with shareholders on strategy and governance is an important
part of its responsibilities. Interim and final results are com-
municated via formal meetings with roadshows, participa-
tion in conferences and additional dialogue with key investor
representatives held in the intervening periods. Faron recog-
nises the Annual General Meeting as an opportunity to meet
shareholders.
As an AIM company, Faron complies with the AIM Rules for
Companies, the Market Abuse Regulation and other relevant
legislation in all its corporate communications issues. The
Company announcements are published via Regulatory Infor-
mation Service providers.
The Company speaks to the financial community and
shareholders only through authorised representatives. The
Chief Executive Officer is the designated person to make pub-
lic statements. The Chief Executive Officer may delegate this
authority to other members of the management team.
The contact details are below:
Faron
email: investor.relations@faron.com
Media and investor relations:
Consilium Strategic Communications
email: faron@consilium-comms.com
Share Dealing
The Company has established a share dealing code appropri-
ate to an AIM-listed company, and all the Directors of the Com-
pany understand the importance of compliance to that code.
Ethical Values and Corporate Culture
Faron is strongly committed to conducting its business affairs
with honesty and integrity and in full compliance with all
applicable laws, rules and regulations. The Company requires
that all employees and Directors comply with all laws, rules
and regulations applicable to the Company wherever it does
business.
Employees and Directors should endeavour to deal honest-
ly, ethically and fairly with the Company’s collaborators, licen-
sors,
licensees, business partners, suppliers, customers,
competitors and employees. Statements regarding the Com-
pany’s therapies and services must not be untrue, misleading,
deceptive or fraudulent.
Employees and Directors act in the best interests of the
Company and use the Company’s assets and services solely
for legitimate business purposes of the Company and not for
any personal benefit or the personal benefit of anyone else.
Risk management and Internal control
The principal risks and uncertainties identified by the Board
are set out on pages 21 to 23 of the 2018 Annual Report. The
Board has put in place internal controls and systems which
are designed to manage rather than eliminate risk and provide
reasonable but not absolute assurance against material mis-
statement or loss. A key element of delivering the Company’s
strategy and managing the risks facing the Company is the
employment of a skilled workforce and use of appropriate third
parties. The Board reviews the risks and uncertainties facing
the Company and the effectiveness of its systems annually.
At present the Company does not consider it necessary
to have an internal audit function due to the small size of the
administrative function and the frequent interaction with the
auditors and the supervision of the audit Committee. The
Board is, however, following closely both regulatory and opera-
tional developments in this realm and plans to react appropri-
ately if and to the extent considered necessary.
There is a monthly review and authorisation of transactions
by the Chief Financial Officer and Chief Executive Officer. A
comprehensive budgeting process is completed once a year
and is reviewed and approved by the Board. The Company’s
results, compared with the budget, are reported to the Board
on regular basis and discussed in detail.
The Company maintains appropriate insurance cover in
respect of actions taken against the Directors because of their
roles, as well as against material loss or claims against the
Company. The insured values and type of cover are compre-
hensively reviewed on a periodic basis.
55
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 We seek to ensure that all staff have access to the training
they need both for their own development and to enable them
to deliver a high-quality work contribution.
We consider all staff members to be equal and we aim to
create a working environment which is free of unlawful dis-
crimination. In this regard, we maintain an internal code of
conduct based on professionalism and respect.
Suppliers
We are committed to eliminating unlawful discrimination and
to promoting equality and diversity in our professional deal-
ings with suppliers and other third parties. We endeavour to
enter into clear and fair contracts with our suppliers.
Environment
We are committed to behaving responsibly and to minimising
our impact on the environment. In considering the environ-
ment, we have resolved to include environmental considera-
tions in our business travel and to minimise our consumption
of natural resources and manage waste through responsible
disposal and reuse and recycling, including paper and ink
cartridges.
Responsibility and review
The Board has overall responsibility for our CSR strategy and
for implementing our CSR principles. They have a key role in
ensuring the systems and controls we have in place are effec-
tive. All members of staff have a role to play in complying with
our CSR objectives and are encouraged to make further sug-
gestions in relation to initiatives we could undertake.
We are fully committed to the highest possible standards
of openness, honesty and accountability. In line with that com-
mitment, we actively encourage all staff members who have
serious concerns about any real or perceived departure from
the high ethical standard that we set to voice those concerns
openly.
Corporate Social Responsibility
Faron acknowledges that running its business has an effect
on society. In particular, the Company has a responsibility to
the patients, our employees and contractors as well as the
broader community in which we operate.
We are committed to taking responsibility for our actions
and encourage a positive contribution towards improving
standards for patients and our employees, minimising our
impact on the environment and improving the quality of the
local community.
We are committed to maintaining and promoting high
standards of business integrity. Company values, which incor-
porate the principles of corporate social responsibility and
sustainability, guide our relationships with clients, employees
and the communities and environment in which we operate.
Faron’s approach to sustainability addresses both our environ-
mental and social impacts, supporting our vision to remain an
employer of choice, while meeting client demands for social-
ly responsible partners. We respect local laws and customs
while supporting international laws and regulations.
By putting CSR into practice, we are committed, wherever
possible, to:
• developing treatments for medical conditions with signifi-
cant unmet needs
• conducting ourselves responsibly and in an ethical manner
• creating a positive and supportive working environment
• acting fairly in our dealings with suppliers and other third
parties
• minimising the impact on our environment
Our CSR principles
Conduct
We aim to adopt the highest professional standards and not
to act in such a way as to compromise Faron’s integrity. We
actively promote respect between our staff members in their
dealings with each other and with suppliers and other third
parties.
Working environment
We recognise that our staff are our most important resource.
We actively seek to offer our staff a positive and healthy work-
ing environment and ensure that they have rewarding careers
and job satisfaction.
56
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Statement of Responsibilities
Website publication
The Directors are responsible for ensuring that the annual
report and the financial statements are made available on a
website. Financial statements are published on the Compa-
ny’s website in accordance with the AIM rule 26 and the rec-
ommendations of the QCA’s Corporate Governance Code for
Small and Medium Sized Companies.
On behalf of the Board
Frank Armstrong
Chairman
3 May 2019
Under the Finnish Limited Liability Companies Act and the
Finnish Accounting Act the Company must prepare an Annual
Report and financial statements in accordance with applicable
law and regulations.
The Board of Directors and the CEO are responsible for
the preparation of financial statements that give a true and
fair view in accordance with International Financial Report-
ing Standards (IFRS) as adopted by the EU, as well as for
the preparation of financial statements and the report of the
Board of Directors that give a true and fair view in accordance
with the laws and regulations governing the preparation of the
financial statements and the report of the Board of Directors
in Finland. The Board of Directors is responsible for the appro-
priate arrangement of the control of the Company’s accounts
and finances, and the CEO shall see to it that the accounts
of the Company are in compliance with the law and that its
financial affairs have been arranged in a reliable manner. In
accordance with the rules of the London Stock Exchange
for companies trading securities on the Alternative Invest-
ment Market, the Company is also required to prepare annual
accounts and financial statements under IFRS.
In preparing these financial statements, the Board of Direc-
tors is required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are rea-
sonable and prudent;
• state whether they have been prepared in accordance with
IFRS as adopted by the European Union, subject to any
material departures disclosed and explained in the financial
statements;
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Board of Directors and the CEO are responsible for keep-
ing 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 state-
ment comply with the requirements of the Finnish Accounting
Act. 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.
57
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 corpor ate gov erna nce
Directors’ Report
For the year ended 31 December 2018.
The Directors present their report together with
the audited financial statements for the year ended
31 December 2018.
Directors
Financial information
During the year ended 31 December 2018 following persons
have been members of Board of Directors of the Company:
Executive
Dr Markku Jalkanen, PhD, Chief Executive Officer
Mr Yrjö Wichmann, MSc, Chief Financial Officer
Non-Executive
Dr Frank Armstrong, FRCPE, FFPM, Chairman
Mr Matti Manner, LLM, Vice-chairman
Dr Jonathan Knowles, PhD, Non-Executive Director*
Dr Huaizheng Peng, MD, PhD, Non-Executive Director*
Mr Leopoldo Zambeletti, Non-Executive Director
Mr John Poulos, Non-Executive Director
Dr Gregory B. Brown, Non-Executive Director
The Company produces budgets and cash flow projections on
an annual basis for approval by the Board. These are reviewed
during the year and updated if needed to reflect any changes
in the business. Detailed management accounts are produced
on a monthly basis, with all significant variances investigated
promptly. The management accounts are reviewed and com-
mented on by the Board at Board meetings and are reviewed
and reported to the Directors on a monthly basis by the man-
agement team.
Financial Key Performance Indicators
(KPIs)
For a review of the Group’s KPIs please see page 18 Financial
Review.
*resigned from Board on 12 September 2018
Research and development
Principal risks and uncertainties
For a discussion of the principal risks and uncertainties which
face Faron please see pages 21 to 23 Risks and uncertainties.
Details of Company’s key research and development programs
can be found in the Strategic Report and the detailed program
sections. See also notes 2.8 and 6. Further information is also
available on the Company website, www.faron.com.
Results and dividends
Post balance sheet events
The Consolidated Statement of Comprehensive Income for
the year is set out on here.
The Company’s loss of the financial year after taxation
and other comprehensive losses was € 20.1 million (2017:
€ 21.1 million).
The Company has no distributable equity and thus the Direc-
tors do not recommend the payment of a dividend (2017: nil).
In January 2019, the Company received the fourth and last
instalment of the Clevegen Tekes R&D loan of € 307 thousand.
In March 2019, the Company raised net proceeds of approx-
imately € 2,900 thousand through a directed share issue and
at 31 March 2019 it had € 4,877 thousand cash and equity of
€ 731 thousand.
58
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Financial instruments and management of
liquid resources
Annual General Meeting
The Company’s principal financial instrument comprises cash,
and this is used to finance Company’s operations. The Compa-
ny has also other financial instruments such as leasing facili-
ties that arise directly from its operations.
The Company has a policy, which has been consistently fol-
lowed, of not trading in financial instruments and to minimize
currency exposure by actively matching currency expenses
and income to the extent possible. The Company’s cash is held
on bank accounts in reputable bank in Finland. The Group’s
treasury policy is reviewed annually. See note 2.16 ‘Financial
assets’, note 19 ‘Financial assets and liabilities’ and note 20,
‘Financial risk management’ in the notes to the Financial State-
ments for IFRS disclosure regarding financial instruments.
Substantial shareholdings
The AGM will be held in 28 May 2019 and further details will be
provided to shareholders in advance of the meeting.
Independent auditors
PricewaterhouseCoopers have expressed their willingness to
continue in office as auditors for the year. A resolution to reap-
point them will be proposed at the forthcoming AGM.
Disclosure and information to auditors
Each of the current Directors hereby confirms that:
(a) So far as he is aware, there is no relevant audit information
of which the auditors are unaware; and
(b) He has taken all reasonable steps to ascertain any relevant
audit information and to ensure that the auditors are aware of
such information
On 31 December 2018 the Company had been notified of the
following holdings of more than 3% or more of the issued
share capital of the Company.
On behalf of the Board
Frank M Armstrong
Chairman
3 May 2019
A&B (HK) Company Limited
3,408,409
10.98%
Marko Salmi
3,093,439
9.97%
Markku Jalkanen*
2,909,390
9.38%
Tom-Erik Lind
2,813,835
9.07%
Hargreaves Lansdown
Asset Mgt
Timo Syrjälä**
Aviva Investors
1,860,876
6.00%
1,460,830
4.71%
1,339,008
4.32%
Juho Jalkanen***
1,094,570
3.53%
* of which, 1,806,890 are held by Markku Jalkanen directly, and 1,078,500
are held by Markku Jalkanen’s wife being Sirpa Jalkanen and her related
party.
** of which, 550,830 are held directly by Timo Syrjälä and 910,000 are held
by Acme Investments SPF S.à.r.l., an entity which is wholly owned by Timo
Syrjälä.
*** Held by Juho Jalkanen and related parties.
59
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 financial statemen ts
Statement of comprehensive income
For the year ended 31 December
€’000
Revenue
Other operating income
Group
Parent
Note
2018
2017
2018
2017
3, 4
5
19
205
-
1,495
19
205
-
1,495
Research and development expenses
6, 7, 8
(16,463)
(19,100)
(16,463)
(19,100)
General and administrative expenses
7, 8
(3,750)
(3,054)
(3,740)
(3,054)
Operating loss
Financial expense
Financial income
Loss before tax
Tax expense
Loss for the period
(19,989)
(20,659)
(19,979)
(20,659)
9
9
(397)
302
(408)
7
(397)
302
(408)
7
(20,084)
(21,060)
(20,074)
(20,074)
10
(2)
(1)
(2)
(1)
(20,086)
(21,061)
(20,076)
(21,061)
Other comprehensive income
-
-
-
-
Total comprehensive loss for the period
(20,086)
(21,061)
(19,409)
(20,076)
Loss per ordinary share
Basic and diluted loss per share, EUR
11
(0.65)
(0.76)
(0.65)
(0.76)
60
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
financial statemen ts
Balance sheet
As at 31 December
€’000
Assets
Non-current assets
Machinery and equipment
Subsidiary shares
Intangible assets
Prepayments and other receivables
Total non-current assets
Current assets
Prepayments and other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Capital and reserves attributable to the equity
holders of the Company
Share capital
Reserve for invested unrestricted equity
Accumulated deficit
Translation difference
Total equity
Non-current liabilities
Borrowings
Total non-current liabilities
Current liabilities
Borrowings
Trade payables
Other current liabilities
Total current liabilities
Group
Parent
Note
2018
2017
2018
2017
12
1,23
12
13
15
16
17
-
525
636
1,177
2,759
4,067
6,825
22
-
325
1,310
1,657
3,920
9,310
13,230
17
18
525
636
1,195
2,759
4,058
6,817
22
-
325
1,310
1,657
3,920
9,310
13,230
8,002
14,887
8,012
14,887
2,691
64,464
2,691
48,576
2,691
64,464
2,691
48,576
(66,786)
(46,524)
(66,775)
(46,524)
17, 18
-
369
-
4,743
-
380
-
4,743
19
19
21
21
1,887
1,887
2,088
2,088
245
3,534
1,967
5,745
338
3,196
4,522
8,056
1,887
1,887
245
3,533
1,967
5,744
2,088
2,088
338
3,196
4,522
8,056
Total liabilities
7,633
10,144
7,631
10,144
Total equity and liabilities
8,002
14,887
8,012
14,887
61
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
financial statemen ts
Parent Company Statement of changes in equity
€’000
Note
Share capital
Reserve for
invested
unrestricted
equity
Accumulated
deficit
Total
equity
Balance as at 31 December 2016
2,691
32,362
(26,652)
8,401
Comprehensive loss for the period
Transactions with equity holders
of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,149 thousand
Share options exercised
Warrants exercised
Share-based compensation
17
17,18
17,18
7,18
-
-
-
-
-
-
-
(21,061)
(21,061)
15,863
97
254
-
-
-
-
15,863
97
254
1,189
1,189
16,214
1,189
17,403
Balance as at 31 December 2017
2,691
48,576
(46,524)
4,743
Comprehensive loss for the period
Transactions with equity holders
of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,149 thousand
Share-based compensation
17
7,18
-
-
-
-
-
(20,076)
(20,076)
15,888
-
15,888
-
(176)
(176)
15,888
(176)
15,712
Balance as at 31 December 2018
2,691
64,464
(66,775)
380
62
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
financial statemen ts
Group Statement of changes in equity
€’000
Note
Share
capital
Reserve for
invested
unrestrict-
ed equity
Translation
difference
Accumulated
deficit
Total
equity
Balance as at 31 December 2016
2,691
32,362
Comprehensive loss for the period
Transactions with equity holders
of the Company
Issue of ordinary shares, net of
transaction costs EUR 1,149 thousand
Share options exercised
Warrants exercised
Share-based compensation
17
17,18
17,18
17,18
-
-
-
-
-
-
-
15,863
97
254
-
16,214
Balance as at 31 December 2017
2,691
48,576
Comprehensive loss for the period
Transactions with equity holders
of the Company
Issue of ordinary shares, net of
transaction costs EUR 1,149 thousand
Share-based compensation
17
17,18
-
-
-
-
-
15,888
-
15,888
Balance as at 31 December 2018
2,691
64,464
-
-
-
-
-
-
-
-
-
-
-
-
-
(26,652)
8,401
(21,061)
(21,061)
-
-
-
15,863
97
254
1,189
1,189
1,189
17,403
(46,524)
4,743
(20,086)
(20,086)
-
15,888
(176)
(176)
(176)
15,712
(66,786)
369
63
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
financia l state me nts
Statement of cash flows
As at 31 December
€’000
Note
2018
2017
2018
2017
Group
Parent
Cash flow from operating activities
Loss before tax
Adjustments for:
Depreciation and amortisation
Interest expense
Unrealised foreign exchange loss (gain), net
Share-based compensation
Adjusted loss from operations before
changes in working capital
Change in net working capital:
Prepayments and other receivables
Trade payables
Other liabilities
Cash used in operations
Taxes paid
Interest paid
Net cash used in operating activities
Cash flow from investing activities
Payments for acquisition of shares in subsidiaries
Payments for intangible assets
Payments for equipment
Net cash used in investing activities
Cash flow from financing activities
Proceeds from issue of shares
Share issue transaction cost
Proceeds from borrowings
Repayment of borrowings
(20,084)
(21,060)
(20,074)
(21,060)
8
9
9
18
100
121
(36)
(176)
76
75
290
1,189
100
121
(36)
(176)
76
75
290
1,189
(20,075)
(19,430)
(20,065)
(19,430)
1,836
338
(2,595)
(20,496)
(2)
(27)
(1,286)
1,175
1,189
(18,352)
(1)
(10)
1,836
337
(2,595)
(20,487)
(2)
(27)
(1,286)
1,175
1,189
(18,352)
(1)
(10)
(20,525)
(18,363)
(20,516)
(18,363)
-
(293)
(2)
(295)
-
(90)
(8)
(98)
(18)
(293)
(2)
(313)
-
(90)
(8)
(98)
17,023
(1,135)
-
(347)
17,362
(1,148)
453
(84)
17,023
(1,135)
-
(347)
17,362
(1,148)
453
(84)
10
9
1,23
12
12
17
17
20
Net cash from financing activities
15,541
16,583
15,541
16,583
Net increase (+) / decrease (-) in cash and
cash equivalents
Effect of exchange rate changes on cash and
cash equivalents
(5,279)
(1,878)
(5,288)
(1,878)
36
(290)
36
(290)
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
16
16
9,310
4,067
11,478
9,310
9,310
4,058
11,478
9,310
64
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
financial statements
Notes to the financial statements
1. Corporate information
Faron Pharmaceuticals Ltd. (the ”Company”) is a clinical stage
biopharmaceutical company incorporated and domiciled in
Finland, with its headquarters at Joukahaisenkatu 6 B, 20520
Turku, Finland. The Company has two major drug develop-
ment projects focusing on acute trauma, cancer growth and
spread and inflammatory diseases. During the first quarter
2018, Faron Pharmaceuticals Ltd has registered subsidiaries
in the United States of America and in Switzerland.
The Company is listed on the London Stock Exchange’s AIM
market since 17 November 2015, with a ticker FARN.
The Board of Directors of the Company approved the
financial statements on 3 May 2019.
2. Summary of significant accounting
policies
2.1. Basis of preparation
The financial statements have been prepared in accordance
with the International Financial Reporting Standards of the
International Accounting Standards Board (IASB) and as adopted
by the European Union (IFRS) and the interpretations of the
International Financial Reporting Standards Interpretations
Committee (IFRS IC). The financial statements have been
prepared on a historical cost basis, unless otherwise stated.
The financial statements have been prepared on the
basis of a full retrospective application of IFRS 15, Revenue
from Contracts with Customers, with the adoption date as of
1 January 2017.
The principal accounting policies applied in the preparation
of these financial statements are set out below. The Company
has consistently applied these policies to all the periods
presented, unless otherwise stated. The areas of the financial
statements involving a higher degree of judgment or complexity,
or areas where assumptions and estimates are significant to
the financial statements are disclosed in note 2.21.
The Consolidated Financial Statements incorporate the
parent company, Faron Pharmaceuticals Ltd, and all subsidiaries
in which it holds over 50% of the voting rights. The subsidiaries
established during the financial period are consolidated from
the date that control was obtained by the Group.
The subsidiaries are consolidated by using the purchase
method. All intragroup transactions, receivables, liabilities and
unrealized gains are eliminated in the Consolidated Financial
Statements. Faron Pharmaceuticals Ltd holds 100% owner-
ship of all its subsidiaries.
The Consolidated Financial Statements are presented in
euro which is the functional currency of the parent company.
The statements of comprehensive income and statements of
cash flows of foreign subsidiaries, whose functional currency
is not euro, are translated into euro each month at the average
monthly exchange rates, while the statements of financial
position of such subsidiaries are translated at the exchange
rate prevailing at the reporting date. Translation differences
resulting from the translation of profit for the period and other
items of comprehensive income in the statement of comprehen-
sive income and statement of financial position are recognized
as a separate component in equity and in other comprehen-
sive income. Also, the translation differences arising from the
application of the purchase method and from the translation
of equity items cumulated subsequent to acquisition are
recognized in other comprehensive income.
During the financial year 2018 the impact of subsidiaries is
rather moderate and therefore all figures stated in notes are
parent company figures if not else stated.
All amounts are presented in thousands of euros, unless
otherwise indicated, rounded to the nearest euro thousand.
2.2. Going concern
As part of their going concern review the Directors have fol-
lowed the Finnish Limited Liability Companies Act, the Finnish
Accounting Act and the guidelines published by the Financial
Reporting Council entitled “Guidance on the Going Concern
Basis of Accounting and Reporting on Solvency Risks –
Guidance for directors of companies that do not apply the UK
Corporate Governance Code”.
The Group and Parent Company are subject to a number
of risks similar to those of other development stage phar-
maceutical companies. These risks include, amongst others,
generation of revenues in due course from the development
portfolio and risks associated with research, development,
testing and obtaining related regulatory approvals of its pipe-
line products. Ultimately, the attainment of profitable opera-
tions is dependent on future uncertain events which include
65
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 obtaining adequate financing to fulfil the Group’s commercial
and development activities and generating a level of revenue
adequate to support the Group’s cost structure.
The Group made a net loss of EUR 20,086 thousand during
the year ended 31 December 2018. It had total equity of EUR
369 thousand including an accumulated deficit of EUR 66,786
thousand. As at that date, the Group had cash and cash equiv-
alents of EUR 4,067 thousand. In March 2019, the Company
raised net proceeds of approximately EUR 2,900 thousand
through a directed share issue and at 31 March 2019 it had
EUR 4,877 thousand cash and an unaudited equity of EUR 731
thousand.
The Directors have prepared detailed financial forecasts
and cash flows looking beyond 12 months from the date of
these financial statements. In developing these forecasts, the
Directors have made assumptions based upon their view of
the current and future economic conditions that are expect-
ed to prevail over the forecast period. The Directors estimate
that the cash held by the Group together with known receiva-
bles will be sufficient to support the current level of activities
into the third quarter of 2019. The Directors are continuing to
explore sources of finance available to the Group and based
upon initial discussions with a number of existing and poten-
tial investors they have a reasonable expectation that they will
be able to secure sufficient cash inflows for the Group to con-
tinue its activities for not less than 12 months from the date
of approval of these financial statements; they have therefore
prepared the financial statements on a going concern basis.
Because the additional finance is not committed at the date
of approval of these financial statements, these circumstances
represent material uncertainty that may cast significant doubt
on the Company's ability to continue as going concern. Should
the Group be unable to obtain further finance such that the
going concern basis of preparation were no longer appro-
priate, adjustments would be required including to reduce
balance sheet values of assets to their recoverable amounts,
to provide for further liabilities that might arise.
2.3. Foreign currency transactions and
balances
Functional and presentation currency
The financial statements are presented in euro, which is the
Company's functional and presentation currency.
Transaction currency
Transactions in foreign currencies are translated at the
exchange rates ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies are
translated at the exchange rates ruling at the reporting date.
Foreign exchange differences arising on translation are rec-
ognised in the statement of comprehensive income, within
financial income and expenses. Non-monetary assets and
liabilities denominated in foreign currencies are translated at
the foreign exchange rate ruling at the date of the transaction.
2.4. Segment reporting
Operating segments are reported in a manner consistent with
the internal reporting provided to the chief operating decision
maker. The Chief Executive Officer, reviewing the operating
results regularly to make decisions about the allocation of
resources and to assess overall performance, is identified as
the chief operating decision maker. The Chief Executive Officer
manages the Company as one integrated business and hence,
the Company has one operating and reportable segment.
2.5. Revenue recognition
The Company adopted IFRS 15 Revenue from Contracts with
Customers effective 1 January 2017 and has applied the
single, principles based five-step model to all contracts with
customers provided by IFRS 15 as follows:
1. Identify the contract with a customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance
obligations in the contract
5. Recognise revenue when (or as) the entity satisfies a
performance obligation (over time or at a point in time).
Revenue from licensing agreements
According to IFRS 15, performance obligation is a promise to
provide a distinct good or service or a series of distinct goods
or services. Goods and services that are not distinct are
bundled with other goods or services in the contract until a
bundle of goods or services that is distinct is created. A good
or service promised to a customer is distinct if the cus tomer
can benefit from the good or service either on its own or
together with other resources that are readily available to
the customer and the entity’s promise to transfer the good or
service to the customer is separately identifiable from other
promises in the contract.
The Company’s existing license agreements with Maruishi
in Japan, with A&B in Greater China and with Pharmbio in
Republic of Korea each include only one performance obliga-
tion, which is the grant of the license to use of its intellectual
property (“IP”). After the Company has granted the license, it
66
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 does not have an obligation to participate or provide additional
services to its customers. The transaction price for the grant
of the license to use the Company’s IP comprises of fixed
and variable payment streams and the grant of the license is
considered to be a right to use IP. Upfront fees earned, are
recognised as revenue at a point in time, upon transfer of
control over the license to the licensee. Revenue from vari-
able consideration, which are contingent on achievements
of future milestones are recognised as revenue when it is
highly probable the revenue will not reverse, that is when the
underlying contingencies have been resolved. For future royalty
payments associated with a license, the Company applies the
IFRS 15 exception for sales-based royalties and recognises
the revenue only when the subsequent sale occurs.
In addition, there is a potential performance obligation
regarding future manufacturing. The Company has tentatively
agreed on supply and manufacture of the drug product to
its licensees. The terms including quantities and commer-
cial terms for the future supply will be subject to separate
negotiations.
For further information on revenue recognition, see notes
2.21 and 3.
2.6. Recognition of government grants
The direct government grants are recognised as other operating
income at the same time as the underlying expenditure is
incurred, provided that there is reasonable assurance that the
Company will receive the grant and complies with the condi-
tions of such grant. Direct grant payments received in advance
of the incurrence of the expenditure that the grant is intended
to compensate are deferred at the reporting date and presented
under advances received on the balance sheet.
The indirect government assistance in the form of below-
market interest government loans is recognised as grant
income and recorded as other operating income in the same
period in which the company recognises the expenses for
which the benefit is intended to compensate. Grant income is
measured as the difference between the initial fair value of the
loan and the proceeds received.
2.7. Research and development expenses
Research and development costs are expensed as incurred
and presented under research and development expenses
in the statement of comprehensive income. Research and
develo pment expenses include costs for outsourced clinical
trial services, materials and services, employee benefits and
other expenditure directly attributable to the Company’s
research and development activities. The Company’s research
and development expenses are directly related to the
Company’s development projects and may therefore fluctuate
strongly from year to year.
Capitalization of expenditure on the development of the
Company’s products commences from the point at which
technical and commercial feasibility of the product can
be demonstrated and it is probable that future economic
benefits will result from the product once completed. As
at 31 December 2018, considering the development stage
of the Company’s drug candidates, no internally developed
assets related to Company’s development activities had met
these criteria and had therefore not been recognised. The
uncertainties inherent in developing pharmaceutical products
prohibits the capitalization of internal development expenses
as an intangible asset until the marketing approval has been
received from the relevant regulatory agencies.
2.8. Employee benefits
The Company’s employee benefits consist of short-term
employee benefits, post-employment benefits (defined contri-
bution pension plans) and share-based compensation. Short-
term employee benefits are charged to the statement of com-
prehensive income in the year in which the related service is
provided. Under defined contribution plans, the Company’s
contributions are recorded as an expense in the accounting
period to which they relate and the Company does not have
any further obligations once the contributions have been paid.
2.9. Share-based compensation
The options and warrants granted under share-based incentive
programs are measured at fair value at earlier of the grant date
or the service commencement date, using the Black-Scholes
valuation model. The options, for which the option exercise
price is determined later, right before the vesting, an estimate
is used to determine the fair value at service commencement
date and the estimate is subsequently revised until the options
become granted.
The share-based compensation expense is recognised
on a straight-line basis over the vesting period together with
a corresponding increase in equity, based on the Company’s
estimate of equity instruments that will eventually vest. At
each reporting date, the Company revises its estimate of the
number of equity instruments that are expected to vest and its
estimate of the grant date fair value for the options with earlier
service commencement date. The exercise price paid by the
option or warrant holder to subscribe the Company’s shares
is recognised in the reserve for invested unrestricted equity.
67
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 2.10. Loss per share
2.14. Impairment of non-financial assets
Basic loss per share is calculated by dividing the loss for the
period with the weighted average number of ordinary shares
during the year.
Assets that are subject to depreciation or amortisation are
reviewed for impairment whenever there are indications that
the carrying amount may not be recoverable.
Since the Company has reported losses, inclusion of
unexercised options and warrants would decrease the loss per
share and therefore not taken into account in diluted loss per
share calculation.
2.11. Income tax
Income tax expense for the period consists of current and
deferred taxes. Tax is recognised in the statement of compre-
hensive income, except for the income tax effects of items
recognised in other comprehensive income or directly in
equity, which is similarly recognised in other comprehensive
income or equity.
Deferred taxes are recognised using the liability method on
temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the financial state-
ments. Deferred taxes are determined using tax rates enacted
or substantively enacted by the balance sheet date in the re-
spective countries and are expected to apply when the related
deferred tax asset is realised or the deferred tax liability is settled.
Deferred income tax assets are recognised only to the
extent that it is probable that future taxable income will be avail-
able, against which the temporary differences can be utilized.
2.12. Machinery and equipment
The Company’s machinery and equipment comprise of office
furniture and equipment, which is stated at historical cost less
depreciation and any impairment losses. The historical cost
includes expenditure that is directly attributable to the acquisi-
tion of the machinery and equipment.
Depreciation is calculated using the straight-line method
over the asset’s estimated useful life of four years. Depreciation
is recorded to the costs of the asset function.
An impairment loss is recognised for the amount by which
the asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair
value less costs of disposal and value in use. The value in use
represents the discounted future net cash flows expected to
be derived from the asset.
2.15. Inventories
Inventories are stated at the lower of cost and net realizable
value. The cost includes all costs of direct materials and
external services associated with the process of manufac-
turing of the goods sellable upon obtaining the regulatory
marketing approval. The cost of inventories is fully written
down, with a corresponding charge recognised in research
and development expenses until such approval has been
obtained. When marketing approval from the relevant
regulatory authority is received, the write-down is reversed to net
realisable value, which may not exceed the original cost.
2.16. Financial assets
The Company’s financial assets comprise of other receiv ables
and cash and cash equivalents, which are all classified to the
category “financial assets measured at amortised cost”. These
are non-derivative financial assets with fixed or determinable
payments that are not quoted in an active market. They are
included in current assets, except for maturities greater than
12 months after the reporting date, which are classified as
non-current assets.
Other receivables consist mainly of the deferred grant
income from the European Union for which the grant payment
has not been received, carried at the amount expected to be
received according to the terms and conditions of the grant.
Cash and cash equivalents comprise cash on hand and at
2.13. Intangible assets
banks.
intangible assets comprise of capitalized
The Company’s
in connection with the preparation,
patent costs arising
filing and obtaining of patents. Patent cost are amortised on a
straight-line basis over the useful lives of the patents of ten years.
2.17. Financial liabilities
The Company’s financial liabilities comprise of interest bearing bor-
rowings, trade payables, other non-current and current liabilities.
Borrowings are initially recognised at fair value, less any
directly attributable transaction costs. Subsequently borrow-
ings are carried at amortised cost using the effective interest
method. Borrowings are presented as current liabilities unless
the Company has an unconditional right to defer settlement of
68
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
the liability for at least 12 months after the end of the reporting
period. Borrowings are not derecognised until the liability has
ceased to exist, that is, when the obligation identified in a con-
tract has been fulfilled or cancelled or is no longer effective.
Borrowings comprise of three government loans with a
below-market rate of interest from The Finnish Funding
Agency for Technology and Innovation (“Tekes”, currently
“Business Finland”), of which two have been fully drawn down
before the Company’s date to transition to IFRS. Accordingly,
the Company has utilized the IFRS 1 exemption and not ac-
counted for the below-market grant separately for these two
loans, which are carried at amortised cost.
The government loan originated after the date of transition
to IFRS was initially recognised and measured at fair value
and subsequently at amortised cost over the loan period by
using the effective interest method. The grant component of
the loan, which is the benefit of the below-market interest rate,
is measured as the difference between the initial fair value of
the loan and the proceeds received.
Trade payables and other liabilities are classified as current
liabilities, unless the Company has an unconditional right to
defer settlement of the liability for at least 12 months after the
end of the reporting period, in which case they are classified as
non-current liabilities. The carrying amount of trade pay ables
and other current liabilities are considered to be the same as
their fair values, due to their short-term nature. Non-current
liabilities are initially measured at fair value and subsequently
at amortised cost.
2.18. Equity
The Company’s equity comprises of share capital, reserve
for invested unrestricted equity and accumulated deficit. The
proceeds from issuance of new ordinary shares, less incremen-
tal costs directly attributable to the issue, are credited to the
reserve for invested unrestricted equity, in accordance with
the terms and conditions of the share issue.
The accumulated deficit comprises of the accumulated
profits and losses of the Company since the inception.
2.19. Leases
The Company as lessee
interest element of the payments is expensed. An asset recog-
nised under a finance lease is depreciated over its useful life.
The Company has no finance leases.
Leases where a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases are charged to
the income statement on a straight-line basis over the lease term.
In January 2016, the IASB published IFRS 16, Leases, its
new leasing standard. As a result of the new standard, the
Company has reviewed all of the group’s leasing arrange-
ments over the last year. The Company applies the simplified
transition approach and will not restate comparative amounts
for the year prior to first adoption. All lease arrangements are
both short-term and low value leases. See note 2.23.
2.20. Provisions and contingent liabilities
Provisions are recognised when the Company has a present
legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle
the obligation, and a reliable estimate of the amount can be
made. The Company does not have provisions at the end of
the reporting periods presented in these financial statements.
A contingent liability is a possible obligation that arises
from past events and whose existence will be confirmed
only by the occurrence of uncertain future events not wholly
within the control of the entity. Such present obligation that
probably does not require settlement of a payment obligation
and the amount of which cannot be reliably measured is also
considered to be a contingent liability. Contingent liabilities are
disclosed in the notes to the financial statements.
2.21. Critical accounting estimates and
significant management judgements in
applying accounting policies
Revenue recognition
The Company early adopted IFRS 15 on 1 January 2017 with
full retrospective application. In determining the amounts to
be recognised as revenue, the Company uses its judgement in
the following main issues:
Leases of equipment, where substantially all the risks and re-
wards of ownership, are classified as finance leases. Assets
leased under finance leases are capitalized at the inception of
the lease at the lower of the fair value of the leased property
and the present value of the minimum lease payments. Lease
obligations are included in current and non-current financial
liabilities based on their maturity, net of finance charges. The
•
Identifying the performance obligations in the license agree-
ments and determining whether the license provided is
distinct - based on the Company's analysis, the license is
distinct as the licensee is able to benefit from the license
on its own at its current stage and the licensee has the
responsibility for the development in that territory. The
management has determined that the provision of data
and information generated by the Company in connection
69
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 with its own development activities to facilitate the licen-
sees’ territory-specific development efforts is imma terial
(perfunctory) to the grant of the license to the IP and
does not constitute a separate performance obligation.
• Management has concluded that the license meets the
criteria to be classified as a right to use, as the license grant-
ed provides at the outset of the contract all necessary
documents and knowhow to utilize the license. The contract
does not define activities that would significantly affect the in-
tellectual property to which the licensee has rights after the date
of granting.
as required by the standard, but has not restated compara-
tive financial information. Upon adoption on 1 January 2018,
IFRS 9, Financial Instruments did not have an impact on the
financial statements, as the most significant financial instru-
ment the Company holds is cash and cash equivalents and
the standard will not materially impact the classification or
measurement of cash and cash equivalents.
• In June 2016, the IASB issued three amendments to
IFRS 2, Share-based Payment, in relation to the clas-
share-based compen-
sification and measurement
sation transactions. The amendments clarify how to
account for certain types of share-based payment trans-
actions and provide requirements on the accounting for:
Share-based compensation
The Company recognises expenses for share-based com-
pensation. For share options and warrants management
estimates certain factors used in the option pricing model,
including volatility, vesting date of options and number of
options and warrants likely to vest. If these estimates vary from
actual occurrence, this will impact the value of the share-
based compensation. Further details of the Company's esti-
mation of share-based compensation are disclosed in note 18.
Clinical trial accruals
o The effects of vesting and non-vesting conditions on the
measurement of cash-settled share-based payments;
o Share-based payment transactions with a net settle-
ment feature for withholding tax obligations; and
o A modification to the terms and conditions of a share-
based payment that changes the classification of the
transaction from cash-settled to equity-settled
The adaptation of the amendments to IFRS 2, Share-based
Payment, had no material impact on the Company’s financial
statements
Quantification of the accruals related the clinical trials require
significant management judgement. The services invoiced by
Contract Research Organisations consist of contributions of
various independent subcontractors and the actual tasks com-
pleted may be reported with significant delays. Also the clini-
cal study sites, which are mainly public sector hospitals, may
invoice their costs with long delays. These factors combined
result in a complicated task of defining on which period the cost
belongs to and requires management to make assumptions
when defining the right timing of the delivered services.
2.22. New and amended standards and
interpretations adopted by the Company
• In July 2014, the IASB published the final version of IFRS
9, Financial Instruments, which reflects all phases of the
financial instruments project and replaces IAS 39, Financial
Instruments: Recognition and Measurement, and all pre-
vious versions of IFRS 9, Financial Instruments. IFRS 9
addresses the classification, measurement and derecogni-
tion of financial assets and financial liabilities, introduces
new rules for hedge accounting and a new impairment mod-
el for financial assets. IFRS 9 is effective for annual periods
beginning on or after 1 January 2018, with early application
permitted. The Company has applied IFRS 9 retrospectively
2.23. New standards and interpretations
issued not yet effective
• In January 2016, the IASB published IFRS 16, Leases, its new
leasing standard, which will replace the current guidance in
IAS 17, Leases, and related interpretations IFRIC 4, SIC-15
and SIC-27. The new standard will result in almost all leas-
es being recognised on the balance sheet, as the distinction
between operating and finance leases is removed. Under the
new standard, an asset (the right to use the leased item) and
a financial liability to pay rentals are recognised. The only ex-
ceptions are short-term and low-value leases. The standard
applies to annual periods beginning on or after 1 January
2019, with earlier application permitted. As a result of the
new standard, the Company has reviewed all of the group’s
leasing arrangements over the last year. The Company ap-
plies the simplified transition approach and will not restate
comparative amounts for the year prior to first adoption. All
lease arrangements are both short-term and low value leases.
The amendments are effective for accounting periods begin-
ning on or after 1 January 2018. The amendments are required
to be applied without restating prior periods, but retrospective
application is permitted if elected for all three amendments
and other criteria are met.
70
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 There are no other IFRS or IFRIC interpretations that are not
effective that are expected to have a material impact on the
Company.
3. Revenue
The Company has entered into exclusive license agreements
with Maruishi in Japan, with A&B in Greater China and with
Pharmbio in the Republic of Korea for the development, com-
mercialization and supply of Traumakine and is entitled to
related milestone payments. The Company retains rights to
Traumakine in the rest of the world. The license partners are
responsible for all regulatory activities and needed clinical
in respective
activities necessary for commercialization
territories. Under the license agreements, the Company is
also entitled to receive royalty payments based on the product
sales in territories, but such royalties have not been earned or
recognised to revenue during the periods presented.
License agreement and supply agreement with Maruishi
In 2011, the Company entered into a license agreement
with Japanese license partner Maruishi. The Company has
not recognised revenue for the Maruishi license agreement
during the periods presented, but is entitled to receive
additional payments upon achievement of certain develop-
ment or commercial milestones.
In 2014, the Company entered into a separate supply
agreement with Maruishi for the delivery of investigational
medicinal products to be used in territory-specific clinical
studies. In 2018 the Company recognised EUR 19 thousand
revenue from deliveries based on this agreement.
License agreement with Pharmbio
In 2016, the Company entered into license agreement with
Korean license partner Pharmbio and met the upfront at sign-
ing. In this connection the Company satisfied the performance
obligation for the grant of the license and use of its IP and
recognised revenue in the amount of EUR 750 thousand. The
Company is entitled to receive additional milestone payments
from Pharmbio only if certain development or commercial
milestones are achieved.
4. Segment reporting
The Company is a late clinical stage drug discovery and
development company. Its operations have been focused on
the development of its main drug candidates Traumakine and
Clevegen. The Company’s chief operating decision maker has
been identified as the Chief Executive Officer (CEO).
The CEO manages the Company as one integrated busi-
ness and hence the Company has one operating and report-
able segment.
The Company had EUR 19 thousand revenue in 2018
(nil in 2017).
All of the Company’s non-current assets are located in
Finland.
5. Other operating income
€’000
Grants from the
European Union
Other income
Grant component of
government loans
Year ended 31 December
2018
2017
191
14
1,063
-
-
432
Total operating income
205
1,495
Grants from the European Union comprise of direct fund-
ing from the European Commission under the Seventh
Framework Programme (FP7) for Research and Technological
Development to support the Traumakine clinical program. The
grant component of government loans comprises of indirect
financial benefit from the below-market interest of a loan from
the Finnish Funding Agency for Technology and Innovation
(“Tekes”, currently “Business Finland”), which has been grant-
ed to finance the Clevegen clinical development program. The
project funded with the FP7 -funding ended in 2H2018.
71
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 6. Breakdown of expenses by function
7. Employee benefits
Research and development expenses
€’000
€’000
Year ended 31 December
2018
2017
Salaries
Outsourced clinical trials
services
(5,250)
(9,392)
Materials and services
(7,311)
(4,727)
Employee benefits
(1,820)
(2,704)
Other R&D costs
(1,652)
(1,315)
Inventory write-down
Depreciation and amortization
(338)
(92)
(893)
(69)
Total research and
development expenses
(16,463)
(19,100)
General and administration expenses
€’000
Year ended 31 December
2018
2017
Internal financial and reporting
process development
Employee benefits
Other G&A costs
Communication
Depreciation and amortization
Total general and
administrative expenses
(1,358)
(1,330)
(907)
(137)
(8)
(165)
(1,665)
(849)
(368)
(7)
(3,740)
(3,054)
Year ended 31 December
2018
2017
(2,816)
(2,713)
(513)
3
176
(360)
(107)
(1,189)
(3,150)
(4,369)
(1,820)
(2,704)
(1,330)
(1,665)
(3,150)
(4,369)
Pension expenses –
contribution-based plans
Social security contributions
Share-based compensation
Total employee benefit
expenses
Employee benefit expenses
by function
Research and development
expenses
General and administrative
expenses
Total employee benefit
expenses
The average number of personnel in 2018 was 25 (2017: 18).
Share-based compensation information is included in note 18
and management remuneration information in note 23.
72
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 8. Depreciation and amortisation
9. Financial income and expenses
€’000
Year ended 31 December
2018
2017
€’000
Year ended 31 December
2018
2017
Depreciation and
amortisation by type of asset
Intangible assets - patents
Intangible assets
Machinery and equipment
Total depreciation and
amortisation
Depreciation and
amortisation by function
Research and development
expenses
General and administrative
expenses
Total depreciation and
amortisation
Financial income
Interest income
Gains from foreign exchange
Total financial income
(92)
(1)
(7)
(69)
-
(7)
(100)
(76)
Financial expenses
Interest expenses
Losses from foreign exchange
Other financial expenses
(69)
Total financial expenses
(7)
(92)
(8)
-
302
302
(121)
(274)
(2)
(397)
-
7
7
(75)
(332)
(1)
(408)
(100)
(76)
Total financial income and
expenses, net
(95)
(401)
Interest expenses consist of paid and accrued interest
expenses. The accrued interest expense relates mainly to the
government loans (note 19).
The foreign exchange losses relate to euro value changes
of cash balances nominated in Pound Sterling.
Unrealised foreign exchange loss is EUR 36 thousand and
gain is EUR 290 thousand for the years ended 31 December
2018 and 2017, respectively.
73
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 10. Tax expense
€’000
Tax expense
Total tax expense
Tax losses and deductible temporary differences for which no
deferred assets have been recognised, are as follows:
Year ended 31 December
2018
2017
€’000
(2)
(2)
(1)
(1)
R&D expenses not yet
deducted in taxation (1)
Year ended 31 December
2018
2017
49,063
16,893
Income tax consists of foreign corporation tax.
The difference between income taxes at the statutory tax rate
in Finland (20%) and income taxes recognised in the state-
ment of comprehensive income is reconciled as follows:
€’000
Year ended 31 December
2018
2017
Loss before tax
(20,074)
(21,060)
Income tax calculated at
Finnish tax rate 20%
4,015
4,212
Tax losses carried forward (2)
11,151
25,862
Deferred tax depreciation on
fixed assets
-
1,628
Total
60,214
44,383
1) The Company has incurred research and development costs,
that have not yet been deducted in its taxation. The amount
deferred for tax purposes can be deducted over an indefinite
period.
2) Tax losses carried forward expire over the period of 10
years. The tax losses will expire as follows:
Tax losses and temporary
differences for which
no deferred tax asset is
recognised
Non-deductible expenses and
tax exempt income
Non-credited foreign
withholding taxes
Taxes in the statement of
comprehensive income
€’000
2018
2017
(4,266)
(3,974)
Expiry within five years
Expiry within 6-10 years
(251)
(238)
Total
1,164
9,987
3,164
22,698
11,151
25,862
(2)
(2)
(1)
(1)
The related deferred tax assets have not been recognised in the
balance sheet due to the uncertainty as to whether they can
be utilized. The Company has a loss history, which is considered
a significant factor in the consideration of not recognising
deferred tax assets. The total tax value of unrecognised deferred
tax assets is EUR 12,043 thousand (2017: EUR 8,877 thousand).
The Company does not have any other deductible or
taxable temporary differences. Therefore, no deferred tax
assets or liabilities have been recognised in the balance sheet
and thus the itemisation of deferred taxes is not provided.
74
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 11. Loss per share
Loss per share is calculated by dividing the net loss by the weighted
average number of ordinary shares in issue during the year.
12. Intangible assets and machinery and
equipment
€’000
Intangible
assets
Machinery
and
equipment
€’000
Year ended 31 December
2018
2017
Book value 1 January 2018
Loss for the period
(20,076)
(21,061)
Additions
Disposals
Weighted average number of
ordinary shares in issue
30,749,648
27,887,901
Depreciation/amortisation
Basic and dilutive loss
per share (in €)
(0.65)
(0.76)
As of 31 December 2018, the Company had only share
options outstanding as the warrants were exercised during
2017. Number of potentially dilutive instruments currently
outstanding totalled 1,540,900 as of 31 December 2018 (31
December 2017: 1,540,900). Since the Company has reported
a net loss, the share options and warrants would have an
anti-dilutive effect and are therefore not taken into account
in diluted loss per share -calculation. As such, there is no
difference between basic and diluted loss per share.
Book value 31 December 2018
As at 31 December 2018
Acquisition cost
Accumulated disposals
Accumulated depreciation/
amortisation
Book value 31 December 2018
Book value 1 January 2017
Additions
Depreciation/amortisation
Book value 31 December 2017
As at 31 December 2017
Acquisition cost
Accumulated depreciation/
amortisation
Book value 31 December 2017
325
293
-
(93)
525
823
-
(298)
525
304
90
(69)
325
530
(205)
325
22
2
-
(7)
17
39
-
(22)
17
21
8
(7)
22
36
(14)
22
75
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 13. Non-current prepayments and other
receivables
15. Current prepayments and other
receivables
As at 31 December
2018
1,814
434
349
162
2017
1,594
434
404
425
-
1,063
2,759
3,920
€’000
Prepayments for API
Production supplies
Other receivables
Total non-current
prepayments and other
receivables
As at 31 December
2018
2017
€’000
524
76
36
1,192
Prepayments
86
32
Receivable for production
defects
636
1,310
Prepayments for API consist of payments remitted to
manufacturer for API to be consumed in the Company’s
development activities. Other receivables consist of restricted
cash in the form of security deposits for rental agreements.
VAT receivable
Other receivables
Grant receivable
Total current prepayments
and other receivables
The majority of prepayments consist of the Clinical Service
Agreements with Contract Research Organisations, which are
or were current service providers in different clinical trials. The
grant receivables were nil at 31 December 2018 as the FP7
-project ended during 2H2018.
As at 31 December
14. Inventories
€’000
Work in process
Write-down of inventory
(1,231)
Total inventories
-
2018
1,231
2017
893
(893)
-
Inventories purchased prior to regulatory marketing approval
are recognised as inventory but are subject to full write-down.
Write-downs of inventories to net realisable value amounted to
EUR 1,231 thousand (2017 EUR 893 thousand). These were
recognised as research and development expenses. The
Company has not reversed any previous inventory write-downs.
76
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 16. Cash and cash equivalents
As at 31 December
€’000
Bank accounts
Total cash and cash equivalents
17. Shareholders’ equity equivalents
Group
Parent
2018
4,067
4,067
2017
9,310
9,310
2018
4,058
4,058
2017
9,310
9,310
Movements in number of shares, share capital and reserve for invested unrestricted equity were as follows.
€’000
1 January 2017
Issue of new shares, net of transaction costs
Exercise of warrants
Exercise of options
31 December 2017
1 January 2018
Issue of new shares, net of transaction costs
31 December 2018
Total registered
shares (pcs)
Share capital
Reserve for
unrestricted equity
26,311,704
2,672,340
151,400
29,100
2,691
-
-
-
32,362
15,863
254
97
29,164,544
2,691
48,576
29,164,544
1,863,350
31,027,894
2,691
-
2,691
48,576
15,888
64,464
On 1 March 2017, the number of shares was increased to
27,734,044 following the issue of 1,422,340 new shares. On 27
April 2017, the number of shares was increased to 27,787,034
following the issue of 52,990 new shares due to exercise of war-
rants. On 31 May 2017, the number of shares was increased
to 27,914,544 following the issue of 127,510 new shares due
to exercise of warrants and options and on 11 October 2017,
the number of shares was increased to 29,164,544 follow-
ing the issue of 1,250,000 new shares. On 19 February 2018,
the number of shares was increased to 29,336,744 following
the issue of 172,200 new shares, on 21 February 2018, the
number of shares was increased to 30,094,744 following the
issue of 758,000 new shares and on 26 February the number
of shares was increased to 31,027,894 following the issue of
933,150 new shares.
The Company has one class of ordinary shares. The shares
have no par value. Each share entitles the holder to one vote
at the Annual General Meeting and equal dividend. All shares
are fully paid.
The subscription price for the shares is recorded to the
share capital, unless the Board has made a resolution to
record the subscription price in the reserve for invested
unrestricted equity. If the shares of a Finnish limited liability
company have no par value according to its articles of associ-
ation, the Finnish Limited Liability Companies Act allows com-
panies the recognition of the proceeds from share issuance to
the reserve for invested unrestricted equity. In such situations
the board of a company can choose on a subscription by sub-
scription basis, how much of the issue, if anything, is record-
ed in share capital and how much to the reserve for invested
unrestricted equity that is distributable. During 2017 and 2018,
the Board recognised all relevant transactions in the invested
unrestricted equity reserve.
77
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 18. Share options and warrants
Option Plan 2015
The Option Plan 2015 was approved at the Company’s extraor-
dinary shareholders’ meeting on 15 September 2015 as part
of the Company’s incentive scheme determined by the Board
of Directors. The share options are granted to the members of
the Board of Directors and the management team and other
management and employees for no consideration. The annual
general meeting on 10 May 2017 resolved to amend, due to the
increase in the number of employees in the Company and the
increase in the number of members of the Board of Directors,
the Option Plan so that a maximum total of 500,000 C options
and a maximum total of 500,000 D options may be offered
under initial Option Plan terms and conditions. The share op-
tions have a service condition and are forfeited in case the
employee leaves the Company before the share options vest,
unless the Board of Directors approves otherwise. After the
beginning of the share subscription period, the vested options
may be freely transferred or exercised. The fair value of the
options has been determined using the Black & Scholes option
valuation model and expensed over the vesting period. Grant
dates for the share options may vary depending on the date
when the Company and the employees agree to the key terms
and conditions of the Option Plan. The maximum number of
share options that can be awarded under the Option Plan is
1.800.000 in four different tranches designated as A options,
B options, C options and D options. Each share option entitles
the holder of the option to subscribe for one ordinary share in
the Company.
The exercise price for ordinary shares based on A options
is euro equivalent of the Company’s share subscription price
in the Company’s initial public offering on the AIM market
place of the London Stock Exchange on 17 November 2015.
The exercise price for ordinary shares based on B options, C
options and D options is euro equivalent of the exercise price
determined based on the Company’s average share price on
the AIM market place during 1 July - 30 September 2016, 2017
and 2018, respectively.
Key characteristics and terms of the option plan are listed in
the table below.
The estimated date of the allocation of D -options to the em-
ployees and key management will be 30 June 2019, which has
been used in the option calculations.
2015 Option Plan
A options
B options
C options
D options
Maximum number of share options
400,000
400,000
500,000
500,000
Exercise price, EUR
Dividend adjustment
3.71
No
2.90
No
8.39
No
1.09
No
Beginning of subscription period
2 November 2015
8 October 2016
8 October 2017
8 October 2018
End of subscription period
20 September 2021
20 September 2021
20 September 2021
20 September 2021
Vesting conditions
Service until the beginning of the subscription period
78
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 For the year ended 31 December 2018
For the year ended 31 December 2017
2015 Option Plan
2015 Option Plan
Number of share options
A
B
C
D
A
B
C
D
Outstanding at 1 January
385,000
385,900
500,000
270,000
400,000
400,000
250,000
250,000
Granted
Forfeited
Exercised
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(15,000)
(14,100)
250,000
20,000
-
-
-
-
Outstanding at 31 December
385,000
385,900
500,000
270,000
385,000
385,900
500,000
270,000
Exercisable at 31 December
385,000
385,900
500,000
-
385,000
385,900
500,000
The weighted average fair value of
the share options granted, EUR
The weighted average share price
at the date of exercise, EUR
-
-
-
-
-
-
3.23
0.53
3.24
3.67
6.20
3.45
8.83
8.83
-
-
-
Determination of the fair value for the share
options granted
2018
2015 Option Plan
C
D
C
Share price at grant date, EUR
4.51-9.39
0.62-4.96
4.51-9.39
Subscription price, EUR
4.51-8.39
1.09-4.96
4.51-8.39
2017
2015 Option Plan
D
9.21
9.21
Volatility, % (*)
Interest free rate, %
Expected dividends yield, %
Option fair value, EUR
42.59-52.57
55.60
42.59-52.57
42.59
0.01
0
0.01
0
0.01
0
1.42-4.01
0.11-1.25
1.42-4.01
Effect on earnings 2017, EUR thousand (**)
Effect on earnings 2018, EUR thousand
758
-
25
-
758
-
0.01
0
2.87
25
-
(*) Expected volatility was determined as the average volatility of a peer group consisting of ten comparable biotechnology com-
panies listed on London Stock Exchange AIM list.
(**) Effect of share options granted on earnings is calculated based on earlier of the grant date or the service commencement date.
The share-based compensation expense for the Option Plan 2015, turned positive of EUR 176 thousand in 2018 (negative EUR
1,189 thousand in 2017).
79
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Warrants
Tranche
Number of warrants
Share subscription period
Exercise price, EUR
Warrants A
Warrants B
109,800
2 November 2015 – 7 May 2018
41,600
2 November 2015 – 28 February 2018
1.55
2.01
Number of warrants
Outstanding at 1 January
Granted
Forfeited
Exercised
Outstanding at 31 December
Exercisable at 31 December
The weighted average share price
at the date of exercise, EUR
Warrants A
2018
Warrants B
Warrants A
2017
Warrants B
-
-
-
-
-
-
-
-
-
-
-
-
-
-
109,800
41,600
-
-
-
-
(109,800)
(41,600)
-
-
-
-
8.72
8.72
As of 31 December 2018 there were no warrants as all of the warrants the Company had issued in 2015, were exercised during 2017.
80
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 19. Financial assets and liabilities
As at 31 December
€’000
2018
2017
2018
2017
Group
Parent
385
4,067
4,452
3,534
2,132
5,666
1,497
9,310
10,807
3,196
2,426
5,622
385
4,058
4,443
3,533
2,132
5,665
1,497
9,310
10,807
3,196
2,426
5,622
back in equal instalments over a 5-year period, unless other-
wise agreed with Tekes. For more information on contractual
maturities of the Tekes R&D loans and interests is provid-
ed in the note 19. The accrued interest on Tekes R&D loans
amounted to EUR 79 thousand (2017 EUR 65 thousand).
Grant payments received in advance of the incurrence of the
costs the grant is intended to compensate are deferred at the
reporting date and presented under advances received on the
balance sheet.
This section sets out an analysis of net debt and the move-
ments in net debt (calculated as cash and cash equivalents
less borrowings) for each of the periods presented.
Financial assets measured at amortised cost
Other receivables (*)
Cash and cash equivalents
Total financial assets measured at amortised cost
Financial liabilities measured at amortised cost
Trade payables
Borrowings in form of Tekes R&D loans
Total financial liabilities measured at amortised cost
*Prepayments are excluded as they are not considered to be
financial instruments.
Due to the short-term nature of the other receivables, their car-
rying amount is considered to equal their fair values.
Borrowings in the form of Tekes R&D loans
Fair value for the Tekes R&D loans is calculated by discounting
estimated future cash flows for the loans using appropriate
interest rates at the reporting date. The discount rate consid-
ers the risk-free interest rate and estimated margin for the
Company’s own credit risk. Discounted future cash flows are
derived from the terms containing the repayment amounts
and repayment dates for the principal and the cash payments
for interest. Given that some of the inputs to the valuation
technique rely on unobservable market data, loan fair values
are classified in Level 3.
The fair value of all the Tekes loans was EUR 1,792 thousand
(2017 EUR 2,139 thousand).
Tekes R&D loans are granted to a defined product develop-
ment project and cover a contractually defined portion of the
underlying development projects’ R&D expenses. The below-
market interest rate for these loans is the base rate set by the
Ministry of Finance minus three (3) percentage points, subject
to a minimum rate of 1%. Repayment of these loans shall be
initiated after 5 years, thereafter loan principals shall be paid
81
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 As at 31 December
€’000
Net debt
Group
Parent
2018
2017
2018
2017
Cash and cash equivalents
Tekes R&D loans- repayable within one year
Tekes R&D loans- repayable after one year
Net debt
4,067
(245)
(1,887)
1,935
9,310
(338)
(2,088)
6,884
4,058
(245)
(1,887)
1,926
9,310
(338)
(2,088)
6,884
€’000
Group
Parent
Cash
and cash
equivalents Borrowings
Cash
and cash
equivalents Borrowings
Total
Total
Net debt as at 1 Jan 2017
11,478
(2,176)
9,302
11,478
(2,176)
9,302
Cash flows
(1,878)
(369)
(2,247)
(1,878)
(369)
(2,247)
Foreign exchange adj.
Other non-cash movements
(290)
-
-
119
Net debt as at 31 Dec 2017
9,310
(2,426)
(290)
119
6,884
(290)
-
-
119
(290)
119
9,310
(2,426)
6,884
Cash flows
(5,279)
347
(4,933)
(5,288)
347
(4,941)
Foreign exchange adj.
Other non-cash movements
36
-
-
(53)
36
(53)
36
-
-
(53)
36
(53)
Net debt as at 31 Dec 2018
4,067
(2,132)
1,934
4,058
(2,132)
1,926
82
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Finally entering into commercialization, collaboration and
licensing agreements with larger pharmaceutical companies
entitles the Company to receive up-front and milestone pay-
ments related to agreed regulatory or commercial points, as
well as royalty payments once commercialization has been
successful. Activities in the area of business development are
targeted at securing such agreements. Consideration of these
activities is part of the management’s duties and is monitored
by the Board of Directors, which ultimately decides on enter-
ing into such agreements.
There can be no assurance that sufficient financing can
be secured in order to permit the Company to carry out its
planned activities. To protect the continuity of the Company’s
operations, sufficient liquidity and capital has to be main-
tained. The Company aims to have funds to finance its oper-
ations for the foreseeable future. The Company can influence
the amount of capital by adapting its cost basis considering
available financing. Management monitors liquidity on the
basis of the amount of funds. These are reported to the Board
of Directors on a monthly basis.
The Company’s Board of Directors approves the operation-
al plans and budget and monitors the implementation of these
plans and the financial status of the Company on a monthly
basis.
20. Financial risk management
The operations of the Company expose it to financial risks.
The main risk that the Company is exposed to is liquidity
risk, with capital management being another important area
given the nature of the Company’s operations and its financing
structure. The Company’s risk management principles focus
on obtaining funding and managing capital taking into conside-
ration the unpredictability of the financial markets with the aim
at minimizing any undesired impacts on the Company’s finan-
cial performance and position. The Board of Directors define
the general risk management principles and approve opera-
tional guidelines concerning specific areas including but not
limited to liquidity risk, foreign exchange risk, interest rate risk,
credit risk, the use of any derivatives and investment of the
Company’s liquid assets.
(a) Capital management and liquidity risks
The Company’s objective when managing capital is to safe-
guard the Company’s ability to continue as a going concern
(refer to notes 2.3 and 16).
Significant financial resources are required to advance the
drug development programs into commercialized pharmaceu-
tical products. The Company relies on its ability to fund the
operations of the Company through three major sources of
financing – equity financing, research and development grants
and loans and licensing agreements.
The Company has been able to fund its operations with
equity and R&D loans. While equity financing has been
available in the past (the last such financing was a EUR
15.8 million share issue in February 2018), there can be no
assurance that sufficient funds can be secured in order to
permit the Company to carry out its planned activities. In general,
capital market conditions are volatile. The prevailing financial
market situation and the overall investor’s sentiment dictate
whether the Company is able to secure additional financing in
the future, which can be considered a risk. To partly manage
this risk, the Company and its management is in constant
dialogue with financial investors, investment banks, debt
providers and other market participants.
The Company also relies on different sources of research
and development grants and loans. These funds, which are
provided through regional, national or EU level institutions,
have been historically available to the Company. The Company
strictly complies with all rules and legal obligations pertaining
to these funding programs and is in regular contact with the
funding agencies providing these. Availability of such funds in
the future cannot be guaranteed and thus this poses a poten-
tial risk to the Company’s funding in the future.
83
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 As at 31 December 2018, the contractual maturity of loans and interests was as follows:
€’000
R&D loans
Repayment of loans
Interest expenses
Total
2019
2020
2021
2022-
thereafter
245
23
268
245
21
265
338
17
356
1,304
23
1,328
As at 31 December 2017, the contractual maturity of loans and interests was as follows:
€’000
R&D loans
Repayment of loans
Interest expenses
Total
2018
2019
2020
2021-
thereafter
347
25
372
338
21
359
338
18
356
1,403
42
1,445
Total
2,132
85
2,217
Total
2,426
106
2,532
(b) Market risk
(c) Credit and counterparty risk
The Company works with partners and financial institu-
tions with good credit ratings. Management monitors credit
ratings of the financial institutions that hold the Company’s bank
deposits regularly. Further, the Company currently derives its
revenue from restricted number of reputable licence partners
in specific territories. This risk of concentration of creditors is
partly mitigated by the fact that these partners are financially
solid. These licence agreements are governed by contractual
relationships that typically address and describe remedies for
situations in which interests of the Company and the partner
are no longer aligned.
i. Foreign exchange risk
The Company operates internationally but is mainly ex-
posed to translation risk in respect of Pound Sterling (“GBP”)
denominated cash and cash equivalents balances The
Company’s policy is not to hedge translation risk. As of 31
December 2018, the Company had cash and cash equivalents
of EUR 4,058 thousand and GBP 0 thousand (2017: EUR 359
thousand and GBP 7,941 thousand) and the foreign exchange
gains and losses recorded arise mainly from the GBP cash
balances. The Company is not exposed to significant trans-
action risk, as the Company mainly operates in its functional
currency, the EUR.
ii. Interest rate risk
The Company’s interest rate risk arises from Tekes R&D loans,
which interest is the base rate defined by the Finnish Ministry
of Finance minus three (3) percentage points, subject to
minimum rate of 1%. During the periods presented, the
interest has been below the minimum level and the Company
has paid the minimum interest of 1% on the loans. During the
periods presented, the Company has not been exposed to
variable interest rate risk and accordingly the Company has
not entered into derivative contracts
84
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 21. Trade payables and other current liabilities
As at 31 December
€’000
Trade payables
Accrued research & development costs
Accrued payroll
Other liabilities
Clinical trial hospital fees
Other accruals
Advances received
Accrued milestone payment
Total
Group
Parent
2018
3,534
749
527
281
268
142
-
-
2017
3,196
350
969
302
1,241
84
976
600
2018
3,533
749
527
281
268
142
-
-
2017
3,196
350
969
302
1,241
84
976
600
5,501
7,718
5,500
7,718
Advances received comprise mainly received grant payments
from European Union for which the related grant income has
not yet been recognised or which have not been forwarded
to the other participants of the grant consortium. For further
information about grant income (note 5). Other liabilities com-
prise mainly of unpaid prepayment to FP7 -grant consortium
members.
85
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 22. Contingencies and commitments
Operating lease – Faron as a lessee
The future aggregate minimum lease payments under non-cancellable operating leases are as follows:
Year ended 31 December
€’000
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2018
179
82
-
2017
172
231
-
The Company’s operating lease commitments comprise of
rent commitments for leasehold properties and lease commit-
ments for cars, machines and equipment with leases of 3 to
4 years. The Company’s operating leases are non-cancellable
and they do not include redemption or extension options. At
the end of financial year 2019 the Company has non-cancellable
leasing commitments of EUR 10 thousand. As a result of the
new standard, the Company has reviewed all of the group’s
leasing arrangements over the last year. The Company intends
to apply the simplified transition approach and will not restate
comparative amounts for the year prior to first adoption. All
lease arrangements are both short-term and low value leases.
Contractual contingencies
The Company has contingent milestone payments of EUR
1,400 thousand to a subcontractor that will become payable
only upon the Company achieving certain milestones it its
clinical development and obtaining the regulatory approval for
Traumakine.
The Company has a contingent contractual liability to a
development party for pre-clinical product candidate Clevegen
to pay additional milestone payments. First milestone pay-
ment of EUR 427 thousand payable when production system
reached certain material yield threshold was charged 2018.
The remaining ones become payable upon the Company
achieving subsequent regulatory filings and approvals for
Clevegen. The milestone payments related to subsequent
regulatory filings and approvals for Clevegen are considered
to be remote.
86
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018
23. Related party transactions
Parent and subsidiary relations of Faron Pharmaceutical Group on 31 December 2018:
Companies owned by the parent company
Country
Faron Europe GmbH
Faron USA LLC
Switzerland
USA
Group
holding%
100
100
Group
voting%
100
100
Faron has not had interests in other entities as at and for the
years ended December 31, 2017 and 2018.
The Company identifies the following related parties:
• A&B (HK) Company Limited, an investment company exist-
ing under the laws of Hong Kong having significant influ-
ence in Faron Pharmaceuticals Oy, given its shareholding of
10,98%. A&B (HK) Company Limited does not have a repre-
sentative on the Board of Directors since September 2018.
• Members of the Board of Director, and their close family
members; and
• Company’s key Management team and their close family
members
Key management personnel
The Company’s key management personnel consist of the following:
• Members of the Board of Directors
• Management team, including CEO
Year ended 31 December
€’000
Compensation of key management personnel*
Salaries and other short-term employee benefits
Post-employment benefits
Share-based payments
Total
2018
1,535
288
(176)
1,647
2017
1,668
220
681
2,569
The Management team was awarded 0 share options during
2018 (2017: 249,850 share options). At the end of the 2018,
the number of outstanding options and share granted to the
Management team amounted to 663,450 share options (at the
end of 2017: 663,450 share options).
Non-executive Directors were awarded 0 share options
during 2018, (2017: 40,000 share options). At the end of 2018,
the number of outstanding options and share options grant-
ed to the non-executive directors amounted to 600,000 share
options (at the end of 2017: 600,000 share options).
87
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 Management and Board shareholding
Management* shareholding, 31 December 2018
Number of shares (pcs)
Shareholding, percentage
Board** shareholding, 31 December 2018
(excluding the shareholding of CEO and CFO)
Number of shares (pcs)
Shareholding, percentage
Total number of shares outstanding at 31 December 2018 (pcs)
*Presented information for the Management Includes the executive directors of the Board
**Presented information for the Board includes only non-executive directors.
Transactions with related parties
There are no additional related party transactions during 2017 and 2018 than already disclosed.
4,884,373
15.7 %
689 369
2.2 %
31,027,894
88
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 24. Events after the balance sheet date
In January 2019, the Company received the fourth and last instalment of the Clevegen Tekes R&D –loan of EUR 307 thousand.
In March 2019, the Company raised net proceeds of approximately EUR 2,900 thousand through a directed share issue and at
31 March 2019 it had EUR 4,877 thousand cash and equity of EUR 731 thousand.
Result and dividend
The statement of comprehensive income is on page 2.
The loss for the accounting period was 20,075,949.50 euro (2017: 21,060,639.95 euro).
The Board of Directors does not recommend the payment of a dividend (2017: nil).
Board signatures
London, 3 May 2019
Frank Armstrong, chairman
Markku Jalkanen
Gregory Brown
Matti Manner
John Poulos
Yrjö Wichmann
Leopoldo Zambeletti
The Auditor’s Note
The report on the audit performed has been issued today
Helsinki, 3 May 2019
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
89
FARON PHARMACEUTICALS LTDANNUAL REPORT 2018 1 (3)
Auditor’s Report (Translation of the Finnish Original)
To the Annual General Meeting of Faron Pharmaceuticals Oy
Report on the Audit of the Financial Statements
Opinion
In our opinion the financial statements give a true and fair view of the group’s and the parent company’s financial
performance and financial position and cash flows in accordance with International Financial Reporting
Standards (IFRS) as adopted by the EU.
What we have audited
We have audited the financial statements of Faron Pharmaceuticals Oy (business identity code 2068285-4) for
the year ended 31 December 2018. The financial statements comprise:
•
•
the consolidated balance sheet, statement of comprehensive income, statement of changes in equity,
statement of cash flows and notes
the parent company’s balance sheet, statement of comprehensive income, statement of changes in equity,
statement of cash flows and notes.
Basis for Opinion
We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good
auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements
section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the parent company and of the group companies in accordance with the ethical
requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical
responsibilities in accordance with these requirements.
Material Uncertainty Related to Going Concern
We draw attention to the notes in financial statements on page 7, item 2.2 “Going concern”. As mentioned in the
note the additional finance is not committed at the date of approval of the financial statements. This together with
other items mentioned in the note indicates, that a material uncertainty exists that may cast significant doubt on
the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Responsibilities of the Board of Directors and the Managing Director for the Financial
Statements
The Board of Directors and the Managing Director are responsible for the preparation of financial statements that
give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the
EU and comply with statutory requirements. The Board of Directors and the Managing Director are also
PricewaterhouseCoopers Oy, Authorised Public Accountants, P.O. Box 1015 (Itämerentori 2), FI-00101 HELSINKI
Phone +358 20 787 7000, fax +358 20 787 8000, www.pwc.fi
Reg. Domicile Helsinki, Business ID 0486406-8
2 (3)
responsible for such internal control as they 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 Board of Directors and the Managing Director are responsible for
assessing the parent company’s and the group’s ability to continue as a going concern, disclosing, as applicable,
matters relating to going concern and using the going concern basis of accounting. The financial statements are
prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company
or the group or to cease operations, or there is 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 good auditing practice 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.
As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion,
forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
parent company’s or the group’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
• Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going
concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures
are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the
date of our auditor’s report. However, future events or conditions may cause the parent company or the group
to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures,
and whether the financial statements represent the underlying transactions and events so that the financial
statements give a true and fair view.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the group to express an opinion on the consolidated financial statements. We are responsible
for the direction, supervision and performance of the group audit. We remain solely responsible for our audit
opinion.
3 (3)
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
Other Reporting Requirements
Other Information
The Board of Directors and the Managing Director are responsible for the other information. The other
information comprises of the Strategic Report, Directors' Report, Directors' Remuneration Report and
the Statement of Responsibilities included in the Annual Report, but does not include the financial
statements and our auditor's report thereon. Our opinion on the financial statements does not cover the
other information.
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.
In our opinion the information given in in the Strategic Report, Directors' Report, Directors'
Remuneration report and the Statement of Responsibilities is consistent with the information in the
financial statements.
If, based on the work we have performed on the other information that we obtained prior to the date of this
auditor’s report, 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.
Helsinki 3 May 2019
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
Faron Pharmaceuticals Ltd
Joukahaisenkatu 6, Intelligate
FI-20520 TURKU
Finland
Phone: +358 2 469 5151
Fax: +358 2 469 5152
Email: info@faron.com