Annual Report 2019
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 FARON PHARMACEUTICALS LTD
ANNUAL REPORT 2019
Faron Pharmaceuticals in brief
Faron (AIM:FARN, First North: FARON) is a clinical stage
biopharmaceutical company developing novel treatments
for medical conditions with significant unmet needs. The
Company currently has a pipeline based on the receptors
involved in regulation of immune response in oncology
and organ damage. Faron is based in Turku, Finland.
Clevegen, its precision immunotherapy, is a novel
anti-Clever-1 antibody with the ability to switch immune
suppression to immune activation in various conditions,
with potential across oncology, infectious disease and
vaccine development. Currently in phase I/II clinical
development as a novel macrophage checkpoint
immunotherapy for patients with untreatable solid
tumours, Clevegen has potential as a single-agent therapy
or for use in combination with other immune checkpoint
molecules or standard of care therapies.
Traumakine, the Company’s pipeline candidate to
prevent vascular leakage and organ failures, has completed
a phase III clinical trial in Acute Respiratory Distress
Syndrome (ARDS). Plans for its future development are
being finalised to avoid interfering steroid use together
with Traumakine.
We are very pleased to have secured
a further EUR 8 million through our
series of fundraises in late 2019, further
supporting the progress of our pipeline.
I would like to thank our new and existing
shareholders, and the entire team at
Faron, for their continued support.
Dr Markku Jalkanen
Chief Executive Officer
For further information on the Company’s progress, development programs and pipeline, please visit Faron´s website www.faron.com.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Contents
FARON PHARMACEUTICALS
Clevegen and Traumakine
Highlights 2019
STRATEGIC REPORT
Chairman’s Statement
Chief Executive Officer’s Review
Financial Review
Risks and Uncertainties
CORPORATE GOVERNANCE
Chairman’s Introduction to Governance
Compliance with the Principles of the QCA Code
Board of Directors
Remuneration Report
Corporate Governance Statement
Directors’ Report
FINANCIAL REPORT
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 2019
Clevegen
The future of immunotherapy
THE TARGET AND PROGRAMME
CLINICAL DEVELOPMENT
Faron is currently conducting its first-in-human clinical
study MATINS with Clevegen in selected metastatic or
inoperable solid tumours. Any significant developments
in Faron’s programmes are reported on Faron´s website
www.faron.com > Media > News and press releases.
Finding an all-encompassing cure for cancer has for
decades been an overwhelming medical and scientific
challenge. No one can pledge to cure all cancer. We
focus on becoming the best in activating immunity
by supporting human immune defence mechanisms
against tumours. This could help in treating several
cancer types, as immune defences are often, if not
always, suppressed in cancer patients.
Faron’s immuno-oncology programme Clevegen revolves
around CLEVER-1 (Common Lymphatic Endothelial and
Vascular Endothelial Receptor 1), a key immunological
switch expressed under immunosuppressive conditions.
Pre-clinical studies have proven that CLEVER-1, also known
as Stabilin-1 or STAB-1, is involved in cancer growth and
spread. Recently, it has become very clear, that CLEVER-1
maintains the immunosuppressive phenotype of tumour
associated macrophages (TAMs).
THE SOLUTION
Blocking or silencing CLEVER-1 on human macrophages
activates MHC expression and promotes IFN-y leukocyte
cultures. Disruption or inhibition of CLEVER-1 weakens
tumour progression in mice.
Clevegen is a humanized anti-Clever-1 antibody which
targets CLEVER-1 positive TAMs and converts these
highly immunosuppressive M2 macrophages to immune
stimulating M1 macrophages. This unique macrophage-
directed immuno-oncology switch may be used alone or in
combination with other cancer treatments. Clevegen also
has promise outside immuno-oncology, as it can switch
immune suppression to immune activation in various
conditions, such as infectious diseases and vaccine
development.
Data from Faron’s ongoing MATINS trial has shown,
that I) in Clevegen, we potentially have the first macrophage
immune checkpoint drug which has promoted immune
activation of all dosed patients to date; II) Clevegen is
safe and well-tolerated, making it a low-risk candidate for
combination with existing cancer therapies; III) Clevegen
has shown early clinical benefits in patients who have
exhausted all other treatment options.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Traumakine
Endothelial barrier is everything
THE TARGET AND PROGRAMME
Faron’s Traumakine programme addresses the treatment
of Acute Respiratory Distress Syndrome (ARDS) and
other ischemic conditions. ARDS is a severe, orphan lung
disease characterized by widespread inflammation in the
lungs and a sudden failure of the respiratory system. The
integrity of vasculature and capillaries, which maintain
the supply of oxygen in various organs, is sustained by
endothelial cells covering the inner surfaces of blood
vessels and forming a barrier between circulation and
tissues. The breakdown of this endothelial barrier results
in leakage of blood content to tissues. When this happens
in lungs (ARDS), the lung air is filled with protein rich fluid
and blood cells resulting in respiratory failure.
There are several, seemingly different common causes
of ARDS: sepsis, pneumonia, aspiration of fumes, food or
stomach contents going into the lungs or significant trauma.
There is no pharmaceutical treatment for ARDS, lung-
protective mechanical ventilation being the main form of
treatment. The reported mortality rate of ARDS is 30 to 45%.
THE SOLUTION
Traumakine is based on the patent-protected use of
intravenous interferon beta to prevent capillary leakage
in organs under threat of ischemia and inflammation.
The active pharmaceutical ingredient in Traumakine is
recombinant human IFN beta-1a.
Through extensive research and ex-vivo studies,
scientists at Turku University have
identified that a
molecule called CD73 is an essential entity needed to
maintain endothelial barrier function. One of the key
findings that led to the development of Traumakine was
a discovery that interferon beta-1a could enhance CD73
expression and therefore could be used to treat a range of
vascular leakage conditions, including ARDS. Traumakine
works by enhancing lung CD73 expression and increasing
production of anti-inflammatory adenosine so that vascular
leaking and escalation of inflammation are reduced.
The European Commission has granted Traumakine an
orphan designation. This means Traumakine is intended
for the treatment of a disease that is life-threatening
and chronically debilitating indication. Also, the FDA has
granted Traumakine with Fast Track designation which
is a process designed to facilitate the development and
expedite the review of drugs to treat serious conditions
and fill an unmet medical need.
Furthermore, the UK’s Medicines and Healthcare
Products Regulatory Agency
(MHRA) has granted
Promising Innovative Medicines (PIM) designation for
Traumakine. PIM designation is granted when a medicine
shows early signals, based on evidence to date, that it
has potential value in a disease area with significant and
urgent unmet need. PIM further qualifies an accompanying
application and progression of the medicine towards the
next stage in UK’s EAMS process.
CLINICAL DEVELOPMENT
Following meticulous pre-clinical research Faron has
conducted three clinical studies with Traumakine in the
treatment of ARDS. Based on findings from the detailed
analysis of INTEREST results, and following discussions
with regulators, Faron is continuing clinical development
of Traumakine in ARDS.
Any significant developments in Faron’s programmes
are reported on Faron´s website www.faron.com > Media
> News and press releases.
Inducing CD73 expression on vascular endothelium
to protect organs under ischemia and inflammation
could be a new way to approach the treatment of
several life threatening diseases and conditions.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Highlights
Operational (including post period):
CLEVEGEN®
Regulator of major inhibitory immune checkpoints
and wholly-owned novel cancer immunotherapy in
development
• Part I of the open label phase I/II MATINS trial, initiated
across multiple sites through Europe and primarily
intended to investigate safety and tolerability, was
completed with dose escalation reaching its planned
maximum level of 10mg/kg. Clevegen demonstrated
good tolerability at all dosing levels (0.1 to 10 mg/kg)
without dose limiting toxicity.
following
• Clevegen promoted immune activation in all dosed
patients, measured
treatment with
Clevegen and observed as increased circulating
CD8+ T-cells and CD8+/CD4+ ratio, decreased
regulatory T-cells (T-regs) or a substantial increase in
mobile natural killer (NK) cells in the blood.
• Partial responses were observed in two patients.
The first, a colorectal cancer (CRC) patient, showed
a continuation of lung and lymph node metastasis
shrinkage and their tumour load biochemical marker,
carcinoembryonic antigen (CEA), also normalised.
The second, a heavily pre-treated melanoma patient,
showed a reduction in the size of the target lesion
tumour (a lung metastasis) by 44 percent and other
non-target
lesions stabilized. Their biochemical
tumour load marker also declined and clearance of
pleura fluid was observed.
• Data showing Clevegen’s potential early efficacy and
good tolerability were presented at the European
Society of Medical Oncology (ESMO) 2019 Congress
in Barcelona, Spain. At the Society’s subsequent
Immuno-Oncology Congress 2019
in Geneva,
Switzerland, more detailed cell surface biomarker
data were presented for the first time showing
Clevegen’s potential to downregulate a range of
inhibitory immune checkpoints commonly targeted
by current immuno-oncology (IO) therapies.
• The US Food and Drug Administration (FDA) approved
Faron’s Investigational New Drug (IND) application for
Clevegen, enabling expansion of the MATINS trial into
the US.
• CRC and ovarian cancer were selected by the MATINS
data monitoring committee as the first and second
expansion cohorts in part II of the study. Both cancer
types are known to host a significant number of
Clever-1 positive tumour-associated macrophages
(TAM) which correlates with increased mortality rates.
• New experimental data supporting the immuno-
therapeutic blockade of Clever-1 as an alternative
to, or in combination with PD-1 checkpoint inhibition
to reactivate immunity against immunosuppressive
tumours were published in Clinical Cancer Research,
a journal of the American Association for Cancer
Research.
• Several new patent filings were carried out during the
period to further strengthen the existing IP around
Clevegen use in conditions where harmful immune
suppression causes serious diseases.
• bexmarilimab is under consideration by the World
Health Organization as the Proposed International
Nonproprietary Name.
• Manufacturing was established to supply drug
product for cohort expansions in part II of the
MATINS study.
• Partnering discussions continued with the aim of
supporting expansion of clinical development and
exploring the potential of Clevegen in combination
with existing immunotherapies and other cancer
therapies.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 TRAUMAKINE®
in development for the treatment of organ failures
• Faron remains focused on developing Traumakine as
a treatment for acute respiratory distress syndrome
(ARDS) taking
levels of
concomitant corticosteroids used as a standard of
care for ARDS and some ruptured abdominal aorta
aneurysm (RAAA) patients.
into account the high
• Following feedback from the FDA regarding trial
design, Faron submitted an amended protocol to
the FDA, reflecting the FDA’s feedback that further
studies with
(IFN-beta) should
exclude the use of overlapping corticosteroids since
they are likely to block the desired therapeutic effect
of Traumakine and may have a potentially deleterious
impact on patient outcomes.
interferon-beta
• The FDA accepted Faron’s proposed study protocol
for the new Traumakine trial, which excludes the
use of concomitant corticosteroids and which will
be split in two steps. The first step will commence
with INTEGRITY, a pilot randomised and placebo
controlled study, which will serve as final adjustment
for adequate statistical powering and sample size
justification for the pivotal second step, CALIBER.
• The Company envisages that further Traumakine
trials are likely to be funded through a third party.
• Top-line data from the phase III ARDS trial with
Japanese partner Maruishi Pharmaceutical Co., Ltd
were, as expected, consistent with the INTEREST
study
treatment with
Traumakine did not result in reduced mortality or an
increased number of ventilator-free survival days
when compared to placebo. In the study, very high
concomitant corticosteroids use (77%) was observed.
results, showing
that
•
in the
concomitant
Traumakine,
• A phase I study in healthy volunteers (pharmaco-
the
kinetic/dynamic YODA study), examining
administration
of
use
and
confirmed
corticosteroids with
observations previously seen
INTEREST
study. Traumakine produced the expected levels
of bioactivity, suggesting drug formulation was
not a factor in the outcome of that trial and that
concomitant corticosteroids use interferes in the
desired IFN-beta effect on CD73.
Interim results from the phase II INFORAAA study
examining the effect of Traumakine on mortality
(predominantly for multi-organ failure, MOF) and on
pharmacodynamic biomarkers in surgically operated
RAAA patients, showed biomarker (MxA and CD73)
responses indicating a good IFN-beta response from
Traumakine. A trend towards reduction of mortality was
seen in patients increasing their CD73 plasma levels.
• Based on the advice from the INFORAAA independent
data monitoring committee and investigators, the
Company decided to close the INFORAAA trial, as
unexpected high use of concomitant corticosteroids
prevent
the
INFORAAA protocol.
implementation of
the scientific
• Faron filed a request for arbitration with the
Arbitration Institute of the Stockholm Chamber
of Commerce seeking damages from Rentschler
Biopharma SE for terminating the API manufacturing
process for Traumakine.
It
is the understanding of the Company that
the current API manufacturing process used to
significant
manufacture Traumakine
upgrading to secure MAA/BLA approval. Various
options for manufacturing are currently being
explored.
requires
•
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 AOC3 ANTAGONIST PLATFORM TECHNOLOGY
•
In March 2020, Faron acquired rights for the potential
new use of AOC3 inhibitors. Faron will be responsible
for the future development of the AOC3 protein
inhibitor and for the management, prosecution
maintenance and filing of patent applications.
CORPORATE
• Yrjö Wichmann took up the new position of Vice
President, Financing and Investor Relations and
Toni Hänninen was appointed as Faron’s new Chief
Financial Officer.
• Faron’s shares were listed on Nasdaq First North
Growth Market Helsinki as of 3 December 2019.
FINANCIAL
• On 31 December 2019, the Company held cash
balances of €7.1 million (2018: €4.1 million).
• Loss for the period for the financial year ended 31
December 2019 was €13.3 million (2018: €20.1
million loss).
• Net assets on 31 December 2019 were €1.6 million
(2018: €0.4 million).
• During the period, in November, August, May and
March 2019, the Company successfully raised a total
of €15.6 million gross (€14.5 million net) from new
and existing shareholders, employees and Company
Directors through issuance of total of 12,262,853 new
ordinary shares. The majority of these proceeds are
being used to advance Clevegen through the MATINS
trial, further Traumakine development through the
design and preparation of the next clinical trials and
advance partnering discussions in respect of both
Traumakine and Clevegen.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Financial
Consolidated key figures, IFRS
€’000
Revenue
Research and Development expenses
General and Administrative expenses
Loss for the period
Loss per share EUR
Unaudited
7–12/2019
6 months
Unaudited
7–12/2018
6 months
1–12/2019
12 months
1–12/2018
12 months
0
(5,255)
(1,688)
(6,850)
(0.18)
(1)
(4,762)
(1,378)
(6,026)
(0.20)
0
(10,237)
(3,049)
(13,262)
(0.36)
19
(16,463)
(3,750)
(20,086)
(0.65)
Number of shares at end of period
43,290,747
31,027,894
43,290,747
31,027,894
Average number of shares
38,551,293
30,749,648
36,850,577
30,749,648
€’000
Cash and cash equivalents
Equity
Balance sheet total
Unaudited
30 Jun 2019
Unaudited
30 Jun 2018
31 Dec 2019
31 Dec 2018
2,892
(1,761)
5,103
11,168
6,722
16,716
7,059
1,610
10,209
4,067
369
8,002
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Chairman’s
Statement
2019 was a significant year for Faron. The highly
experienced management team made significant progress
executing the Company’s strategy and maintaining
momentum in the delivery of its novel pipeline.
The development programme for Faron’s wholly-
owned novel precision cancer immunotherapy candidate,
Clevegen, has accelerated rapidly. Promising early clinical
data continued to give us confidence in the potential of
Clevegen as a next-generation immuno-oncology therapy
and one that could potentially be used in combination
therapy. The strength of the early clinical data generated in
2019 enabled the Clevegen team to quickly identify a group
of patients thought most likely to respond to treatment.
Selection of the first expansion cohort in colorectal
cancer was a significant achievement and is testament
to the focus Faron has placed on Clevegen’s development
this year. The US Food and Drug Administration (FDA)
approval of the Company’s Investigational New Drug
(IND) application for Clevegen was a major development
milestone enabling expansion of Clevegen’s clinical
development in the US.
Harnessing the immune system to fight cancer has
transformed the way patients are treated and scientists
continue to make new discoveries in the field of immuno-
oncology every day. It is exciting to see the Clevegen
programme generating such interest in this field, from
the scientific community and commercial organisations.
The wealth of data generated in 2019 strengthens Faron’s
confidence in the programme’s future.
Alongside Clevegen’s development progress in 2019,
the Company continued to build on its understanding of the
results from Traumakine’s INTEREST trial. Data from a late-
stage trial undertaken by our Japanese partner Maruishi
were consistent with our study results a year earlier and
supported our observation that corticosteroid use interferes
with Traumakine efficacy. This observation has since been
confirmed by the FDA who, following discussions about
the future development path for Traumakine, advised
that further studies should exclude the concomitant
use of steroids. The body of evidence generated during
Traumakine’s development programme is clearly a matter
of interest for opinion leaders involved in the treatment of
of acute respiratory distress syndrome (ARDS) patients
and the debate around whether corticosteroids have any
beneficial role in ARDS patients continues.
Recent guidance from the World Health Organization
(WHO) on the clinical management of severe acute
respiratory infection related to the novel coronavirus that
emerged in China at the end of 2019 advises against the
routine use of corticosteroids. The emergence of this
novel virus, and the risk of ARDS among infected patients,
is a reminder of the need for new treatments to tackle this
potentially fatal condition.
During the year our fundraising activities and our
listing on the Nasdaq First North Growth Market in
Finland received strong shareholder support enabling us
to build a more secure financial position for the Company
and give the pipeline its greatest chances of success. It
was also encouraging to see the Company’s share price
performance in 2019, its growth reflecting the progress
of the business and the strength of Faron’s pipeline
potential.
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 On behalf of the Board, I would like to thank all
those who have played a part in Faron’s progress in
2019 – the management team, staff and Board for their
hard work and commitment, our partners and steering
committee members for their support and expertise,
and the investigators and patients involved in our clinical
trials. I would also like to pay particular thanks to our
CEO, Markku Jalkanen who, while guiding Faron through
difficult circumstances, has successfully led its transition
to becoming a leading immunotherapy company.
We look forward to continued progress with our
pipeline products Clevegen and Traumakine in 2020.
Dr Frank Armstrong
Chairman
March 19, 2020
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Chief Executive
Officer’s Review
OVERVIEW
Faron is focused on immuno-oncology, organ trauma and
vascular damage. Our goal is to save lives by developing
unique scientific discoveries into ground-breaking new
treatments for hard-to-treat and rare diseases. Our work is
rooted in two scientific principles. First, a deep knowledge
of the pharmacology of our drug candidates. And second,
understanding the science of the targeted conditions at
the molecular level, to most effectively influence their
underlying causes.
Our focus for 2019 has been to continue to progress
our wholly-owned novel precision cancer immunotherapy
candidate, Clevegen, through the first-in-human clinical
study, MATINS, in selected metastatic or inoperable solid
tumours. We have also been working closely with the
regulatory authorities to determine the future development
pathway for Traumakine in ARDS and organ failures.
CLEVEGEN DEVELOPMENT
We have made significant, and exciting, clinical progress
with Clevegen during 2019. Clevegen is our wholly-owned
novel precision cancer immunotherapy candidate, which
causes conversion of the immune environment around a
tumour from immune-suppressive to immune-stimulating
by reducing the number and function of tumour-associated
macrophages (TAMs). Clevegen is differentiated from
other immunotherapies through its specific targeting of
M2 TAMs which facilitate tumour growth. Through myeloid
cell plasticity, Clevegen can convert these M2 TAMs to
M1s, leaving existing M1 TAMs intact and allowing both to
support immune activation against tumours. We believe
it has the potential to function as a novel macrophage
checkpoint immunotherapy both as a monotherapy and
in combination with other immuno-oncology therapies or
standard of care treatments.
MATINS TRIAL
The MATINS (Macrophage Antibody To INhibit immune
Suppression) study is a first-in-human open label phase I/II
clinical trial with an adaptive design to investigate the safety
and efficacy of Clevegen in selected metastatic or inoperable
solid tumours. The selected tumours under investigation
are cutaneous melanoma, hepatobiliary/hepatocellular,
pancreatic, ovarian and colorectal cancer, all known to host
a significant number of Clever-1 positive TAMs. Together
these five target groups consist of approximately 2 million
annual cases worldwide. Cancer patients with high Clever-1
expression are identified with a simple blood myeloid cell
staining with Clevegen (“liquid biopsy”).
Part I of the MATINS study was conducted to establish
tolerability, safety and dose escalation to optimize dosing.
Subjects in Part I of the study received doses of 0.1 mg/
kg, 0.3 mg/kg, 1.0 mg/kg, 3.0 mg/kg and 10 mg/kg. All
dose levels tested showed good tolerability with no dose
limiting toxicity signals and all subjects dosed in the
study experienced a switch in their immune cell profiles
following treatment with Clevegen towards increased
immune activation, observed as increased circulating
CD8+ T cells and CD8+/CD4+ ratio, decreased regulatory
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 T-cells (T-regs) or a substantial increase in mobile natural
killer (NK) cells in the blood.
Based on results from the initial part of the MATINS
trial, Faron announced in April 2019 that late-stage
colorectal cancer (CRC) had been chosen for the first
expansion cohort for the second part of the trial. Following
the successful conclusion of the dose escalation in
Part I, and with approval from the MATINS trial’s data
monitoring committee (DMC), Faron initiated this first
expansion cohort, Part II, in January 2020. A total of 10
late-stage CRC patients are expected to be dosed at the
approved initial dose level of 0.3 mg/kg cohort, including
two patients who had previously received this dose in the
earlier Part I of the study. Furthermore, in January 2020,
we announced that ovarian cancer has been selected
as the second expansion cohort in the trial. Both these
tumour types are known to host a significant number of
Clever-1 positive TAMs which correlates with increased
mortality rates among these patients.
In November 2019, the FDA approved the Company’s
Investigational New Drug (IND) application for Clevegen®
(FP-1305), enabling expansion of the MATINS trial into the
US. We anticipate opening the first site in mid-2020. In due
course, we also plan to file applications for Breakthrough
Therapy status in the US and PRIME status in Europe,
further facilitating regulatory
interactions during the
development of Clevegen.
Clevegen’s ability to down regulate a range of major
inhibitory checkpoints reaffirms our belief in its potential
as a master regulator of immunity and a highly effective
immunotherapy. It indicates that Clevegen treatment
through
therapies
increased efficacy of other
could potentially allow
immuno-oncology
the biomarker
analysis of patient’s blood cells post Clevegen induced
immune activation, finally offering a biological rationale to
guide combination therapies. 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 positive
outcome from these negotiations during 2020.
TRAUMAKINE DEVELOPMENT
With no currently approved pharmacological treatments
available, acute respiratory distress syndrome (ARDS)
remains a significant problem for patients and healthcare
systems. During 2019, the Company has continued
to further understand the correlation between the
combined use of corticosteroids and IFN-beta and has
been working closely with the regulatory authorities in
order to determine the next steps in Traumakine’s future
development pathway.
In April 2019, Faron announced top-line data from
the Phase III trial with Japanese partner Maruishi
Pharmaceutical Co., Ltd. Results from this trial were in
line with the Company’s expectations, and previously
announced results observed
in the INTEREST trial,
showing that treatment with Traumakine did not result in
reduced mortality or an increased number of ventilator-
free survival days when compared to placebo. In order to
further examine the effects of concomitant steroid use and
Traumakine, as seen in both the INTEREST trial and the
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Japanese study, Faron conducted the pharmacokinetic/
dynamic YODA study in healthy volunteers. Results from
this study, announced in June 2019, were consistent with
the INTEREST data, supporting the conclusion that co-
administration of steroids with Traumakine in patients
inhibits IFN-beta action.
Also, in June 2019, Faron announced interim results from
the Phase II INFORAAA study, which examined the effect
of Traumakine on mortality (predominantly for multi-organ
failure, MOF) and pharmacodynamic biomarkers of surgically
operated ruptured abdominal aorta aneurysm (RAAA) patients.
Based on the advice from the INFORAAA independent data
monitoring committee and
investigators, the Company
decided to close the INFORAAA trial, as unexpected high use
of concomitant corticosteroids was preventing the scientific
implementation of the INFORAAA protocol.
Interestingly,
(WHO) published a
in January 2020, the World Health
Organization
recommendation
recognising the risk of using corticosteroids on patients
with coronavirus. This recommendation aligns with our
findings from the post-hoc analysis of the INTEREST
study and strengthens our belief that the whole medical
community should be more diligent with regard to the
combined use of corticosteroids and type I interferons.
Faron’s scientific network has also confirmed this
interaction at a molecular level in lung endothelial cells.
The Company remains committed to progressing
Traumakine for the treatment of ARDS and, following
the Company’s revised protocol submission in February
2020, the FDA have now accepted the protocol design
for the next Traumkine study. The study design reflects
the feedback and conclusions from the FDA that
further studies with IFN beta should exclude the use of
concomitant glucocorticoids since they are likely to block
the desired therapeutic effect of Traumakine and may
have a potentially deleterious impact on patient survival.
We are planning to split the clinical development of
Traumakine in ARDS into two steps, commencing with
INTEGRITY, a pilot randomised and placebo controlled
study with approximately 60 patients. The INTEGRITY
data will then serve as final adjustment for adequate
statistical powering and sample size justification for the
pivotal CALIBER study, subjected for FDA review. We
expect that the sample size of the CALIBER study will not
exceed 200 patients based on the post hoc analysis of the
INTEREST trial data. We envisage that future Traumakine
trials (including INTEGRITY and CALIBER) are likely to be
funded through a third party or parties.
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AOC3 ANTAGONIST PLATFORM TECHNOLOGY
In March 2020, Faron announced it had acquired rights
for the potential new use of AOC3 inhibitors covered by
a recently filed patent application. The AOC3 enzymatic
domain, a semicarbazide-sensitive amine oxidase is known
to produce hydrogen peroxide, a potent inflammatory
mediator. Being expressed by many inflamed vascular
endothelial cells, the AOC3 overexpression has been
connected with many vascular diseases.
Faron will be responsible for future development of
the invention and for the management, prosecution and
maintenance of any patent applications as well as for
the filing of new patent applications for the AOC3 protein
inhibitor. Pre-clinical studies with humanized AOC3 mice
and with ex vivo human cells in relation to the Invention
are currently ongoing and further information will be
provided later in the year.
CORPORATE
On 3 December 2019, Faron started trading on Nasdaq First
North Growth Market (“Nasdaq First North”), a multilateral
trading facility operated by Nasdaq Helsinki Ltd. The ISIN
code of Faron’s ordinary shares is FI4000153309 and the
trading code on Nasdaq First North is FARON. This is in
addition to Faron’s listing, since November 2015, on AIM.
In October 2019, Faron received a letter from Rentschler
Biopharma SE (“Rentschler”) in which Rentschler stated
that it was terminating the agreement concerning the
API manufacturing for Traumakine. Following a detailed
investigation by Faron into the circumstances around
manufacturing arrangements, the Company has since
concluded that, in its view, Rentschler was in breach of
the underlying agreement between the parties. Faron has
filed a request for arbitration, funded by a third party on
a non-recourse basis, with the Arbitration Institute of the
Stockholm Chamber of Commerce seeking damages.
In May 2019, Yrjö Wichmann left his role as the
Company’s Chief Financial Officer to take up the new
Investor
position of Vice President, Financing and
Relations. Mr Wichmann remains a member of the senior
management team but stepped down from the Board with
effect from 28 May 2019. We were delighted to welcome
Mr Toni Hänninen as Faron’s new CFO, effective from
1 June 2019, being responsible for both internal and
external reporting.
The Annual General Meeting held on 28 May 2019
resolved the number of members of the Board as six.
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Frank Armstrong, Markku Jalkanen, Matti Manner,
Leopoldo Zambeletti, Gregory Brown and John Poulos
were re-elected to the Board for a term that ends at the
end of the next AGM.
Traumakine:
• Further updates in relation to INTEGRITY and
CALIBER during 2020
• Continuation plans to be announced in H2-2020
FINANCIAL
During the period, the Company successfully raised
approximately EUR 15.6 million (gross), EUR 14.5 million
(net) from new and existing shareholders, employees and
Company Directors. The majority of these proceeds are
being used to advance Clevegen through the MATINS trial,
further Traumakine development through the design and
preparation of the next clinical trials and advance partnering
discussions in respect of both Traumakine and Clevegen.
OUTLOOK
Our focus for 2020 will be to continue to expedite
Clevegen’s clinical development through part II and
part III of the MATINS trial and to report these data to
regulatory authorities. We will also continue to work in
close collaboration with the regulatory authorities in order
to progress the INTEGRITY and CALIBER clinical trials and
secure Traumakine’s future development pathway. We
are continuing to make progress with potential partners
regarding both Clevegen and Traumakine, whilst also
exploring funding opportunities to ensure we can continue
to progress both products. I would like to thank our
shareholders for their continued belief in the Company and
the management team for their hard-work and dedication
and look forward to updating the market on our progress
throughout the course of the year.
THE BOARD ANTICIPATES THE FOLLOWING PIPE-
LINE PROGRESS AND CATALYSTS DURING 2020:
Clevegen:
• Completion of all biomarker analyses from MATINS
•
•
Part I patients to guide Clevegen dosing
Initiation of the second expansion cohort, ovarian
cancer, during H1-2020
Initial data from the first expansion cohort (CRC)
expected in Q2-2020
• Expansion of the MATINS trial to leading cancer
centres in France and Spain in Q2-2020
• Opening of US study sites to facilitate rapid
expansion of the MATINS trial in Q2-2020
• Partnering update during 2020
AOC3 Antagonist Platform Technology:
• Additional information from pre-clinical studies with
humanized AOC3 mice and with ex vivo human cells
during 2020
Dr Markku Jalkanen
Chief Executive Officer
March 19, 2020
15
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Financial
Review
KEY PERFORMANCE INDICATOR
As a clinical stage drug development company, Faron’s
primary interconnected KPIs are cash burn and cash
position. The Company conducted several successful
fundraises during 2019. The Company’s net cash flow
showed €3.0 million positive due to a reduction in
expenses and said fundraises. 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 2019 (2018: €nil).
The Company recorded €0.2 million (2018: €0.2
million) of other operating income. This consisted of the
reimbursement of already occurred legal expenses by the
third-party recovery services provider as announced by
the Company on 30 December 2019.
RESEARCH AND DEVELOPMENT COSTS
The R&D costs decreased by €6.3 million from €16.5
million in 2018 to €10.2 million in 2019. The costs of
outsourced clinical trial services were reduced by €3.4
million from €5.3 to €1.9 million. The cost of materials and
services used in the R&D was reduced by €1.7 million from
€7.3 to €5.6 million.
GENERAL AND ADMINISTRATION COSTS
Administrative expenses decreased by €0.8 million from
€3.8 million in 2018 to €3.0 million in 2019. The decrease
was mainly due to the €1.4 million decrease in external
costs related to the development of internal financial
and reporting processes during 2018, but this was
partially offset by an increase of €0.7 million in the other
administrative expenses.
TAXATION
The Company’s tax credit for the fiscal year 2019 can
be recorded only after the Finnish tax authorities have
approved the tax report and confirmed the amount
of tax-deductible. The total amount of cumulative tax
losses carried forward approved by tax authorities on 31
December 2019 was €16.1 million (2018: €11.2 million).
The Company estimates that it can utilise most of these
during the years 2020 to 2028 by offsetting them against
future profits. In addition, Faron has €58.6 million of R&D
costs incurred in the financial years 2010 - 2019 that have
not yet been deducted in its taxation. This amount can
be deducted over an indefinite period at the Company’s
discretion.
LOSSES
Loss before income tax was €13.3 million (2018: €20.1
million). Net loss for the year was €13.3 million (2018:
€20.1 million), representing a loss of €0.31 per share
(2018: €0.65 per share) (adjusted for the changes in
number of issued shares).
16
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 CASH FLOWS
FINANCIAL POSITION
Net cash flow was €3.0 million positive for the year ended
31 December 2019 (2018: €5.3 million negative). Cash
used for operating activities decreased by €9.0 million to
€11.5 million for the year, compared to €20.5 million for
the year ended 31 December 2018. This decrease was
mostly driven by a decrease in R&D investments.
Net cash inflow from financing activities was €14.5
million (2018: €15.5 million) due to the successful equity
placings completed in during 2019.
FUNDRAISING
During the period, 1 January to 31 December 2019, the
Company successfully raised a total of €15.6 million gross
(€14.5 million net) across several fundraises from new and
existing shareholders, employees and Company Directors.
The majority of these proceeds are being used to advance
Clevegen through the MATINS trial, further Traumakine
development through the design and preparation of the
next clinical trials and advance partnering discussions in
respect of both Traumakine and Clevegen.
•
•
•
•
In March 2019, €3.1 million gross (€2.9 net) through
issuance of new ordinary shares.
In May 2019, €1.3 million gross (€1.3 net) through
issuance of new ordinary shares.
In August 2019, €2.5 gross (€2.2 net) million through
issuance of new ordinary shares.
In November 2019, €8.7 million gross (€8.0 net)
through issuance of new ordinary shares.
As at 31 December 2019, total cash and cash equivalents
held were €7.1 million (2018: €4.1 million). The Company
continues to exercise tight cost control to keep the cash
burn as low as possible for preservation of existing
resources.
GOING CONCERN
As part of their going concern review, the Directors have
followed 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 and Liquidity Risks – Guidance for directors
of companies that do not apply the UK Corporate
Governance Code”. The Company and its subsidiaries (the
“Group”) are subject to a number of risks similar to those
of other development stage pharmaceutical companies.
These risks
include, amongst others, generation of
revenues in due course from the development portfolio
and
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
commercial and development activities and generating
a level of revenue adequate to support the Group’s cost
structure.
risks associated with
The Group made a net loss of €13.3 million during the
year ended 31 December 2019. It had total equity of €1.6
17
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 million including an accumulated deficit of €80.0 million.
As at that date, the Group had cash and cash equivalents
of €7.1 million.
The Directors have prepared detailed financial forecasts
and cash flows looking beyond 12 months from the date
of the approval 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 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 fourth
quarter of 2020. The Directors are continuing to explore
sources of finance available to the Group and they believe
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 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 issuance of these financial statements, these
circumstances represent a 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 appropriate, adjustments
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 24
(2018: 25).
SHARES AND SHARE CAPITAL
During the period 1 January to 31 December 2019, the
Company, using the share authorities granted at the
Annual General Meetings held on 31 May 2018 and on 28
May 2019, as well as at an Extraordinary General Meeting
held on 25 October 2019, issued a total of 12,262,853 new
ordinary shares.
• On 28 March 2019, 4,448,625 shares at an issuance
price of € 0.7020 (£0.60) per share.
• On 13 May 2019, 1,757,375 shares at an issuance
price of € 0.7598 (£0.65) per share.
• On 5 August 2019, 941,840 shares at an issuance
price of € 1.1900 (£1.06) per share.
• On 27 August 2019, 1,179,513 shares at an issuance
price of € 1.1900 (£1.06) per share.
• On 12 November 2019, 3,935,500 shares at an
issuance price of €2.1980 (£1.90) per share.
18
The subscription price net of costs 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 2019 the total number of voting rights was
43,290,747.
LEGAL PROCEEDINGS
As announced by the Company on 2 October 2019 and 30
December 2019, the Company has received a letter from
Rentschler Biopharma SE in which Rentschler stated that
it terminates the agreement concerning the Traumakine
API manufacturing. The Company considers that this
statement is without merit and has filed a request for
arbitration to seek damages. To fund the proceedings, the
Company has entered into a litigation funding agreement
with a third-party recovery services provider which, in the
event of success, would receive a typical portion of any
damages awarded.
Toni Hänninen
Chief Financial Officer
March 19, 2020
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Risks and
Uncertainties
Faron is a late clinical stage biopharmaceutical company and, similarly to 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 2019 are below.
RESEARCH AND DEVELOPMENT
COMMERCIAL PRODUCTS AND MANUFACTURING
Faron’s main products are
in clinical development
however, they may not be successful in clinical trials
and the Company may not be able to develop approved
or marketable products. Technical risk is also present at
each stage of the discovery and development process of
other, earlier stage products with challenges in biology
(including the ability to produce candidate drugs with
appropriate safety, efficacy and usability characteristics).
Conversion of cutting-edge scientific research into clinical
development programmes 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 situations where the Company needs
to make rapid alterations to its development projects
without full visibility to all the downstream consequences.
Additionally, drug development is a highly regulated
environment which in itself presents technical risk through
the need for study designs and data to be accepted by
regulatory agencies. 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.
The biotechnology and pharmaceutical industries in which
Faron operates are very competitive. The Company’s
competitors include major multinational pharmaceutical
companies, biotechnology companies and research
institutions. Many of which have substantially greater
financial, technical and operational resources, such as
larger research and development resources and staff. It
may have a material adverse impact on the Company if its
competitors 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.
Furthermore, there can be no guarantee that the Company
will be able, or that it will be commercially advantageous
for the Company, to monetise the value of its intellectual
property through entering into licensing or other co-
operation deals with pharmaceutical companies.
There can be no assurance that the Company’s
proposed products will be capable of being manufactured
in sufficient quantities and standards for clinical trials or
in commercial quantities, in compliance with regulatory
requirements and at an acceptable cost or within an
acceptable timeframe.
19
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 DEPENDENCE ON KEY PERSONNEL AND
SCIENTIFIC AND CLINICAL COLLABORATORS
The Company’s success is highly dependent on the
expertise and experience of the Directors and key
management. Whilst the Company has entered into
employment and other agreements with each of these
key personnel, the retention of such personnel 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 materially adversely
affected. To develop new products and commercialise
its current pipeline, the Company relies, in part, on the
recruitment of appropriately qualified personnel, including
personnel with a high level of scientific and technical
expertise. There is currently a shortage of such personnel
in the pharmaceutical industry, meaning 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.
to a significant degree on
the Company’s development and
Furthermore,
prospects depend
the
experience, performance and continued service of its
senior management team including the Directors. The
Company has invested in its management team at all
levels and has entered into contractual arrangements with
these individuals with the aim of securing their services.
Retention of these services or the identification of suitable
replacements, however, cannot be guaranteed. The loss of
the services of any of the Directors or other members of
the senior management 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 regulated 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 commercialise 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 governmental standards and regulations,
there is no guarantee that any product will be able to
achieve the necessary regulatory 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 intellectual property
laws and third party non-disclosure agreements to protect
its patents and other proprietary rights. The IPR on which
the Company’s business is based is a combination of
patents, patent applications, confidential business know-
how and trade secrets, and trademarks. No assurance can
be given that any currently pending 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, unauthorised third parties may attempt to
copy, or obtain and use, the Company’s IPR and other
technology that is incorporated into its pharmaceutical
products. In addition, alternative technological solutions
similar to the Company’s products may become available
to competitors or prospective competitors of the
20
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 OTHER RISKS RELATED TO OPERATIONS
While operating with multiple vendors and other external
suppliers, the Company regularly delivers and 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 communication are 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 19 March 2020.
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. Therefore, 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 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 position to devote sufficient
resources to pursue such litigation. Any unfavourable
outcomes in respect of patent litigation could limit the
Company’s IPR and activities moving forward.
The Directors do not believe that the Company’s lead
pharmaceutical drug candidates, future drug candidates
in development, and proprietary processes for generating
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
The Company has incurred significant losses since its
inception and does not have any approved or revenue-
generating products. The Company expects to incur losses
for the foreseeable future, and there is no certainty that
the business will generate a profit. The Company is highly
dependent on equity and public grant and loan financing.
The Company may not be able to raise additional funds
that will be needed to support its product development
programmes or commercialisation efforts, and any
additional funds that are raised could cause dilution to
existing investors. The Company operates internationally,
and it is thus exposed in various currencies and fluctuation
in their relative values. Even though the Company seeks to
hedge currency positions there is no guarantee that it will
be successful.
21
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Corporate
Governance
uncertainties set out in this document. As good corporate
governance is fundamentally about culture, rather than
procedure, Faron’s corporate culture is monitored on a
regular basis, and appropriate action is taken if, and to the
extent, deemed necessary.
Dr Frank Armstrong
Non-Executive Chairman
March 19, 2020
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 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 and Nasdaq
First North Growth Market 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 its updated form.
In 2019, Yrjö Wichmann left his role as the Company’s
Chief Financial Officer to take up the new position of Vice
President, Financing and Investor Relations. Mr Wichmann
remains a member of the senior management team but
stepped down from the Board. Toni Hänninen was appointed
as Faron’s new CFO, being responsible for both internal and
external reporting. 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 consistent with the Company’s objectives,
strategy and business model described on the Company’s
website and with the description of principal risks and
22
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Compliance
COMPLIANCE WITH THE PRINCIPLES OF THE QCA CODE
The Principles of the QCA Code
Comply/Explain
Disclosure in the 2019 Report
1. Establish a strategy and business
model which promote long-term
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
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Comply
Pages 4, 5 and 12 to 15
Pages 37 to 39
Page 39
Pages 19 to 21
Pages 28 to 29 and 40 to 41
Pages 24 to 28
Page 28
Page 22
Pages 22 and 24
10. Communicate how the company is governed
and is performing by maintaining a dialogue with
shareholders and other relevant stakeholders
Comply
Pages 28 and 30 to 36
23
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Board of
Directors
On 28 May 2019, at the Company’s Annual General
Meeting, the number of Directors was confirmed as six,
with Frank Armstrong, Markku Jalkanen, Matti Manner,
Leopoldo Zambeletti, Gregory Brown and John Poulos re-
elected to the Board for a term that ends at the end of
the next AGM. At the meeting of the Board held following
the AGM, Frank Armstrong was re-elected Chairman of the
Board and Matti Manner was re-elected Vice-Chairman
of the Board. The Board comprises five non-executive
directors and one executive director. Brief biographical
details for the Directors can be found on the following
pages. During 2019, the Board held 22 meetings.
The Board is responsible to the shareholders for the
proper 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 management appointments. The Board sees to
the administration of the Company and the organisation
of its operations, being responsible for the appropriate
arrangement of the control of the Company accounts and
finances.
All key operational and investment decisions are
subject to full Board approval. The management of the
Company prepares 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
Chairman oversees the Board’s work, ensures that the
24
Board’s decision-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.
is
responsible
The Chief Executive Officer
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.
there
The Board considers
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
from
Directors obtain specialist external advice
appropriate advisers.
The term of office of each Director expires on the closing
of the AGM immediately following their 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.
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Dr Frank Armstrong
Non-Executive Chairman
Matti Manner
Non-Executive Vice-Chairman
led Medical Science and
Dr Armstrong has held Chief Executive roles with five
biotechnology companies (both public and private)
(AIM) and CuraGen
including FulcrumPharma PLC
(NASDAQ). He
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
Caldan Therapeutics and a Director of Newcells Biotech.
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
Edinburgh. 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 and has served as Vice-Chairman since October
2015, having previously been the Chairman of Faron
Ventures Oy from 2002.
He is currently Chairman of Turun Osuuskauppa
and Ruissalo 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.
25
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Dr Markku Jalkanen
Chief Executive Officer
Dr Gregory B. Brown
Non-Executive Director
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 investing in biopharmaceutical
and medical products, where he currently serves as Vice-
Chairman and member of the SAB. In addition, Greg is
currently CEO and a director of Memgen, and a director
of Caladrius Biosciences
(NASDAQ), 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.
Inc
He was appointed as a Non-Executive Director of the
Company in May 2017.
Dr Jalkanen has more than 25 years of experience within
biomedical research, biotech development and the
biopharmaceutical 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 publically 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.
Dr Jalkanen has held several board memberships for
both public and private companies including Inveni Capital
Management, Meddia Ltd and Priaxon AG.
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.
26
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 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 Advisor 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, Nogra
Pharma and the The Meatless Farm. 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.
27
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 PERFORMANCE EVALUATION
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 on related issues. During
2019, the audit committee held three meetings.
NOMINATION COMMITTEE
The nomination committee comprises Matti Manner as
Chairman together with Frank Armstrong. 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 2019, the nomination committee held
two meetings.
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.
The Board has a process for evaluation of its own
performance 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 corporate culture.
In the most recent Board assessment, opportunities
for Board members to engage in professional development
and benchmarking of the Company’s performance
against its peers were identified as areas meriting further
discussion by the Board.
The Directors have reviewed the results of the Board
self-assessment exercise and agreed a series of actions
in that regard, including a new peer group review to be
carried out in 2020.
BOARD COMMITTEES
In conjunction with being admitted to trading on AIM,
the Company has established audit, nomination and
remuneration committees of the Board with formally
delegated duties and responsibilities.
legal status or
Under the Finnish Limited Liability Companies Act,
Board committees do not, generally speaking, have a
formal
independent decision-making
powers; 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 matter
has been delegated to a committee.
At the Board meeting held following the AGM on 28
May 2019, the Board of Directors re-elected the Chairmen
and elected the other members of the Board committees.
REMUNERATION COMMITTEE
As of 28 May 2019, the remuneration committee comprises
Frank Armstrong as Chairman together with John Poulos
and Leopoldo Zambeletti. 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
2019, the remuneration committee held two meetings.
28
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Attendance at Board Meetings
During 2019 the Board held 22 meetings. The table below lists the Directors’ attendance at the Board and
Committee meetings during the year:
The Directors’ attendance during the year ended 31 December 2019
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Executive directors
Jalkanen Markku
Wichmann Yrjö(*)
Non-Executive Directors
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
(*) Resigned from the Board on 28 May 2019
22
8(8)
18
20
21
20
17
2(2)
2(2)
2(3)
3(3)
3(3)
2(2)
2(2)
1(1)
29
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Remuneration
Report
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. No Director is
involved in discussions relating to their own remuneration. This report sets out Faron’s remuneration policy
for the Executive and Non-Executive Directors. The remuneration of the Directors during the year ended 31
December 2019 is set out below:
BASIC SALARY
LONGER TERM INCENTIVES
Executive Directors’ 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.
In 2019, no increments in the salaries were made.
BONUSES
Executive Directors’ annual bonuses are based on the
achievement of the Company’s 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.
In 2019, the Chief Executive Officer voluntarily waived
any bonus for the preceding financial year.
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 September 2015 approved a share option plan and
granted share options to the members of the Board
under this option plan. At the AGM held on 28 May 2019,
the Company authorised the Board to implement a new
share option plan for the employees and Directors of,
and persons providing services to, the Company’s group.
Rules of that new option plan were approved by the Board
on 20 November 2019. Details of these option plans are
on page 52.
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
30
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 sufficient assets to pay all employees the benefits relating
to employee service in the current and prior periods.
NON-EXECUTIVE DIRECTORS’ SERVICE
CONTRACTS AND REMUNERATION
OTHER BENEFITS
The Chief Executive Officer and some employees have the
possibility to take a company car allowance, which is part
of their gross salary. All employees including Executive
Directors have a company mobile phone that constitutes
a company mobile phone allowance.
EXECUTIVE DIRECTORS’ SERVICE CONTRACTS
AND TERMINATION PROVISIONS
The service contracts of Executive Directors are approved
by the Board and are concluded for an indefinite term.
The details of the Executive Directors’ contracts are
summarised below:
Date of contract Notice period
Jalkanen Markku, CEO 16.09.2015 6 months
Wichmann Yrjö(*), CFO(**) 16.09.2015 6 months
(*) Resigned from the Board on 28 May 2019
(**) Vice President, Financing and Investor Relations from 1 June 2019
The remuneration and compensation payable to the
members of the Board
including the Non-Executive
Directors is 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
in respect
Directors are entitled to be reimbursed
incurred travelling,
of their reasonably and properly
accommodation and incidental expenses for attending
and returning from meetings of the Board, Committee
meetings or the general meetings of shareholders.
With the exception of share options disclosed below,
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.
31
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Current contracts are summarised below:
Non-Executive Directors
Independence
Contract
Date of Contract
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
Independent
Non-
independent(*)
Independent
Independent
Independent
Chairman
Vice-chairman
Member
Member
Member
16.09.2015
16.09.2015
16.05.2017
16.05.2017
16.09.2015
(*) Has served as a director for more than 10 consecutive years
The appointments of Non-Executive Directors are
terminable with immediate effect, in accordance with
the Company’s Articles of Association and pursuant to
the Finnish Limited Liability Companies 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 resignation at a meeting of the Board.
The Directors received the following remuneration
during the year
€
Salaries and fees
Bonus
Taxable benefits
Total
Executive Directors
Jalkanen Markku
Wichmann Yrjö(*)
Non-Executive Directors
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
(*) Resigned from the Board on 28 May 2019
257,400
180,769
11,346
16,080
1,041
273,480
193,156
73,800
42,300
40,700
40,600
41,400
73,800
42,300
40,700
40,600
41,400
32
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
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 Directors.
Option Plan 2015 was adopted by the Company at the
Extraordinary General Meeting held on 15 September
2015 and amended in the Annual General Meeting of 16
May 2017. Option Plan 2015 allowed the Company to
offer options for subscription free of charge to members
of the Board, and to such officers and employees of the
Company as the Board sees fit. Each option entitles the
holder of the option to subscribe for one ordinary share
in the Company. Under the terms of Option Plan 2015, an
aggregate maximum number of 1,800,000 options could
be granted, such aggregate being made up of a maximum
of 400,000 “2015A” options, the subscription period for
which ended on 9 June 2016, a maximum of 400,000
“2015B” options, the subscription period for which ended
on 30 September 2019, a maximum of 500,000 “2015C”
options, the subscription period for which ended on 30
September 2019, and a maximum of 500,000 “2015D”
options, the subscription period for which ended on 30
September 2019, all such options being exercisable until
30 September 2021.
The exercise price for ordinary shares based on
“2015A” options is €3.71. The exercise price for ordinary
shares based on “2015B” options is €2.90. The exercise
price for ordinary shares based on “2015C” options is
€8.39. The exercise price for ordinary shares based on
“2015D” options is €1.09.
Total options
Jalkanen Markku
Wichmann Yrjö
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
At 1
January
2019
Granted
during the
period
Cancelled
during
the period
At 31
December
2019
Average
subs. price
per shares, €
240 000
80 000
90 000
30 000
120 000
40 000
60 000
20 000
20 000
20 000
20 000
20 000
60 000
20 000
610 000
230 000
0
0
0
0
0
0
0
0
320 000
120 000
160 000
80 000
40 000
40 000
80 000
840 000
4,02
4,02
4,02
4,02
4,74
4,74
4,02
33
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Details of these options are as follows
2015A options
Date of
grant
At 1
January
2019
Granted
during the
period
Cancelled
during
the period
At 31
December
2019
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
16.09.2015
80 000
Wichmann Yrjö
16.09.2015
30 000
Armstrong Frank
16.09.2015
40 000
Manner Matti
16.09.2015
20 000
Brown Gregory
Poulos John
-
-
0
0
Zambeletti Leopoldo
16.09.2015
20 000
190 000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80 000
30 000
40 000
20 000
0
0
20 000
190 000
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
2015B options
Date of
subscription
At 1
January
2019
Granted
during the
period
Cancelled
during
the period
At 31
December
2019
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
18.11.2016
80 000
Wichmann Yrjö
18.11.2016
30 000
Armstrong Frank
18.11.2016
40 000
Manner Matti
18.11.2016
20 000
Brown Gregory
Poulos John
-
-
0
0
Zambeletti Leopoldo
18.11.2016
20 000
190 000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80 000
30 000
40 000
20 000
0
0
20 000
190 000
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
34
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
2015C options
Date of
subscription
At 1
January
2019
Granted
during the
period
Cancelled
during
the period
At 31
December
2019
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
16.11.2017
80 000
Wichmann Yrjö
16.11.2017
30 000
Armstrong Frank
16.11.2017
40 000
Manner Matti
16.11.2017
20 000
Brown Gregory
16.11.2017
20 000
Poulos John
16.11.2017
20 000
Zambeletti Leopoldo
16.11.2017
20 000
230 000
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
230 000
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
2015D options
Date of
subscription
At 1
January
2019
Granted
during the
period
Cancelled
during
the period
At 31
December
2019
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
Wichmann Yrjö
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
21.05.2019
21.05.2019
21.05.2019
21.05.2019
21.05.2019
21.05.2019
Zambeletti Leopoldo
21.05.2019
0
0
0
0
0
0
0
0
80 000
30 000
40 000
20 000
20 000
20 000
20 000
230 000
0
0
0
0
0
0
0
0
80 000
30 000
40 000
20 000
20 000
20 000
20 000
230 000
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
1,09
08.10.2018
30.09.2021
35
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
At 31 December
2019
Issued Share Capital
Share Options
Ordinary shares
Percentage held
Ordinary shares
Average
exercise price, €
7.38
0.30
0.15
1.27
0.11
0.0
0.04
8.95
320,000
120,000
160,000
80,000
40,000
40,000
80,000
840,000
4.02
4.02
4.02
4.02
4.74
4.74
4.02
Executive
Jalkanen Markku 3,194,290
(1)
Wichmann Yrjö(*) 131,294
(2)
Non-Executive
Armstrong Frank 64,792
Manner Matti 551,035
(3)
Brown Gregory B 46,490
Poulos John 0
Zambeletti Leopoldo 17,461
3,874,068
(*) Resigned from the Board on 28 May 2019
(1) of which 2,020,565 are held by Markku Jalkanen
directly and 1,173,725 are held by Markku Jalkanen’s wife
Sirpa Jalkanen and her related party
(2) of which 81,437 are held by Yrjö Wichmann directly and
49,857 are held by his spouse
(3) of which 528,890 are held by Matti Manner directly and
22,145 are held by his spouse
36
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Corporate
Governance
Statement
For the Year Ended 31 December 2019
COMMUNICATING WITH SHAREHOLDERS
The contact details are below:
The Company acknowledges that effective communication
with shareholders on strategy and governance is an
important part of its responsibilities. Interim and final
results are communicated via formal meetings with
roadshows, participation in conferences and additional
dialogue with key investor representatives held in the
intervening periods. Faron recognises the Annual General
Meeting as an opportunity to meet shareholders.
As an AIM and First North listed company, Faron
complies the Market Abuse Regulation, the AIM Rules for
Companies and the Nasdaq First North Growth Market
Rulebook. The Company complies with other relevant
legislation in all its corporate communications issues.
The Company speaks to the financial community and
shareholders only through authorised representatives. In
accordance with the Company’s disclosure policy, the Chief
Executive Officer is the designated person to make public
statements. The Chief Executive Officer may delegate this
authority to other members of the management team. In
addition to the CEO, the Vice President of Financing and
Investor Relations is able to communicate externally on
behalf of the Company.
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
appropriate to an AIM and First North listed company,
and all the Directors of the Company 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 honestly, ethically and fairly with the Company’s
37
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 licensors,
collaborators,
licensees, business partners,
suppliers, customers, competitors and other employees.
Statements regarding the Company’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 19 to 21 of the 2019 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 misstatement 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 vendors. 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, the frequent interaction with
the auditors and the supervision of the audit committee.
The Board is, however, closely following both regulatory
and operational developments in this realm and plans
to react appropriately 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 comprehensively reviewed on a periodic basis.
REGULATED ADVISORS
The shares of Faron are listed for trading on the London
Stock Exchange AIM and Nasdaq First North Growth
Market marketplaces, which require the nominating of
advisors. Panmure Gordon (UK) Limited is the Company’s
nominated adviser and broker on AIM and Sisu Partners
Oy is the Company’s certified advisor on First North.
CORPORATE SOCIAL RESPONSIBILITY
Faron acknowledges that running its business has an effect
on society. In particular, the Company has a responsibility
to the patients, its employees and contractors as well as
the broader community in which it operates.
Faron is committed to taking responsibility for its
actions and encourages a positive contribution towards
improving standards for patients and its employees,
minimising its impact on the environment and improving
the quality of the local community.
Faron is committed to maintaining and promoting high
standards of business integrity. The Company’s values,
which incorporate the principles of corporate social
responsibility and sustainability, guide its relationships with
clients, employees and the communities and environment
in which it operates. Faron’s approach to sustainability
addresses both its environmental and social impacts,
supporting its vision to remain an employer of choice,
while meeting client demands for socially responsible
partners. Faron respects local laws and customs while
supporting international laws and regulations.
By putting CSR into practice, Faron is committed, wherever
possible, to:
• developing treatments for medical conditions with
significant unmet needs
• conducting itself responsibly and in an ethical
manner
• creating a positive and supportive working
environment
• acting fairly in its dealings with suppliers and other
third parties
• minimising the impact on its environment
FARON’S CSR PRINCIPLES
Conduct
The Company aims to adopt the highest professional
standards and not to act in such a way as to compromise
Faron’s integrity. Faron actively promotes respect between
its staff members in their dealings with each other and
with suppliers and other third parties.
Working Environment
The Company recognises that its staff are its most
important resource. Faron actively seeks to offer its staff a
positive and healthy working environment and ensure that
they have rewarding careers and job satisfaction.
Faron seeks to ensure that all staff have access to the
training they need both for their own development and to
38
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 enable them to deliver a high-quality work contribution.
Faron considers all staff members to be equal and aims
to create a working environment which is free of unlawful
discrimination. In this regard, the Company maintain an
internal code of conduct based on professionalism and
respect.
Suppliers
Faron is committed to eliminating unlawful discrimination
and to promoting equality and diversity in its professional
dealings with suppliers and other third parties. The
Company endeavours to enter into clear and fair contracts
with its suppliers.
Environment
Faron is committed to behaving responsibly and to
minimising its impact on the environment. In considering
the environment, the Company has resolved to include
environmental considerations in its business travel and
to minimise its consumption of natural resources and
manage waste through responsible disposal and reuse
and recycling, including paper and ink cartridges.
for
Responsibility and Review
The Board has overall responsibility for the Company’s
CSR strategy and
implementing Faron’s CSR
principles. They have a key role in ensuring the systems
and controls Faron has in place are effective. All members
of staff have a role to play in complying with the
Company’s CSR objectives and are encouraged to make
further suggestions in relation to initiatives Faron could
undertake.
Faron is fully committed to the highest possible
standards of openness, honesty and accountability. In line
with that commitment, the Company actively encourages
all staff members who have serious concerns about any
real or perceived departure from the high ethical standard
that it sets to voice those concerns openly.
STATEMENT OF RESPONSIBILITIES
Under the Finnish Limited Liability Companies Act and
the Finnish Accounting Act, the Company must prepare
financial statements in accordance with applicable law
and regulations.
The Board and the CEO are responsible for the
preparation of financial statements that give a true and
in accordance with International Financial
fair view
Reporting Standards (IFRS) as adopted by the EU, as
well as for the preparation of financial statements and
the report of the Board 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 in Finland. The Board is responsible for the
appropriate 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 AIM, the Company is also required to prepare annual
accounts and financial statements under IFRS.
In preparing these financial statements, the Board of
Directors is required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and accounting estimates that
are reasonable and prudent;
• state whether they have been prepared in
accordance with IFRS as adopted by the EU, 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 and the CEO are responsible for keeping
adequate accounting records that are sufficient to show
and explain the Company’s transactions and disclose with
reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the
financial statement 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.
WEBSITE PUBLICATION
The Directors are responsible for ensuring that the financial
statements are made available on a website. Financial
statements are published on the Company’s website in
accordance with AIM Rule 26, Nasdaq First North Growth
Market Rulebook and the recommendations of the QCA’s
Corporate Governance Code for Small and Medium Sized
Companies.
On behalf of the Board
Frank Armstrong
Chairman
March 19, 2020
39
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Directors’
Report
For the year ended 31 December 2019
The Directors present their report together with the audited financial statements for the year ended 31
December 2019.
DIRECTORS
RESULTS AND DIVIDENDS
During the year ended 31 December 2019 the following
persons have been members of the Board of the Company:
The Consolidated Statement of Comprehensive Income
for the year is set out on here.
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 Gregory B Brown | Non-Executive Director
Mr John Poulos | Non-Executive Director
Mr Leopoldo Zambeletti | Non-Executive Director
(*) Resigned from the Board on 28 May 2019
(**) Vice President, Financing and Investor Relations from 1 June 2019
PRINCIPAL RISKS AND UNCERTAINTIES
For a discussion of the principal risks and uncertainties
which face Faron please see pages 19 to 21 of this
document.
The Company’s loss of the financial year after taxation
and other comprehensive losses was €13.3 million (2018:
€20.1 million).
The Company has no distributable equity and thus the
Directors do not recommend the payment of a dividend
(2018: nil).
FINANCIAL INFORMATION
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 commented
on by the Board at Board meetings and are reviewed
and reported to the Directors on a monthly basis by the
management team.
40
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 FINANCIAL KEY PERFORMANCE INDICATORS
(KPIs)
For a review of the Group’s KPIs please see page 16
Financial Review.
(*) of which 2,680,647 are held directly by Timo Syrjälä directly and
3,815,965 are held by Acme Investments SPF S.à.r.l., an entity which
is wholly owned by Timo Syrjälä
(**) of which 2,020,565 are held by Markku Jalkanen directly and
1,173,725 are held by Markku Jalkanen’s wife Sirpa Jalkanen and her
related party
RESEARCH AND DEVELOPMENT
Details of the Company’s key research and development
programmes can be found in the Strategic Report and
the detailed programme sections. See also notes 2.8 and
6. Further information is also available on the Company
website, www.faron.com.
FINANCIAL INSTRUMENTS AND MANAGEMENT
OF LIQUID RESOURCES
The Company’s principal financial instrument comprises
cash, and this is used to finance the Company’s operations.
The Company has also other financial instruments such
as leasing facilities that arise directly from its operations.
The Company has a policy, which has been consistently
followed, of not trading in financial instruments and
to minimise 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 Statements for
IFRS disclosure regarding financial instruments.
ANNUAL GENERAL MEETING
The Company held two general meetings
in 2019,
an Annual General Meeting on 28 May 2019 and an
Extraordinary General Meeting on 25 October 2019.
In 2020, the Annual General Meeting will be held on 15
April 2020. 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 reappoint them will be proposed at the forthcoming
Annual General Meeting.
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
SUBSTANTIAL SHAREHOLDINGS
On behalf of the Board
On 31 December 2019 the Company had been notified of
the following holdings of 3% or more of the issued share
capital of the Company.
Frank Armstrong
Chairman
March 19, 2020
Timo Syrjälä(*)
Tom-Erik Lind
6,496,612
15.01%
3,547,712
8.20%
A&B (HK) Company Limited
Markku Jalkanen(**)
Marko Salmi
3,408,409
3,194,290
2,817,736
Hargreaves Lansdown Asset Mgt
2,356,781
7.87%
7.38%
6.51%
5.44%
41
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 Financial
Report
Statement of Comprehensive Income
For the year ended 31 December
Group Parent
€’000
Revenue
Other operating income
Research and development expenses
General and administrative expenses
Operating loss
Financial expense
Financial income
Loss before tax
Tax expense
Loss for the period
Note
2019
2018
2019
2018
3, 4
5
6, 7, 8
6, 7, 8
9
9
10
0
185
(10,237)
(3,049)
19
205
0
185
19
205
(16,463)
(10,237)
(16,463)
(3,750)
(3,080)
(3,740)
(13,101)
(19,989)
(13,132)
(19,979)
(224)
74
(397)
302
(215)
77
(397)
302
(13,251)
(20,084)
(13,270)
(20,074)
(11)
(2)
(9)
(2)
(13,262)
(20,086)
(13,279)
(20,076)
Other comprehensive income
-
-
-
-
Total comprehensive loss for the period
(13,262)
(20,086)
(13,279)
(20,076)
Loss per ordinary share
Basic and diluted loss per share, EUR
11
(0.36)
(0.65)
(0.36)
(0.65)
42
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Balance Sheet
€’000
Assets
Non-current assets
Machinery and equipment
Right-of-use-assets
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
Group Parent
Note
2019
2018
2019
2018
12
14
23
12
13
15
16
13
386
-
529
77
17
-
-
525
636
13
386
18
529
209
17
-
18
525
636
1,005
1,177
1,155
1,195
2,145
7,059
9,204
2,759
4,067
6,825
2,145
7,058
9,203
2,759
4,058
6,817
Total assets
10,209
8,002
10,358
8,012
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
Lease liabilities
Total non-current liabilities
Current liabilities
Borrowings
Lease liabilities
Trade payables
Other current liabilities
Total current liabilities
2,691
78,916
2,691
64,464
2,691
78,916
2,691
64,464
(79,997)
(66,786)
(80,003)
(66,775)
-
17, 18
1,610
-
369
-
1,604
-
380
19
14
19
14
21
21
2,263
261
2,524
163
135
2,967
2,810
6,075
1,887
-
1,887
245
-
3,534
1,967
5,745
2,263
261
2,524
163
135
3,173
2,759
6,230
1,887
-
1,887
245
-
3,533
1,967
5,744
Total liabilities
8,599
7,633
8,754
7,631
Total equity and liabilities
10,209
8,002
10,358
8,012
43
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Parent Company Statement of
Changes in Equity
€’000
Note
Share
capital
Reserve for Accumulated
deficit
invested
unrestricted
equity
Total
equity
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
Comprehensive loss for the period
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,174 thousand
Share-based compensation
17
7,18
-
-
-
-
-
(13,279)
(13,279)
14,452
-
14,452
-
51
51
14,452
51
14,503
Balance as at 31 December 2019
2,691
78,916
(80,003)
1,604
44
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Group Statement of
Changes in Equity
€’000
Note
Share
capital
Reserve for
invested
unrestricted
equity
Translation
difference
Accumulated
deficit
Total
equity
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
7,18
-
-
-
-
-
15,888
-
15,888
Balance as at 31 December 2018
2,691
64,464
Comprehensive loss for the period
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,174 thousand
Share-based compensation
17
7,18
-
-
-
-
-
14,452
-
14,452
Balance as at 31 December 2019
2,691
78,916
-
-
-
-
-
-
-
-
-
-
-
(46,524)
4,743
(20,086) (20,086)
-
15,888
(176)
(176)
(176) 15,712
(66,786)
369
(13,262) (13,262)
-
14,452
51
51
51 14,503
(79,997)
1,610
45
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Statement of Cash Flows
As at 31 December
Group Parent
€’000
Note
2019
2018
2019
2018
Cash flow from operating activities
Loss before tax
Adjustments for:
Depreciation and amortisation
Interest expense
Unrealised foreign exchange loss (gain), net
Tax expense
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
(13,251)
(20,084)
(13,270)
(20,074)
8
9
9
10
18
238
158
(7)
11
100
121
(36)
-
51
(176)
238
155
(16)
9
51
100
121
(36)
-
(176)
(12,800)
(20,075)
(12,833)
(20,065)
1,173
(567)
731
1,836
338
(2,595)
1,041
(360)
688
(11,463)
(20,496)
(11,464)
10
9
(9)
(51)
(2)
(27)
(9)
(51)
1,836
337
(2,595)
(20,487)
(2)
(27)
Net cash used in operating activities
(11,523)
(20,525)
(11,524)
(20,516)
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
Payment of lease liabilities
23
12
12
17
17
20
20
2.19
-
(100)
-
(100)
15,627
(1,175)
307
-
(151)
-
(293)
(2)
(295)
(0)
(100)
(0)
(100)
17,023
(1,135)
-
(347)
-
15,627
(1,175)
307
-
(151)
(18)
(293)
(2)
(313)
17,023
(1,135)
-
(347)
-
Net cash from financing activities
14,608
15,541
14,608
15,541
Net increase (+) / decrease (-)
in cash and cash equivalents
Effect of exchange rate changes on
cash and cash equivalents
2,985
(5,279)
2,984
(5,288)
7
36
16
36
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
16
16
4,067
7,059
9,310
4,067
4,058
7,058
9,310
4,058
46
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Notes to the Financial Statement
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
development projects focusing on acute trauma, cancer
growth and spread and inflammatory diseases.
Faron Pharmaceuticals Ltd. is listed on the London
Stock Exchange’s AIM market since 17 November 2015,
with a ticker FARN. On 21 November the company
announced it has submitted an application for the listing
of its ordinary shares on Nasdaq First North Growth
Market, a multilateral trading facility operated by Nasdaq
Helsinki Ltd. The first date of trading at Nasdaq First North
was 3 December 2019 (trading code FARON).
The Board of Directors of the Company approved the
financial statements on 19 March 2020.
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
International
Financial Reporting Standards Interpretations Committee
(IFRIC). The financial statements have been prepared on a
historical cost basis, unless otherwise stated.
interpretations of the
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% ownership 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 comprehensive income and statement of financial
position are recognised as a separate component in
equity and in other comprehensive 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 recognised in
other comprehensive income.
All figures presented in notes are group 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
followed 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 and Liquidity Risks – Guidance for directors
of companies that do not apply the UK Corporate
Governance Code”. The Company and its subsidiaries (the
“Group”) are subject to a number of risks similar to those
of other development stage pharmaceutical companies.
These risks
include, amongst others, generation of
revenues in due course from the development portfolio
and
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
commercial and development activities and generating
risks associated with
47
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 a level of revenue adequate to support the Group’s cost
structure.
The Group made a net loss of €13.3 million during
the year ended 31 December 2019. At the end of the
financial year, it had total equity of €1.6 million including
an accumulated deficit of €80.0 million. As at that date,
the Group had cash and cash equivalents of €7.1 million.
The Directors have prepared detailed financial
forecasts and cash flows looking beyond 12 months from
the date of the approval 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 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 fourth quarter of 2020. The Directors are continuing to
explore sources of finance available to the Group and they
believe 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 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 issuance of these financial statements, these
circumstances represent a 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 appropriate, 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 Group’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 recognised in the statement
income
of comprehensive
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.
income, within financial
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 Group as
one integrated business and hence, the Group has one
operating and reportable segment.
2.5. Revenue Recognition
The Group 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 customer 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.
license
agreements with Maruishi in Japan, with A&B in Greater
China and with Pharmbio in Republic of Korea each
include only one performance obligation, which is the
grant of the license to use of its intellectual property
(“IP”). After the Company has granted the license, it 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.
Faron Pharmaceuticals Ltd.’s existing
48
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Revenue from variable 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 Group 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. Faron Pharmaceuticals
Ltd. has tentatively agreed on supply and manufacture
of the drug product to its licensees. The terms including
quantities and commercial 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 conditions 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 development 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 2019, 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 Group’s employee benefits consist of short-
term employee benefits, post-employment benefits
(defined contribution pension plans) and share-based
compensation. Short-term employee benefits are charged
to the statement of comprehensive income in the year
in which the related service is provided. Under defined
contribution plans, the Group’s contributions are recorded
as an expense in the accounting period to which they
relate and the Group does not have any further obligations
once the contributions have been paid.
2.9. Share-based Compensation
The options 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 Group’s
estimate of equity instruments that will eventually vest. At
each reporting date, the Group 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
Group’s shares is recognised in the reserve for invested
unrestricted equity.
2.10. Loss per Share
Basic loss per share is calculated by dividing the loss for
the period with the weighted average number of ordinary
shares during the year.
Since the Group 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.
49
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
2.11. Income Tax
Income tax expense for the period consists of current
and deferred taxes. Tax is recognised in the statement of
comprehensive 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 statements. Deferred taxes are determined
using tax rates enacted or substantively enacted by the
balance sheet date in the respective 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 available, against which the temporary differences, tax
losses and tax credit can be utilized.
2.12. Machinery and Equipment
The Group’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 acquisition 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.
2.13. Intangible Assets
The Group’s intangible assets comprise of capitalized
patent costs arising in connection with the preparation,
filing and obtaining of patents. Patent cost are amortised
on a straight-line basis over the useful lives of the patents
of ten years.
2.14. Impairment of Non-financial Assets
Assets that are subject to depreciation or amortisation are
reviewed for impairment whenever there are indications
that the carrying amount may not be recoverable.
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
manufacturing of the goods sellable upon obtaining the
regulatory marketing approval. The cost of inventories is
fully written down.
2.16. Financial Assets
The Group’s financial assets comprise of other receivables
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 banks.
2.17. Financial Liabilities
The Group’s financial
interest
bearing borrowings, trade payables, other non-current and
current liabilities.
liabilities comprise of
Borrowings are initially recognised at fair value, less
any directly attributable transaction costs. Subsequently
borrowings are carried at amortised cost using the
effective interest method. Borrowings are presented as
current liabilities unless the Group has an unconditional
right to defer settlement of 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 contract 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 Group’s date to transition to IFRS.
Accordingly, the Group has utilized the IFRS 1 exemption
and not accounted 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
50
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 between the initial fair value of the loan and the proceeds
received.
Trade payables and other liabilities are classified as
current liabilities, unless the Group 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 payables 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 Group’s equity comprises of share capital, reserve
for invested unrestricted equity and accumulated deficit.
The proceeds from issuance of new ordinary shares, less
incremental 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 Group since the inception.
Under the Finnish Limited Liability Companies Act
(624/2006, as amended), if the board of directors of a
company notices that the company has negative equity,
the board must make a register notification on the loss
of share capital. However, if the fair value of the assets
of the company is otherwise than temporarily notably
higher than their book value, the difference between the
probable current price and the book value may be taken
into account as an addition to equity. During the Period,
the Board noticed that the Company had negative equity.
The Board reviewed the situation, carried out a survey of
the amount of equity and took measures to remedy the
financial position of the Company so that, following the
placing announced in November 2019, the Company had
at the end of the Period positive equity. In ascertaining the
financial position of the Company, the Board, exercising
special caution, noted that the fair value of the intellectual
property assets of the Company related to Clevegen
and Traumakine is notably higher than their book value.
In making the calculations required under the Limited
Liability Companies Act, that difference was taken into
account as an addition to equity and, accordingly, no
register notification was made.
2.19. Leases
The Company as Lessee
This note explains the impact of the adoption of IFRS 16
Leases on the Group’s financial statements. The group
has adopted IFRS 16 Leases retrospectively from 1
January 2019, but has not restated comparatives for the
2018 reporting period, as permitted under the specific
transition provisions in the standard. The reclassifications
and the adjustments arising from the new leasing rules
are therefore recognised in the opening balance sheet on
1 January 2019.
On adoption of IFRS 16, the group recognised lease
liabilities in relation to leases which had previously been
classified as ‘operating leases’ under the principles of IAS
17 Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted using
the lessee’s incremental borrowing rate as of 1 January
2019.
The weighted average lessee’s incremental borrowing
rate applied to the lease liabilities on 1 January 2019 was
5.0%.
From 1 January 2019, the Group recognises all leases,
with the exception of short-term (i.e. lease term less than
12 months) and low value leases, in line with IFRS 16
Leases as right-of-use assets with a corresponding lease
liability at the date at which the leased asset is available
for use by the Group. A contract is or contains a lease if
the Group has the right to control the use of an identified
asset for a period of time in exchange for consideration.
When determining the lease term, the Group assesses
the probability of exercising extension and termination
options over the non-cancellable period by considering all
relevant facts and circumstances. Right-of-use assets and
lease liabilities are initially recognised on the consolidated
balance sheet at future fixed lease payments over the lease
term. Lease payments are discounted to present value
using an effective interest rate. Right-of-use assets are
depreciated on a straight-line basis over the lease term and
reviewed periodically for indication of impairment. When
the future lease payments are revised due to changes in
index-linked considerations or the lease term changes, the
right-of-use asset and the corresponding lease liability is
remeasured. Any differences arising on reassessments
are recognised in the consolidated income statement.
Interest expense on lease liabilities is presented within
Interest expense in the consolidated income statement.
In the consolidated cash flow statement, the principal
portion of the lease payment is presented in the cash flow
from financing activities.
Practical expedients applied in applying IFRS 16 for
the first time, the group has used the following practical
expedients permitted by the standard:
• accounting for operating leases with a remaining
lease term of less than 12 months as at 1 January
2019 as short-term lease
low-value leasing assets are not included
•
51
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 The effect of adoption IFRS 16 as at January 1, 2019 is
as follows:
•
Assets
• Right-of-use-assets +EUR 523 thousand
Liabilities
• Non-current leasing liabilities +EUR 386 thousand
• Current leasing liabilities +EUR 137 thousand
IFRS 16 also impacts comparability for the following
financial information:
• Depreciation expenses have increased significantly
and correspondingly rent expenses decreased.
Depreciation for right-of-use-assets totalled to EUR
137 thousand, rent expenses totalled EUR 151
thousand. This increased reported EBIT compared
with 2018.
• Reported assets on 1 January 2019 have increased
by EUR 523 thousand due to recognition of right-of-
use-assets.
• Principal payments of lease liabilities are separately
presented in the cash flow from financing activities
and totalled to EUR 151 thousand.
2.20. Provisions and Contingent Liabilities
Provisions are recognised when the Group 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 Group 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 Group early adopted IFRS 15 on 1 January 2017 with
full retrospective application. In determining the amounts
to be recognised as revenue, the Group uses its judgement
in the following main issues:
52
Identifying the performance obligations in the
license agreements and determining whether the
license provided is distinct - based on the Group’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 Group in connection
with its own development activities to facilitate the
licensees’ territory-specific development efforts
is immaterial (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 granted 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
intellectual property to which the licensee has rights
after the date of granting.
recognises expenses
Share-based Compensation
The Group
for share-based
compensation. For share options management estimates
certain factors used in the option pricing model, including
volatility, vesting date of options and number of options
likely to vest. If these estimates vary from actual
occurrence, this will impact the value of the share-based
compensation. Further details of the Group’s estimation
of share-based compensation are disclosed in note 18.
Clinical Trial Accruals
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 completed may be reported with significant
delays. Also the clinical 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 Group
The group has adopted IFRS 16 Leases retrospectively
from 1 January 2019, but has not restated comparatives
for the 2018 reporting period, as permitted under the
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 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
development 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 2019 the Company has not recognised 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
signing. 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
if certain
milestone payments from Pharmbio only
development or commercial milestones are achieved.
4. SEGMENT REPORTING
Faron Pharmaceuticals Ltd. 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 Group’s chief
operating decision maker has been identified as the Chief
Executive Officer (CEO).
The CEO manages the Group as one integrated
business and hence the Group has one operating and
reportable segment.
The Group had no revenue in 2019 (EUR 19 thousand
in 2018).
All of the Group’s non-current assets are located in
Finland.
specific transition provisions
in the standard. The
reclassifications and the adjustments arising from the
new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019.
On adoption of IFRS 16, the group recognised lease
liabilities in relation to leases which had previously been
classified as ‘operating leases’ under the principles of IAS
17 Leases. These liabilities were measured at the present
value of the remaining lease payments, discounted using the
lessee’s incremental borrowing rate as of 1 January 2019.
Practical Expedients Applied
In applying IFRS 16 for the first time, the group has
used the following practical expedients permitted by the
standard:
•
• applying a single discount rate to a portfolio of
leases with reasonably similar characteristics
relying on previous assessments on whether
leases are onerous as an alternative to performing
an impairment review – there were no onerous
contracts as at 1 January 2019
• accounting for operating leases with a remaining
lease term of less than 12 months as at 1 January
2019 as short-term leases
• excluding initial direct costs for the measurement
of the right-of-use asset at the date of initial
application, and
• using hindsight in determining the lease term where
the contract contains options to extend or terminate
the lease.
The group has also elected not to reassess whether
a contract is or contains a lease at the date of initial
application. Instead, for contracts entered into before the
transition date the group relied on its assessment made
applying IAS 17 and Interpretation 4 Determining whether
an Arrangement contains a Lease.
3. REVENUE
Faron Pharmaceuticals Ltd. 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, commercialization 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 activities
necessary for commercialization in respective territories.
Under the license agreements, the Company is also
entitled to receive royalty payments based on the product
53
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 5. OTHER OPERATING INCOME
7. EMPLOYEE BENEFITS
€’000
Year ended 31 December
2019
2018
Grants from the European Union
Other income
Total operating income
-
185
185
191
14
205
Grants from the European Union comprise of direct
funding from the European Commission under the
Seventh Framework Programme (FP7) for Research and
Technological Development to support the Traumakine
clinical program. The project funded with the FP7 -funding
ended in 2H-2018.
The other income consisted of the reimbursement
of already occurred legal expenses by the third-party
recovery services provider as announced by the Company
on 30 December 2019.
6. BREAKDOWN OF EXPENSES BY FUNCTION
Research and Development Expenses
€’000
Materials and services
Employee benefits
Outsourced clinical
trials services
Other R&D costs
Depreciation and amortization
Inventory write-down
Total research and
development expenses
Year ended 31 December
2019
2018
(5,604)
(2,099)
(1,906)
(437)
(191)
-
(7,311)
(1,820)
(5,250)
(1,652)
(92)
(338)
€’000
Salaries
Pension expenses –
contribution-based plans
Social security contributions
Share-based compensation
Year ended 31 December
2019
2018
(2,711)
(2,816)
(417)
(97)
(51)
(513)
3
176
Total employee benefit expenses
(3,276)
(3,150)
Employee benefit expenses by function
Research and development expenses (2,099)
General and administrative expenses (1,177)
(1,820)
(1,330)
Total employee benefit expenses
(3,276)
(3,150)
The average number of personnel in 2019 was 24 (2018:
25). Share-based compensation information is included
in note 18 and management remuneration information in
note 23.
8. DEPRECIATION AND AMORTISATION
€’000
Year ended 31 December
2019
2018
Depreciation and amortisation
by type of asset
Depreciation for right-of-use-assets
(137)
Intangible assets - patents
Intangible assets
Machinery and equipment
(94)
(2)
(4)
-
(92)
(1)
(7)
(10,237)
(16,463)
Total depreciation and amortisation
(238)
(100)
Depreciation and amortisation by function
Research and development expenses
(191)
General and administrative expenses
(47)
(92)
(8)
Total depreciation and amortisation
(238)
(100)
Depreciation expenses have increased due to adoption of
IFRS 16.
General and Administration Expenses
€’000
Other G&A costs
Employee benefits
Communication
Depreciation and amortization
Internal financial and reporting
process development
Total general and
administrative expenses
Year ended 31 December
2019
2018
(1,615)
(1,177)
(210)
(47)
(917)
(1,330)
(137)
(8)
-
(1,358)
(3,049)
(3,750)
54
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Salaries
(2,711)
(2,816)
Pension expenses –
contribution-based plans
Social security contributions
Share-based compensation
(417)
(97)
(51)
(513)
3
176
Total employee benefit expenses
(3,276)
(3,150)
Employee benefit expenses by function
Research and development expenses (2,099)
General and administrative expenses (1,177)
(1,820)
(1,330)
Total employee benefit expenses
(3,276)
(3,150)
Depreciation and amortisation
by type of asset
Depreciation for right-of-use-assets
(137)
Intangible assets - patents
Intangible assets
Machinery and equipment
(94)
(2)
(4)
Total depreciation and amortisation
(238)
(100)
Depreciation and amortisation by function
Research and development expenses
(191)
General and administrative expenses
(47)
-
(92)
(1)
(7)
(92)
(8)
9. FINANCIAL INCOME AND EXPENSES
€’000
Year ended 31 December
2019
2018
Financial income
Interest income
Gains from foreign exchange
Total financial income
Financial expenses
Interest expenses
Losses from foreign exchange
Interest expenses from lease liabilities
Other financial expenses
-
74
74
(133)
(66)
(23)
(2)
-
302
302
(121)
(274)
-
(2)
Total financial expenses
(224)
(397)
Total financial income and
expenses, net
(150)
(95)
Interest expenses consist of paid and accrued interest
expenses. The accrued interest expense relates mainly
to the government loans, see note 19. Interest expenses
recognised from lease liabilities totalled to EUR 23
thousand due to adoption of IFRS 16.
The foreign exchange losses relate to euro value
changes of cash balances nominated in Pound Sterling.
Unrealised foreign exchange loss is EUR 7 thousand
and loss is EUR 36 thousand for the years ended 31
December 2019 and 2018, respectively.
10. TAX EXPENSE
€’000
Tax expense
Total tax expense
Year ended 31 December
2019
2018
(11)
(11)
(2)
(2)
€’000
Year ended 31 December
2019
2018
Loss before tax
(13,251)
(20,084)
Income tax calculated at Finnish
tax rate 20%
Tax losses and temporary
differences for which no deferred
tax asset is recognised
2,650
4,017
(2,858)
(4,268)
Non-deductible expenses and
tax exempt income
208
Non-credited foreign withholding taxes
(11)
Taxes in the statement of
comprehensive income
(11)
251
(2)
(2)
Tax losses and deductible temporary differences for which
no deferred assets have been recognised, are as follows:
€’000
Year ended 31 December
2019
2018
R&D expenses not yet deducted
(1)
in taxation
Tax losses carried forward
(2)
Deferred tax depreciation on
fixed assets
Total
58,606
16,053
49,063
11,151
-
-
74,659
60,214
(1) The Group 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:
€’000
2019
2018
Expiry within five years
Expiry within 6-10 years
31
16,022
16,053
1,164
9,987
11,151
Total depreciation and amortisation
(238)
(100)
Income tax consists of foreign corporation tax.
Total
The difference between income taxes at the statutory
tax rate in Finland (20%) and income taxes recognised in
the statement of comprehensive income is reconciled as
follows:
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 Group 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 14,932 thousand
(2018: EUR 12,043 thousand).
55
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
The Group 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.
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.
€’000
Year ended 31 December
2019
2018
Loss for the period
(13,262)
(20,086)
Weighted average number of
ordinary shares in issue
Basic and dilutive loss
per share (in €)
36,850,577 30,749,648
(0.36)
(0.65)
As of 31 December 2019, Faron Pharmaceuticals Ltd. had
only share options outstanding. Number of potentially
dilutive
totalled
instruments currently outstanding
1,540,900 as of 31 December 2019 (31 December 2018:
1,540,900). Since the Group has reported a net loss, the
share options 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.
12. INTANGIBLE ASSETS AND MACHINERY AND
EQUIPMENT
Intangible
assets
Machinery
and
equipment
€’000
Book value on 1 January 2019
Additions
Disposals
Depreciation/amortisation
Book value 31 December 2019
As at 31 December 2019
Acquisition cost
Accumulated disposals
525
100
-
(96)
529
923
-
Accumulated depreciation/amortisation (394)
Book value 31 December 2019
529
Book value 1 January 2018
Additions
Disposals
Depreciation/amortisation
Book value 31 December 2018
As at 31 December 2018
Acquisition cost
Accumulated disposals
325
293
-
(93)
525
823
-
Accumulated depreciation/amortisation (298)
Book value 31 December 2018
525
17
-
-
(4)
13
39
-
(26)
13
22
2
-
(7)
17
39
-
(22)
17
13. NON-CURRENT PREPAYMENTS AND OTHER
RECEIVABLES
€’000
Prepayments for API
Production supplies
Other receivables
Total non-current prepayments
and other receivables
As at 31 December
2019
2018
-
38
39
77
524
76
36
636
Group has written down prepayments for API due to
uncertainty to be consumed in the Group’s development
activities. Other receivables consist mainly of restricted
cash in the form of security deposits for rental agreements.
56
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Book value on 1 January 2019
Additions
Disposals
Depreciation/amortisation
Book value 31 December 2019
As at 31 December 2019
Acquisition cost
Accumulated disposals
Book value 1 January 2018
Additions
Disposals
Depreciation/amortisation
Book value 31 December 2018
As at 31 December 2018
Acquisition cost
Accumulated disposals
525
100
-
(96)
529
923
-
325
293
-
(93)
525
823
-
Accumulated depreciation/amortisation (298)
Book value 31 December 2018
525
Prepayments for API
Production supplies
Other receivables
Total non-current prepayments
and other receivables
-
38
39
77
17
-
-
(4)
13
39
-
(26)
13
22
2
-
(7)
17
39
-
(22)
17
524
76
36
636
14. RIGHT-OF-USE-ASSETS AND LEASING
LIABILITIES
€’000
31 December
2019
1 January
2019
Right-of-use assets
Office
Vehicle
Total right-of-use assets
Lease liabilities
Long-term leasing liability
Short-term leasing liability
Total leasing liabilities
366
20
386
261
134
395
485
39
523
386
137
523
Accumulated depreciation/amortisation (394)
Book value 31 December 2019
529
There were no additions to right-of-use assets in 2019.
15. CURRENT PREPAYMENTS AND OTHER
RECEIVABLES
€’000
Prepayments
Other receivables
Receivable for production defects
VAT receivable
Group Parent
2019
895
521
434
295
As at 31 December
2019
2018
1,814
162
434
349
895
521
434
295
2018
1,814
162
434
349
Total current prepayments and other receivables
2,145
2,759
2,145
2,759
The majority of prepayments consist of the Clinical Service
Agreements with Contract Research Organisations, which
are current service providers in different clinical trials.
Other receivables include the receivables from the third-
party recovery services provider as announced by the
Group on 30 December 2019.
57
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
16. CASH AND CASH EQUIVALENTS
€’000
Bank accounts
Total cash and cash equivalents
Group Parent
2019
7,059
7,059
As at 31 December
2019
2018
4,067
4,067
7,058
7,058
2018
4,058
4,058
17. SHAREHOLDERS’ EQUITY
Movements in number of shares, share capital and reserve
for invested unrestricted equity were as follows:
€’000
1 January 2018
Issue of new shares, net of transaction costs
31 December 2018
1 January 2019
Issue of new shares, net of transaction costs
31 December 2019
Total registered
shares (pcs)
Share
capital
Reserve for
unrestricted
equity
29,164,544
2,691
1,863,350
-
31,027,894
2,691
31,027,894
12,262,853
43,290,747
2,691
-
2,691
48,576
15,888
64,464
64,464
14,452
78,916
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 association, the Finnish Limited Liability
Companies Act allows companies 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 subscription
basis, how much of the issue, if anything, is recorded in
share capital and how much to the reserve for invested
unrestricted equity that is distributable. During 2018 and
2019, the Board recognised all relevant transactions in the
invested unrestricted equity reserve.
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 2018 the number of shares was
increased to 31,027,894 following the issue of 933,150
new shares.
On 28 March 2019, the number of shares was
increased to 35,476,519 following the issue of 4,448,625
new shares, on 13 May 2019 the number of shares was
increased to 37,233,894 following the issue of 1,757,375
new shares. On 5 August 2019, the number of shares was
increased to 38,175,734 following the issue of 941,840
new shares, on 27 August 2019, the number of shares was
increased to 39,355,427 following the issue of 1,179,513
new shares and on 12 November 2019 the number of
shares was increased to 43,290,747 following the issue of
3,935,500 new shares.
Faron Pharmaceuticals Ltd. 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
58
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
18. SHARE OPTIONS
Option Plan 2015
The Option Plan 2015 was approved at the Company’s
extraordinary shareholders’ meeting on 15 September
2015 as part of the Group’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 16
May 2017 resolved to amend, due to the increase in the
number of employees in the Group 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 options
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 date of the allocation of D options to the employees
and key management is 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
Beginning of
subscription period
3.71
No
2.90
No
8.39
No
1.09
No
2 November 2015
8 October 2016
8 October 2017
8 October 2018
End of subscription period
30 September 2021
30 September 2021
30 September 2021
30 September 2021
Vesting conditions
Service until the beginning of the subscription period
59
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 2019
2015 Option Plan
2018
2015 Option Plan
Number of share options
A
B
C
D
A
B
C
D
Outstanding at 1
January
Granted
Forfeited
Exercised
Outstanding at 31
December
Exercisable at 31
December
The weighted average
fair value of the share
options granted, EUR
The weighted average
share price at the date
of exercise, EUR
385,000
385,900
500,000
270,000
385,000
385,900
500,000
270,000
-
-
-
-
-
-
-
-
-
230,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
385,000
385,900
500,000
500,000
385,000
385,900
500,000
270,000
385,000
385,900
500,000
-
-
-
-
-
385,000
385,900
500,000
-
-
-
-
-
3.24
3.67
6.20
3.45
3.24
3.67
6.20
3.45
2019
2015 Option Plan
2018
2015 Option Plan
Determination of the fair value for the share options granted
C
D
C
D
Share price at grant date, EUR
4.51–9.39
0.62–4.96
4.51–9.39
0.62–4.96
Subscription price, EUR
Volatility, %(*)
Interest free rate, %
Expected dividends yield, %
Option fair value, EUR
4.51–8.39
1.09–4.96
4.51–8.39
1.09–4.96
42.59–52.57
0.01
0
55.60
0.01
0
42.59–52.57
0.01
0
55.60
0.01
0
1.42–4.01
0.11–1.25
1.42–4.01
0.11–1.25
(*) Expected volatility was determined as the average volatility of a peer group consisting of ten comparable biotechnology companies listed on London
Stock Exchange AIM list.
There was no effect on earnings 2019 or 2018 based on
share options granted.
The share-based compensation expense for the
Option Plan 2015, was EUR 51 thousand in 2019 (positive
of EUR 176 thousand in 2018).
60
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 385,000
385,900
500,000
270,000
385,000
385,900
500,000
270,000
385,000
385,900
500,000
500,000
385,000
385,900
500,000
270,000
-
-
-
-
-
-
-
-
-
-
-
-
230,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
385,000
385,900
500,000
385,000
385,900
500,000
Outstanding at 1
January
Granted
Forfeited
Exercised
Outstanding at 31
December
Exercisable at 31
December
The weighted average
fair value of the share
options granted, EUR
The weighted average
share price at the date
of exercise, EUR
Share price at grant date, EUR
4.51–9.39
0.62–4.96
4.51–9.39
0.62–4.96
Subscription price, EUR
Volatility, %(*)
Interest free rate, %
Expected dividends yield, %
Option fair value, EUR
4.51–8.39
1.09–4.96
4.51–8.39
1.09–4.96
42.59–52.57
42.59–52.57
0.01
0
55.60
0.01
0
0.01
0
55.60
0.01
0
1.42–4.01
0.11–1.25
1.42–4.01
0.11–1.25
19. FINANCIAL ASSETS AND LIABILITIES
€’000
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
2019
334
7,059
7,393
2,967
2,426
5,393
(*) Prepayments are excluded as they are not considered to be financial instruments.
Group Parent
As at 31 December
2019
2018
385
4,067
4,452
3,534
2,132
5,666
334
7,058
7,392
3,173
2,426
5,599
2018
385
4,058
4,443
3,533
2,132
5,665
3.24
3.67
6.20
3.45
3.24
3.67
6.20
3.45
Due to the short-term nature of the other receivables, their
carrying amount is considered to equal their fair values.
at the reporting date and presented under advances
received on the balance sheet.
This section sets out an analysis of net debt and the
movements in net debt (calculated as cash and cash
equivalents less borrowings) for each of the periods
presented. Lease liabilities are included in analysis as of
1 January 2019.
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 considers 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 2,099
thousand (2018 EUR 1,792 thousand).
Tekes R&D loans are granted to a defined product
development 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 back in
equal instalments over a 5-year period, unless otherwise
agreed with Tekes. For more information on contractual
maturities of the Tekes R&D loans and interests is provided
in the note 19. The accrued interest on Tekes R&D loans
amounted to EUR 107 thousand (2018 EUR 79 thousand).
Grant payments received in advance of the incurrence of
the costs the grant is intended to compensate are deferred
61
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
€’000
Net debt
Group Parent
As at 31 December
2019
2018
2019
2018
Cash and cash equivalents
Lease liabilities
Tekes R&D loans- repayable within one year
Tekes R&D loans- repayable after one year
Net debt
7,059
(396)
(163)
(2,263)
4,237
4,067
-
(245)
(1,887)
1,935
7,058
(396)
(163)
(2,263)
4,236
4,058
-
(245)
(1,887)
1,926
Group
Parent
€’000
Cash and cash
equivalents
Borrowings
Total
Cash and cash
equivalents
Borrowings
Total
Net debt as at 1 Jan 2018
Cash flows
Foreign exchange adj.
9,310
(5,279)
36
Other non-cash movements
-
Net debt as at 31 Dec 2018
Cash flows
Foreign exchange adj.
Lease liability
4,067
2,985
7
-
Other non-cash movements
-
(2,426)
347
-
(53)
(2,132)
(307)
-
(396)
13
6,884
(4,933)
36
(53)
1,935
2,678
7
(396)
9,310
(2,426)
6,884
(5,288)
347
(4,941)
36
-
4,058
2,984
16
-
-
(53)
(2,132)
(307)
-
(396)
13
36
(53)
1,926
2,677
16
(396)
13
13
-
Net debt as at 31 Dec 2019
7,059
(2,822)
4,237
7,058
(2,822)
4,236
20. FINANCIAL RISK MANAGEMENT
(a) Capital Management and Liquidity Risks
The operations of the Group expose it to financial risks.
The main risk that the Group is exposed to is liquidity risk,
with capital management being another important area
given the nature of the Group’s operations and its financing
structure. The Group’s risk management principles focus
on obtaining funding and managing capital taking into
consideration the unpredictability of the financial markets
with the aim at minimizing any undesired impacts on the
Group’s financial performance and position. The Board of
Directors define the general risk management principles
and approve operational 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 Group’s liquid assets.
The Group’s objective when managing capital is to
safeguard the Group’s ability to continue as a going
concern (refer to notes 2.2 and 16).
Significant financial resources are required to advance
the drug development programs into commercialized
pharmaceutical products. The Group relies on its ability
to fund the operations of the Group through three major
sources of financing – equity financing, research and
development grants and loans and licensing agreements.
Faron Pharmaceuticals Ltd. has been able to fund
its operations with equity and R&D loans. While equity
financing has been available in the past, there can be no
assurance that sufficient funds can be secured in order
to permit the Group to carry out its planned activities.
In general, capital market conditions are volatile. The
62
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
prevailing financial market situation and the overall
investor’s sentiment dictate whether the Group is able
to secure additional financing in the future, which can be
considered a risk. To partly manage this risk, the Group
and its management is in constant dialogue with financial
investors, investment banks, debt providers and other
market participants.
The Group 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 Group.
The Group 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 potential risk to the
Group’s funding in the future.
Finally entering into commercialization, collaboration
and licensing agreements with larger pharmaceutical
companies entitles the Group to receive up-front and
milestone payments 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 entering
into such agreements.
There can be no assurance that sufficient financing
can be secured in order to permit the Group to carry out
its planned activities. To protect the continuity of the
Group’s operations, sufficient liquidity and capital has to
be maintained. The Group aims to have funds to finance
its operations for the foreseeable future. The Group 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 operational plans and budget and monitors the
implementation of these plans and the financial status of
the Group on a monthly basis.
As at 31 December 2019, the contractual maturity of
loans and interests was as follows:
€’000
2020
2021
2022
2023-
thereafter
Total
R&D loans
Repayment of loans
Interest expenses
Lease liabilities(*)
Total
163
28
261
452
257
26
138
421
564
21
11
596
1,811
2,795
32
0
107
411
1,843
3,313
(*) These are lease liabilities relating to IFRS 16 adoption on 1 January 2019.
As at 31 December 2018, the contractual maturity of loans
and interests was as follows:
€’000
2019
2020
2021
2022-
thereafter
Total
R&D loans
Repayment of loans
Interest expenses
Total
245
23
268
245
21
265
338
17
356
1,304
2,132
23
85
1,328
2,217
63
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 (b) Market Risk
i. Foreign Exchange Risk
The Group operates internationally but is mainly exposed
to translation risk in respect of Pound Sterling (“GBP”)
denominated cash and cash equivalents balances The
Group’s policy is not to hedge translation risk. As of 31
December 2019, the Group had cash and cash equivalents
of EUR 6,611 thousand and GBP 380 thousand (2018:
EUR 4,058 thousand and GBP 0 thousand) and the foreign
exchange gains and losses recorded arise mainly from
the GBP cash balances. The Group is not exposed to
significant transaction risk, as the Group mainly operates
in its functional currency, the EUR.
ii. Interest Rate Risk
The Group’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 Group has paid the minimum interest of 1% on the
loans. During the periods presented, the Group has not
been exposed to variable interest rate risk and accordingly
the Group has not entered into derivative contracts.
(c) Credit and Counterparty Risk
The Group works with partners and financial institutions
with good credit ratings. Management monitors credit
ratings of the financial institutions that hold the Group’s
bank deposits regularly. Further, the Group 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 Group and the partner are no longer
aligned.
64
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019 21. TRADE PAYABLES AND OTHER CURRENT
LIABILITIES
Group Parent
As at 31 December
€’000
2019
2018
2019
2018
Trade payables
Clinical trial hospital fees
Accrued research & development costs
Accrued payroll
Other liabilities
Other accruals
Advances received
Total
2,967
3,534
3,173
3,533
849
811
603
306
166
75
268
749
527
281
142
-
849
811
558
300
166
75
268
749
527
281
142
-
5,777
5,501
5,932
5,500
Other liabilities comprise mainly of unpaid prepayment to
FP7 -grant consortium members.
22. CONTINGENCIES AND COMMITMENTS
Operating Lease – Faron as a Lessee
The future aggregate minimum lease payments under
non-cancellable operating leases are as follows:
€’000
No later than 1 year
Later than 1 year and
no later than 5 years
Later than 5 years
Year ended 31 December
2019
2018
68
131
-
179
82
-
The Group’s operating lease commitments comprise of
lease commitments for machines and equipment with
low value leases of 3 to 4 years and one time-limited office
rent agreement which will be taken into use in the coming
months. The Group’s operating leases are non-cancellable
and they do not include redemption or extension options.
Contingencies and commitments liabilities do not include
lease liabilities that are recognised as lease liabilities on
the balance sheet.
Contractual Contingencies
The Group has a contingent contractual liability to a
development party for pre-clinical product candidate
Clevegen to pay additional milestone payments. Second
milestone payment of EUR 460 thousand payable
when production system reached certain material yield
threshold was charged 2019. The remaining ones become
payable upon the Group achieving subsequent regulatory
filings and approvals for Clevegen.
As announced by the Group on 2 October 2019 and
30 December 2019, Faron Pharmaceuticals Ltd. has
received a letter from Rentschler Biopharma SE in which
Rentschler terminates the agreement concerning the API
manufacturing. The Company considers that this said
termination is without merit and has filed a request for
arbitration to seek damages. To fund the proceedings, the
Company has entered into a litigation funding agreement
with a third-party recovery services provider, which in the
event of success would receive a typical portion of any
damages awarded.
23. RELATED PARTY TRANSACTIONS
Parent and subsidiary relations of Faron Pharmaceuticals
Group on 31 December 2019:
Country
Group
holding
%
Group
voting
%
Companies owned by
the parent company
Faron Europe GmbH Switzerland
100 100
Faron USA LLC USA
100 100
65
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
The Group identifies the following related parties:
Management and Board Shareholding
Management(*) shareholding, 31 December 2019
Number of shares (pcs)
Shareholding, percentage
Board(**) shareholding, 31 December 2019
(excluding the shareholding of CEO and CFO)
Number of shares (pcs)
Shareholding, percentage
4,684,920
10.8 %
679 778
1.6 %
Total number of shares outstanding
at 31 December 2019 (pcs)
43,290,747
(*) 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
2018 and 2019 than already disclosed.
• Members of the Board of Directors, and their close
family members; and
• Company’s key Management team and their close
family members
Faron Pharmaceuticals Ltd. has not had interests in other
entities as at, and for the years ended, December 31, 2018
and 2019.
Key Management Personnel
The Company’s key management personnel consist of the
following:
• Members of the Board of Directors
• Management team, including CEO
€’000
Year ended 31 December
2019
2018
Compensation of key
management personnel(*)
Salaries and other short-term
employee benefits
Post-employment benefits
Share-based payments
Total
1,350
242
51
1,643
1,535
288
(176)
1,647
(*) Presented information for the Management includes the executive
directors of the Board
The Management team was awarded 265,000 share
options during 2019 (2018: 0 share options). At the end
of the 2019, the number of outstanding options and share
granted to the Management team amounted to 800,680
share options (at the end of 2018: 663,450 share options).
Non-executive Directors were awarded 120,000 share
options during 2019, (2018: 0 share options). At the end
of 2019, the number of outstanding options and share
options granted to the non-executive directors amounted
to 400,000 share options (at the end of 2018: 600,000
share options).
Companies owned by
the parent company
Faron Europe GmbH
Switzerland
Faron USA LLC
USA
100
100
100
100
66
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
Number of shares (pcs)
Shareholding, percentage
Board(**) shareholding, 31 December 2019
(excluding the shareholding of CEO and CFO)
Number of shares (pcs)
Shareholding, percentage
4,684,920
10.8 %
679 778
1.6 %
Total number of shares outstanding
at 31 December 2019 (pcs)
43,290,747
24. EVENTS AFTER THE BALANCE SHEET DATE
There are no events after the balance sheet date.
Result and Dividends
The statement of comprehensive income is on page 9.
The Group’s loss for the accounting period was
13,261,911.93 euro (2018: 20,086,402.06 euro).
The Board of Directors does not recommend the
payment of a dividend (2018: nil).
BOARD SIGNATURES
Turku, 19 March 2020
Frank Armstrong
Chairman
Markku Jalkanen
Gregory Brown
Matti Manner
John Poulos
Leopoldo Zambeletti
THE AUDITOR’S NOTE
The report on the audit performed has been issued today
Helsinki, 19 March 2020
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
67
FARON PHARMACEUTICALS LTDANNUAL REPORT 2019
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 consolidated financial statements give a true and fair view of the group’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 2019. 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 consolidated financial
statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS)
as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and
regulations governing the preparation of financial statements in Finland and comply with statutory requirements.
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
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2 (3)
The Board of Directors and the Managing Director are also 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.
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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, Remuneration Report and Corporate
Governance Statement 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 reports mentioned
above and, in doing so, consider whether the information included in the reports are 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, Remuneration
Report and Corporate Governance Statement is consistent with the information in the financial
statements.
If, based on the work we have performed, we conclude that there is a material misstatement in the
reports mentioned above, we are required to report that fact. We have nothing to report in this regard.
Helsinki 19 March 2020
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
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FARON PHARMACEUTICALS LTD
ANNUAL REPORT 2019
Faron Pharmaceuticals Ltd
Joukahaisenkatu 6, 20520 Turku Finland
Phone: +358 2 469 5151
Fax: +358 2 469 5152
Email: info@faron.com
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FARON PHARMACEUTICALS LTDANNUAL REPORT 2019