Annual Report
2020
LEADING THE WAY IN
BREAKTHROUGH
IMMUNE THERAPIES
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 caused
by dysfunction of our immune system. The Company
currently has a pipeline based on the receptors involved
in regulation of immune response in oncology, organ
damage and bone marrow regeneration. Bexmarilimab, a
novel anti-Clever-1 humanised antibody, is its investigative
precision immunotherapy with the potential to provide
permanent
for difficult-to-treat
cancers through targeting myeloid function. Currently in
phase I/II clinical development as a potential therapy for
patients with untreatable solid tumours, bexmarilimab has
immune stimulation
potential as a single-agent therapy or in combination with
other standard treatments including immune checkpoint
molecules. Traumakine is an investigational intravenous
(IV) interferon beta-1a therapy for the treatment of
acute respiratory distress syndrome (ARDS) and other
ischemic or hyperinflammatory conditions. Traumakine
is currently being evaluated in global trials as a potential
treatment for hospitalised patients with COVID-19 and
with the 59th Medical Wing of the US Air Force and the
US Department of Defense for the prevention of multiple
organ dysfunction syndrome (MODS) after ischemia-
reperfusion injury caused by a major trauma. Faron is
based in Turku, Finland.
The past year has been one of the most
significant in Faron’s history, with rapid
expansion of our clinical development
programme for bexmarilimab, our novel
Clever-1 targeting precision immunotherapy.
I’d like to thank our shareholders for their
continued support and the entire team
at Faron for their exceptional efforts
during a challenging year.
Dr Markku Jalkanen
Chief Executive Officer
For further information on the Company’s progress, development programmes and pipeline, please visit Faron´s website www.faron.com.
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Contents
FARON PHARMACEUTICALS
Our Pipeline
Highlights 2020
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 OY
ANNUAL REPORT 2020
Our Pipeline
Building the future of immunotherapy
THERAPEUTIC SPACE
PROGRAMME
INDICATIONS
PRECLINICAL
PHASE I
PHASE II
PHASE III
PARTNER
IMMUNO-
ONCOLOGY
Bexmarilimab
(anti-Clever-1 mAb)
Solid tumors1
MATINS
NSCLC2
MATINS-05 LUNG
Hematological
malignancies
MATINAML
ARDS3 &
COVID-19
REMAP–CAP
HIBISCUS
ORGAN
PROTECTION
Traumakine
(intravenous IFN
beta-1a)
REGENERATIVE
MEDICINE
Haematokine
New Chemical Entity
AOC3 inhibitor
Major
Cardiovascular
Surgery
CAR-T
induced CRS
Acute Kidney
Injury
IRI in
Solid Organ
Transplantation
Hematological
malignancies
Bone
marrow
1) Solid tumours including: ovarian cancer, uveal
melanoma, hepatocellular carcinoma, colorectal cancer,
cholangiocarcinoma, cutaneous melanoma, gastric cancer,
ER+ breast cancer, pancreatic cancer, anaplastic thyroid
carcinoma
2) NSCLC – Non-small cell lung carcinoma. Standard of care
(inc. anti-PD-1) in combination with bexmarilimab
3) ARDS – Acute Respiratory Distress Syndrome
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Bexmarilimab (formerly ‘Clevegen’)
– the future of immunotherapy
THE TARGET AND PROGRAMME
immune stimulation
Bexmarilimab
investigative
is Faron’s wholly-owned,
precision immunotherapy with the potential to provide
for difficult-to-treat
permanent
cancers through targeting myeloid cell function. A novel
anti-Clever-1 humanised antibody, bexmarilimab targets
Clever-1 positive (Common Lymphatic Endothelial and
Vascular Endothelial Receptor 1) tumour associated
macrophages (TAMs) in the tumour microenvironment,
converting
immunosuppressive M2
macrophages to immune stimulating M1 macrophages.
these highly
Bexmarilimab has been shown to successfully block
or silence Clever-1, activating antigen presentation and
promoting interferon gamma secretion by leukocytes.
Additional pre-clinical studies have proven that Clever-1,
encoded by the Stabilin-1 or STAB-1 gene, is a major
source of T cell exhaustion and involved in cancer growth
and spread. Observations from clinical studies to date
indicate that Clever-1 has the capacity to control T cell
activation directly, suggesting that the inactivation of
Clever-1 as an immune suppressive molecule could be
more important than previously thought.
As an immuno-oncology therapy, bexmarilimab has
potential as a single-agent therapy or in combination with
other standard treatments including immune checkpoint
molecules. Beyond immuno-oncology, it offers potential in
infectious diseases, vaccine development and more.
CLINICAL DEVELOPMENT
Bexmarilimab is currently in phase I/II clinical development
as a potential therapy for patients with untreatable
solid tumours. The MATINS study is a first-in-human
open
investigating the
tolerability, safety and efficacy of bexmarilimab in ten
inoperable solid
different hard-to-treat metastatic or
label phase I/II clinical trial
tumour cohorts – cholangiocarcinoma, colorectal
cancer, cutaneous melanoma, ER+ breast cancer, gastric
cancer, hepatocellular carcinoma, ovarian cancer, uveal
melanoma, pancreatic cancer and anaplastic thyroid
carcinoma – which are all known to host a significant
number of Clever-1 positive TAMs.
Data from MATINS have shown that bexmarilimab has
the potential to be the first macrophage immune checkpoint
therapy. To date, the investigational therapy has been
shown to be safe and well-tolerated, making it a low-risk
candidate for combination with existing cancer therapies,
and has demonstrated early signs of clinical benefit in
patients who have exhausted all other treatment options.
Six
solid
tumour
cohorts
cutaneous
melanoma,colorectal cancer, hepatocellular cancer,
ovarian cancer, cholangiocarcinoma (also known as bile
duct cancer) and gastric cancer have demonstrated early
signs of clinical efficacy from bexmarilimab therapy.
–
Harnessing the immune system to fight cancer using
immunotherapy has been a landmark achievement and one
of the most exciting breakthroughs in modern science. As
the immunotherapy research revolution continues Faron
is focused on 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.
This project has received funding from
the European Union’s Horizon 2020
research and innovation programme
under grant agreement No 960914.
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Traumakine –enhancing the endothelial
barrier
THE TARGET AND PROGRAMME
Traumakine® is Faron’s investigational intravenous (IV)
interferon beta-1a therapy for the treatment of acute
respiratory distress Syndrome (ARDS) and other ischemic
or hyperinflammatory conditions.
ARDS is a severe, orphan lung disease characterised 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 the lungs of ARDS patients, the
lungs fill with protein rich fluid and blood cells, resulting in
respiratory failure.
The body’s own, natural production of interferon beta-
1a, a key interferon signalling protein produced in response
to infection, is one of the major innate immunity defences
against virus invasion and a vital response to inflammation,
especially in severe respiratory viral infections. Faron is
investigating the potential of Traumakine treatment to
further strengthen this natural defence.
In addition to a profound antiviral effect, Traumakine
upregulates
the cell surface protein Cluster of
Differentiation 73 (CD73), an enzyme that suppresses
pro-inflammatory responses in endothelial cells. Using an
IV administration of interferon beta-1a provides optimal
exposure to the lung vasculature, increasing protection
against serious lung complications and helping to prevent
vascular leakage by enhancing endothelial barrier function.
CLINICAL DEVELOPMENT
Building on robust pre-clinical research, Faron has
conducted multiple clinical studies using Traumakine
for the treatment of ARDS and other conditions. Phase I/
6
II proof of concept studies investigating the potential of
Traumakine for the treatment of ARDS reported promising
results with a significant drop in mortality among patients
treated with Traumakine and efficacy improvements
consistent with a reduction in vascular leakage. In the
Phase III INTEREST trial that followed, Traumakine
missed the trial’s primary endpoint – an unexpected
outcome which was found, through subsequent data
analyses, to have been caused by the concomitant use of
corticosteroids, which blocked interferon beta-1a activity
and increased mortality risk.
Traumakine is currently being evaluated as a
potential treatment for hospitalised patients with
COVID-19:
• The ongoing global REMAP-CAP
(Randomized,
Embedded, Multifactorial Adaptive Platform Trial for
Community-Acquired Pneumonia) trial, is evaluating
including Traumakine, for
potential treatments,
community-acquired pneumonia,
in
COVID-19 patients, and is currently ongoing across
more than 200 sites and 19 countries.
including
• An upcoming Phase II/III trial – HIBISCUS (Human
intravenous Interferon Beta-Ia Safety and preliminary
efficacy in hospitalized subjects with CoronavirUS)
–will be conducted across the US in hospitalised
patients with COVID-19, who do not yet require
mechanical ventilation, but maximally
low flow
oxygen support. In the trial, Traumakine will be
used prior to the current practice of corticosteroid
treatment,
inflammatory
response syndrome (SIRS) and ARDS, to improve
clinical condition and reduce patient death. HIBISCUS
has received $6.1 million of funding from the U.S.
Department of Defense and the Coronavirus Aid,
Relief, and Economic Security (CARES) Act.
to prevent systemic
As part of a working relationship established with Faron,
the 59th Medical Wing of the US Air Force and the U.S.
Department of Defense are also evaluating Traumakine’s
role in preventing multiple organ dysfunction syndrome
(MODS) after ischemia-reperfusion injury caused by a
major trauma.
IFN beta-1a has previously demonstrated a compelling
argument as the body’s first line of defence against
viral infection. Inducing CD73 expression on vascular
endothelium can protect vital organs against ischemia and
inflammation, offering a new approach to the treatment of
several life threatening diseases and conditions.
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Haematokine
– haematopoietic
stem cell expansion
THE TARGET AND PROGRAMME
is
Hematopoietic Stem Cell Transplantation (HSCT)
standard of care for many diseases of the blood. However,
transplant failure, a result of poor expansion rates from
the transplanted cells, is a complication arising from
transplantations that occurs in over 25% of patients and
can be lethal.
The AOC3 enzymatic domain, a semicarbazide-
sensitive amine oxidase, is known to produce hydrogen
peroxide (H2O2), a potent inflammatory mediator. AOC3
in vivo, ex vivo and in vitro studies have revealed that an
ACO3 enzymatic end product H2O2 controls expansion of
hematopoietic stem cells.
Hematokine® regulates AOC3 activity in order to
expand hematopoietic stem cells, which can be used in
regenerative medicines and in hematological malignancies
where expansion rates in transplanted cells are low. This
programme, currently in pre-clinical development, has the
potential to benefit all indications where an expansion of
haemopoietic stem cells is needed.
CLINICAL DEVELOPMENT
Hematokine is currently undergoing IND-enabling studies
in preparation for its regulatory submission in 2021.
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Highlights
Operational (including post period):
CLEVEGEN® (bexmarilimab) – Faron’s wholly-
owned, novel precision cancer immunotherapy
candidate, in Phase I/II development for
difficult-to-treat cancers
• Strong patient recruitment continues in Part II of the
Phase I/II MATINS trial, investigating the potential of
bexmarilimab in patients with solid tumours who have
exhausted all treatment options. 10 cancer types –
cutaneous melanoma, uveal melanoma, ovarian
cancer, colorectal cancer
(CRC), hepatocellular
cancer, ER+ breast cancer, pancreatic cancer, gastric
thyroid
cancer, cholangiocarcinoma, anaplastic
carcinoma – are currently under investigation.
• Clinical benefits have been observed across six
cancer types to date – CRC, ovarian cancer,
cancer,
cutaneous melanoma,
cholangiocarcinoma and gastric cancer. These are
primary candidates to become expansion cohorts
for Part III of the study.
hepatocellular
• More frequent dosing, beyond the original three week
dosing interval, is being explored in all six cohort
types showing early signs of clinical benefit in order
to confirm the optimum dosing regimen for pivotal
studies, following analysis of key pharmacokinetic
and pharmacodynamic biomarkers indicating the
potential for increased bexmarilimab efficacy.
• Clinical expansion
trials
will
investigate
in additional clinical
bexmarilimab’s potential
settings, with trials expected to start later in 2021
– in combination with standard of care (SOC) as a
first-line therapy in selected advanced solid tumours
and haematological malignancies. Additionally, trials
will also investigate bexmarilimab as a standalone
neoadjuvant therapy for patients with early stage
CRC and and clear cell renal cell carcinoma.
• Established soluble Clever-1 as potential inhibitor
of T cell activation through the testing of MATINS
patients’ plasma. New findings suggest that their
high levels of free, soluble Clever-1 can act as a
direct inhibitor of T cell activation, thereby providing
a broader immunosuppressive effect than previously
expected. This suggests that the inactivation of
Clever-1 could be more broadly applicable, potentially
enabling patients to benefit from immuno-oncology
therapies which have previously been ineffective. A
new patent application has been filed seeking global
protection for these findings and related applications.
• Commercial scale manufacturing contract for the
development and manufacturing of bexmarilimab
was established with AGC Biologics.
• €3.3 million grants to support the development
of bexmarilimab were received in 2020 from the
European Innovation Council (EIC) Accelerator pilot
scheme (€2.5 million) and the Finnish Cancer IO
consortium (€0.8 million).
• Scientific learnings on bexmarilimab were shared
at key global conferences including the virtual
American Society of Clinical Oncology (ASCO20)
Annual Meeting, the European Society of Medical
Oncology (ESMO) Virtual Congress and ESMO’s
Immuno-Oncology Virtual Congress 2020.
TRAUMAKINE® – Faron’s investigational
intravenous (IV) interferon beta-1a therapy,
is in development for the treatment of acute
respiratory distress syndrome (ARDS) and other
ischemic or hyperinflammatory conditions.
• Supported the global search for potential treatments
for COVID-19, with Traumakine’s inclusion in two
global initiatives in 2020 – the global REMAP-CAP
(Randomized, Embedded, Multifactorial Adaptive
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
molecular analysis of IFN-beta signaling pathways in
many published articles over recent months.
• Partnership established with the 59th Medical Wing
of the U.S. Air Force and U.S. Army and U.S. Army
Institute of Surgical Research to explore the use of
Traumakine for organ protection in combat wounds
leading to multi-organ failure from ischemia and
reperfusion.
• To
support
potential
Traumakine’s
future
commercial use, AGC Biologics was selected to be
the new manufacturing house for commercial scale
production. A €2.1 million low interest rate loan from
Business Finland and a €2.5 million loan guarantee
from Finnvera, the official Export Credit Agency of
Finland, are supporting the establishment of a new
cell line for the manufacturing process.
• Detailed analyses into the deleterious effects of
glucocorticoids on Traumakine activity, undertaken
following the INTEREST trial results in 2018, were
published in Intensive Care Medicine, a world-leading
journal in the field of critical care, in May 2020.
HAEMATOKINE® – An AOC3 (amine oxidase
copper containing 3) protein inhibitor in develop-
ment for use in regenerative medicine and to treat
hematological malignancies.
• Faron acquired rights for this potential use of AOC3
inhibitors in March 2020 and will be responsible for
the future development of Haematokine and for the
management, prosecution, maintenance and filing of
patent applications.
IND-enabling studies for this programme are
continuing and, following a first review by the Finnish
patent office, the Company believes global patent
protection could be possible for the Haematokine
project.
•
9
Platform Trial for Community-Acquired Pneumonia),
which is ongoing across more than 200 sites and 19
countries, and the WHO’s Solidarity trial. The WHO
trial determined in October 2020 that subcutaneous
IFN beta-1a was ineffective in reducing overall
mortality in hospitalised COVID-19 patients. At the
time of analysis, too few patients had received an IV
formulation of IFN beta to enable interpretation of the
data and to draw any conclusions on its effect. WHO
has yet to provide the Company with detailed dosing
and safety information which is a normal regulatory
requirement for drug testing and use.
• On
track to
II/III HIBISCUS
initiate a Faron-sponsored trial
investigating the potential of Traumakine to treat
COVID-19. The Phase
(Human
intravenous Interferon Beta-Ia Safety and preliminary
efficacy in hospitalised subjects with CoronavirUS)
study will be conducted
in approximately 5-10
study sites across the US in hospitalised patients
with COVID-19, who do not yet require mechanical
ventilation, but maximally low flow oxygen support.
Use of corticosteroids concomitantly with Traumakine
is not possible in the study setting but enabled in a
sequenced manner, following Traumakine treatment.
Post period the Company received $6.1 million
of funding from the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, granted by the US
Department of Defense, to support HIBISCUS.
• Building on Faron’s already strong IP portfolio for
Traumakine, the Company applied for additional
patent protection for Traumakine relating to the
induction of CD73 for organ protection, followed
by the use of corticosteroids for the treatment of
systemic inflammation. In this sequence, the best
effects of both drugs are optimised in a sequence for
patient benefit. This order is strongly supported by
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
CORPORATE
FINANCIAL
• Faron hosted a virtual R&D Day presenting the
Company’s R&D strategy and insights into its two
clinical stage programmes. Alongside Dr Markku
Jalkanen, Chief Executive Officer, and members of
the Executive Leadership and senior management
teams, external perspectives were provided by Prof.
Alberto Mantovani, Humanitas University, Milan, Italy;
Ass. Prof. Maija Hollmén, MediCity, Turku University,
Finland and Dr. Petri Bono, Terveystalo, Helsinki,
Finland.
IMPACT OF COVID-19
• During the pandemic the Company’s ability to secure
funding and remote working operations has been
key to continued success. Even during exceptional
circumstances, Faron has been able to continue
to operate its business almost normally and the
development of
its clinical trials proceeded as
planned.
• Additionally, Faron closely followed and strictly
complied with the regulations and recommendations
of the Finnish National Institute for Health and
Welfare (THL) and other relevant authorities to
ensure the safety for its employees, study subjects
and partners.
• On 31 December 2020, the Company held cash
balances of €4.1 million (2019: €7.1 million).
• Loss for the period for the financial year ended 31
December 2020 was €16.9 million (2019: €13.3
million).
• Net assets on 31 December 2020 were €-1.8 million
•
(2019: €1.6 million).
In April 2020, the Company successfully raised a
total of €14.0 million gross (€13.0 million net) from
new and existing shareholders, through issuance of
total of 3,500,000 new ordinary shares. The majority
of these proceeds are being used to expand Clevegen
in additional targets in the MATINS trial, support
Traumakine in the ongoing REMAP-CAP trial and to
strengthen the Company’s balance sheet.
• The Company received a combination of grants,
loans and loan guarantees totalling €7.9 million from
Business Finland (May 2020: Grant €0.8 million, June
2020: Loan €2.1 million), The European Innovation
Council (June 2020: Grant €2.5 million), Finnvera
(Aug 2020: Loan guarantee €2.5 million). A total of
€2.2 million of these funds were received during the
period and the rest will continue to be received post
period.
• Post period in February 2021, the Company raised
€15 million gross (approximately €14.4 million net)
from new and existing shareholders through an
issuance of 3,521,127 new ordinary shares.
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
CONSOLIDATED KEY FIGURES, IFRS
€’000
Revenue
Other operating income
Research and Development expenses
General and Administrative expenses
Loss for the period
Loss per share EUR
Unaudited
7–12/2020
6 months
Unaudited
7–12/2019
6 months
1–12/2020
12 months
1–12/2019
12 months
0
1,379
(8,345)
(2,543)
(9,603)
(0.22)
0
185
(5,255)
(1,688)
(6,850)
(0.18)
0
2,122
(13,879)
(4,897)
(16,946)
(0.37)
0
185
(10,237)
(3,049)
(13,262)
(0.36)
Number of shares at end of period
46,896,747
43,290,747
46,896,747
43,290,747
Average number of shares
44,606,204
38,551,293
45,712,111
36,850,577
€’000
Cash and cash equivalents
Equity
Balance sheet total
Unaudited
30 Jun 2020
Unaudited
30 Jun 2019
31 Dec 2020
31 Dec 2019
11,627
7,313
14,343
2,892
(1,761)
5,103
4,108
(1,849)
8,367
7,059
1,610
10,209
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Chairman’s
Statement
2020 was a year of significant activity for Faron. Despite
the challenges that the global pandemic presented to
business continuity and clinical trials across the life
sciences sector, the Company’s focus on pipeline delivery
continued unabated and delivered impressive results.
The development programme for bexmarilimab, Faron’s
wholly-owned novel precision cancer
immunotherapy
candidate, made important clinical progress in 2020 following
completion of the dose-finding Part I of the MATINS clinical
trial. While intended to investigate safety and tolerability, this
part of the trial also delivered exciting data on the potential
of this therapy to promote immune activation, and early
signs of clinical benefit. With ten different hard-to-treat
cancers now under investigation in the second part of the
trial, the Company is gaining greater insights into the future
clinical use and commercial potential of this unique Clever-1
targeting therapy, with a clear focus on patient populations
whose cancers are known to demonstrate significant levels
of the Clever-1 receptor.
The Faron team’s analyses of data from the trial,
alongside the broader scientific community’s growing
understanding of the role of Clever-1 as an immune
suppressive molecule, have provided a much clearer
understanding of the next steps required for bexmarilimab’s
clinical development and support its potential as a
breakthrough therapy for the future. Harnessing the
immune system to fight cancer using immunotherapy has,
undoubtedly, been one of the most exciting breakthroughs
in modern science and the first wave of pioneering
treatments changed the face of cancer treatment. We
know these therapies do not work for everyone and many
patients who initially respond will eventually relapse.
complementary
Combining
in
important
approaches
immunotherapies with
is becoming
increasingly
12
cancer treatment and bexmarilimab’s expanded clinical
development programme, investigating its combination
with existing treatments, will provide important evidence
of its potential use as a future combination therapy.
including acute
The emergence of COVID-19 and
its serious
respiratory distress
complications,
syndrome
(ARDS), mobilised medical and scientific
communities in 2020. I was very pleased that Faron
answered the global call for potential therapies that might
contribute to the fight against the pandemic, by providing
Traumakine, Faron’s intravenous (IV) interferon (IFN) beta-
1a, to two global initiatives investigating multiple therapies
to treat severe COVID-19 patients – the REMAP-CAP
(Randomized, Embedded, Multifactorial Adaptive Platform
Trial for Community-Acquired Pneumonia) and the World
Health Organization’s (WHO) Solidarity trial.
Faron’s earlier observations
Faron has generated a wealth of data to support the
hypothesis that Traumakine can strengthen the body’s
natural defences and provide increased protection against
serious lung complications. Sadly, the first global initiative
to report data –WHO’s Solidarity trial – did not generate
supportive results, with too few patients receiving an IV
formulation of IFN beta to enable interpretation of the data
and to draw any conclusions on the effect of IV IFN beta.
from Traumakine’s
that
development programme
corticosteroid use interferes with Traumakine’s efficacy,
are a significant consideration in trialling the potential of
this therapy in COVID-19 patients. A third trial investigating
Traumakine in COVID-19 patients, the Company’s US phase
II/III HIBISCUS trial, in which the use of corticosteroids is
only possible following treatment with Traumakine, will
yield important results. Interest in IFN beta as a COVID-19
therapy continues to be strong and I am proud that Faron
in ARDS patients,
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
remains actively involved in research to further build the
treatment armamentarium against COVID-19.
Through 2020, as the world adapted to life during
a pandemic, Faron as a company showed remarkable
resilience in the face of such unexpected pressures. Thanks
to the strength shown by everyone across the Company, who
quickly responded to a very different working environment,
all business operations were maintained, clinical progress
accelerated and engagement with the scientific community
continued at a number of virtual congresses.
Faron’s successful financing, both
the capital
fundraising and securing non-dilutive funding, was a
major undertaking, particularly in a virtual world. It puts
the Company in a strong financial position to progress its
clinical programmes and related business activities, as
well as to explore further scientific opportunities within the
Faron pipeline.
On behalf of the Board, I would like to thank everyone
who has contributed to Faron maintaining its momentum
in a difficult year – each and every member of staff and
my colleagues on the Board for their commitment to
the Company; our partner organisations and steering
committee members for their support and expertise;
Faron’s investors for showing continued confidence in
the Company and, importantly, the clinicians and patients
across our trial network. Particular thanks must also
go to our Chief Executive Officer, Markku Jalkanen, and
Chief Financial Officer, Toni Hänninen, for their leadership
throughout 2020.
We look forward to continued progress in 2021.
Dr Frank Armstrong
Chairman
24 March 2021
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Chief Executive
Officer’s Review
OVERVIEW
Faron has three assets (Clevegen® - bexmariliumab;
Traumakine® and Haematokine®), all focusing on
harnessing our immune system. We believe that the three
target molecules Clever-1, CD73 and AOC3 provide new
medical treatment options either to activate, suppress or
maintain the power of our immune system. 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 2020 has been to continue to progress
our wholly-owned novel precision cancer immunotherapy
candidate, bexmarilimab, 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 finalize the HIBISCUS study
protocol for Traumakine in acute respiratory distress
syndrome (ARDS) and organ failures, and were pleased
to provide Traumakine to global initiatives investigating
multiple therapies to treat severe COVID-19 patients,
although our focus to protect central organ provides
significant wider application potential. The third asset
around AOC3, Haematokine, could help to recover lost
renewal of blood cells and activate our immune defence
and other vital blood functions.
BEXMARILIMAB (CLEVEGEN)
During 2020, we have continued to make strong progress
in accelerating the clinical development of bexmarilimab
despite the challenges of COVID-19. Bexmarilimab is our
14
the
reducing
inactivating
function of
is differentiated
immune-stimulating by
wholly-owned novel precision cancer immunotherapy
candidate, which causes conversion of the immune
environment around a tumour from immune-suppressive
to
the number
tumour-associated macrophages
and
function of CLEVER-1
(TAMs) by
receptor. Bexmarilimab
from other
immunotherapies through its specific targeting of M2
TAMs, which facilitate tumour growth. Through myeloid
cell plasticity, bexmarilimab 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 STUDY
The ongoing Phase I/II 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 bexmarilimab in
selected metastatic or inoperable solid tumours.
The completed Part I of the MATINS trial, primarily
intended to investigate safety and tolerability, has already
shown
that bexmarilimab administration promoted
immune activation in MATINS patients, with data also
indicating that bexmarilimab can down regulate a range
of major inhibitory immune checkpoints (like PD-1, CTLA-
4, etc.) that current immuno-oncology therapies aim to
suppress. Bexmarilimab has also been well tolerated,
showing no significant adverse events even at the highest
dosing levels.
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Clinical progress accelerated early in 2020 and today
six out of 10 test cohorts have demonstrated early clinical
benefits, being currently primary candidates to become
expansion cohorts for Part III of the MATINS study as a
monotherapy in patients who have exhausted all treatment
options. All these solid cancer types (colorectal cancer,
ovarian cancer, cutaneous melanoma, hepatocellular
cancer, cholangiocarcinoma – also known as bile duct
cancer – and gastric cancer) require additional treatment
options and therefore present a significant commercial
opportunity.
As a result of key pharmacokinetic and pharma-
codynamic biomarkers indicating that more frequent
dosing could potentially increase bexmarilimab treatment
efficacy, compared to the original dosing interval of
every three weeks, the regulatory authorities approved
an expansion of MATINS to include two additional CRC
cohorts receiving 1 mg/kg dosed at either weekly or two
week intervals, which are on-going currently. The aim
is to reach enough data to finalise dosing regimen for
bexmarilimab prior entering pivotal studies. Recently the
MATINS study data monitoring committee (DMC) also
proposed to study more frequent dosing and higher doses
across all six cohort types showing early signs of clinical
benefit and plans for this are underway.
An additional post period
important finding was
the discovery of an abundant amount of free, soluble
Clever-1 in the plasma of MATINS study patients. Further
experimental testing of isolated Clever-1 has indicated that
this soluble form is a direct inhibitor of T cell activation
and its inactivation could potentially result in an improved
immune response and therefore enable patients to benefit
from immuno-oncology therapeutics which have previously
been ineffective. A new patent application has been filed
seeking global protection for these findings and related
applications.
CLINICAL EXPANSION
Many findings support bexmarilimab combination with
negative immune check point inhibitors: i) synergistic
effect has been observed in animal models, ii) human
tumours with high Clever-1 transcript are resistant to
current immuno-oncology therapies and iii) bexmarilimab
administration can down regulate these inhibitors. These
facts have led Faron to design bexmarilimab combination
studies with standard of care, as a first-line therapy in
selected advanced solid tumours and haematological
malignancies, and as a standalone neoadjuvant therapy
for patients with early stage colon cancer, all of which
Company hopes to start in 2021.
Alongside bexmarilimab’s clinical progress in 2020,
the Company has undertaken further work to prepare
for its future, by appointing global contract development
and manufacturing organisation, AGC Biologics, as
the commercial scale manufacturer. AGC Biologics
has decades of experience
in manufacturing of
biotechnological products, including commercial market
supplies of FDA (US), PDMA (Japan), MHRA (UK) and EMA
(continental Europe) approved products.
TRAUMAKINE
Faron is encouraged by recent vaccine developments to
curb the spread of COVID-19 but the need for effective
treatment options to reduce intensive care need and
mortality for COVID-19 and other virally infected (e.g.
15
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
influenza) patients remains critical. As such, the Company
remains involved in international efforts supported by the
global scientific community to explore the therapeutic
and anti-viral effects of the Company’s intravenous (IV)
interferon (IFN) beta-1a, Traumakine, and to continue
to develop the asset as a future treatment for acute
respiratory distress syndrome (ARDS).
Having demonstrated a compelling argument as one
of the body’s main first lines of defence against viral
infection, recent findings have also shown that seriously
ill COVID-19 patients have compromised
interferon
responses (Feulliet et al. 2021). These findings continue
to drive confidence that treatment with Traumakine can
strengthen the body’s natural defences if administered
intravenously. Specifically, the intravenous dosing of
Faron’s IFN beta-1a provides the lung vasculature with
optimal exposure to IFN, which we believe is a critical
aspect of Traumakine’s potential to increase protection
against serious lung complications.
In 2020, we joined two global initiatives investigating
the potential of multiple therapies to treat COVID-19,
by providing supplies of Traumakine to the REMAP-
CAP programme and the World Health Organization’s
(WHO) Solidarity trial. The data readout from the WHO
Solidarity trial was announced in October 2020 and
concluded that subcutaneous IFN beta-1a was ineffective
in treating hospitalised COVID-19 patients. Interestingly,
the use of concomitant steroids had no impact on this
outcome, confirming again that subcutaneous dosing
has limited exposure to the lungs and should not be
practiced. Traumakine continues to be investigated as
part of the ongoing global REMAP-CAP programme,
which is evaluating potential treatments for community-
acquired pneumonia, including in COVID-19 patients, and
is currently ongoing across more than 200 sites and 19
countries.
Faron is also initiating a third trial investigating the
potential of Traumakine to treat COVID-19 – the US Human
intravenous Interferon Beta-Ia Safety and preliminary
efficacy
in hospitalised subjects with CoronavirUS
(HIBISCUS) trial – which, in January 2021, received $6.1
million from the US Department of Defense (DOD) as part
of the Coronavirus Aid, Relief, and Economic Security
(CARES) Act. The HIBISCUS trial is a phase II/III study to
evaluate the potential of Traumakine to treat COVID-19
and will be conducted in approximately 5-10 study sites
across the US in hospitalised patients with COVID-19, who
do not yet require mechanical ventilation, but maximally
flow oxygen support. Use of corticosteroids
low
concomitantly with Traumakine is not possible in the
study setting but enabled in a sequenced manner after
Traumakine. Supporting this protocol, a detailed analysis
into the effects of glucocorticoids on IV IFN beta-1a
16
activity, which arose following the INTEREST trial in 2018,
was published in Intensive Care Medicine, a world leading
journal in the field of critical care, in May 2020. The results
showed that the desired mechanism of action of IV IFN
beta-1a in the lung vasculature - the upregulation of CD73
- is blocked by the administration of glucocorticoids, and
co-administration of glucocorticoids with IV IFN beta-1a
increases mortality in patients with ARDS compared to
patients administered with IV IFN beta-1a alone.
from
Subject
to data
trials supporting
Traumakine’s profile, the Company will work with
regulatory authorities and other parties to identify the best
path to ensure its future availability to patients.
these
To progress Traumakine manufacturing and support
its potential future commercial use, in August 2020 Faron
announced plans to initiate a new state-of-the-art process
for Traumakine manufacturing with a €2.1 million low
interest rate loan from Business Finland, the governmental
innovation financing agency of Finland. This will be used
to develop and select a new cell line that can be used for
future commercial scale production of Traumakine. The
Company subsequently received a loan guarantee from
Finnvera for €2.5 million to expand the commercial scale
manufacturing.
HAEMATOKINE
In March 2020, Faron announced it had acquired rights
for the potential new use of AOC3 inhibitors. The AOC3
enzymatic domain, a semicarbazide-sensitive amine
oxidase, is known to produce hydrogen peroxide, a potent
inflammatory mediator. AOC3 in vivo, ex vivo and in
vitro studies have revealed that ACO3’s enzymatic end
product hydrogen peroxide (H2O2) controls expansion
of hematopoietic stem cells. Hematopoietic Stem Cell
Transplantation (HSCT) is today the standard of care
in all haematological malignancies. This is due to the
fact that transplant failure is a lethal complication and
a result of poor expansion of transplanted cells, which
can occur in up to 30 per cent of patients. In addition,
secondary transplantation and treatments to revive failing
transplants are expensive and often unsuccessful. With
Haematokine, we believe we can expand stem cells by
regulating AOC3 activity.
Pre-clinical studies with humanised AOC3 mice and
with ex vivo human cells are currently ongoing and further
information will be provided later in the year.
CORPORATE
In June 2020, we hosted a virtual R&D Day presenting
the Company’s R&D strategy and insights into our clinical
stage programmes. In addition to Faron’s management,
external perspectives were provided by Prof. Alberto
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
• Top line data from MATINS Part II
• First patient in neoadjuvant CRC and RCC
• Final dosage and dose frequency decision
• Selection of first pivotal cohort from MATINS trial
• First patient in NSCLC PD(L)1 combination
• First patient in haematological malignancies
• Pre-clinical evaluation in multiple new tumour types
Traumakine:
Initiation of HIBISCUS
•
• Anticipated REMAP-CAP interim read out
• Formation of a Traumakine Scientific Advisory Board
•
• Preclinical work on solid organ transplant
• Partnering update during 2021
Interim analysis from HIBISCUS
AOC3 Antagonist Platform Technology::
• Additional information from pre-clinical studies with
humanised AOC3 mice and with ex vivo human cells
during 2021
Mantovani, Humanitas University, Milan, Italy; Ass. Prof.
Maija Hollmén, MediCity, Turku University, Finland and Dr.
Petri Bono, Terveystalo, Helsinki, Finland.
At the Annual General Meeting held on 18 May 2020,
the number of members of the Board was confirmed as
six. 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.
The Company also announced in July 2020 that Cairn
Financial Advisers LLP had been appointed as Nominated
Adviser to the Company with immediate effect, with
Panmure Gordon (UK) Limited continuing to act as the
Company’s Broker.
FINANCIAL
During the period, the Company successfully raised
approximately €14.0 million (gross), €13.0 million (net)
from new and existing shareholders. Additionally, the
Company was also awarded grants and loans from
Business Finland and from the European Innovation
Council (EIC) Accelerator pilot scheme and a Finnvera
loan guarantee in total of €7.9 million.
Post period in February 2021, the Company raised
€15.0 million gross (approximately €14.4 million net) from
new and existing shareholders through an issuance of
3,521,127 new ordinary shares.
OUTLOOK
Our focus for 2021 will be to continue to progress
bexmarilimab’s clinical development through Part II and
Part III of the MATINS trial and new combination studies,
to further develop our understanding of its potential future
clinical use and commercial potential. We are excited to
commence the HIBISCUS trial for Traumakine in the US
and will continue to provide assistance with global efforts
in fighting COVID-19. 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 and all
the employees at Faron for their hard-work and dedication
during this challenging year and look forward to updating
the market on our progress throughout the course of 2021.
The Board anticipates the following pipeline progress
and catalysts during 2021:
Clevegen:
• Summary of data from MATINS Part I
• Final CLEVER-1 occupancy data
Dr Markku Jalkanen
Chief Executive Officer
24 March 2021
17
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 a successful fundraise
during 2020. The Company’s net cash flow showed €2.8
million negative due to an increase of R&D and G&A
expenditure, partially offset by other income. 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 2020 (2019: €nil).
The Company recorded €2.1 million (2019: €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 increased by €3.6 million from €10.2 million
in 2019 to €13.9 million in 2020. The costs of outsourced
clinical trial services were increased by by €2.5 million
from €1.9 to €4.4 million. The cost of employee benefits
in the R&D was increased by €0.8 million from €2.1 to €2.9
million, mainly driven by additional headcount.
costs, mainly driven by legal expenses, which were offsed
by other income. Futher, employee benefits increased by
€0.5million mainly driven by additonal headcount.
TAXATION
The Company’s tax credit for the fiscal year 2020 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 2020 was €38.2 million (2019: €16.1 million).
The Company estimates that it can utilise most of these
during the years 2020 to 2021 by offsetting them against
future profits. In addition, Faron has €55.0 million of R&D
costs incurred in the financial years 2010 - 2020 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 €16.9 million (2019: €13.3
million). Net loss for the year was €16.9 million (2019:
€13.3 million), representing a loss of €0.37 per share
(2019: €0.36 per share) (adjusted for the changes in
number of issued shares).
CASH FLOWS
GENERAL AND ADMINISTRATION COSTS
Administrative expenses increased by €1.9 million from
€3.0 million in 2019 to €4.9 million in 2020. The increase
was mainly due to the €1.2 million increase in other G&A
Net cash flow was €2.8 million negative for the year ended
31 December 2020 (2019: €3.0 million positive). Cash
used for operating activities increased by €6.0 million to
€17.5 million for the year, compared to €11.5 million for
the year ended 31 December 2019. This increase was
18
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
mostly driven by a increase in R&D investments.
Net cash inflow from financing activities was €14.8
million (2019: €14.6 million) mainly due to the successful
equity placing completed in April 2020.
FUNDRAISING
In April 2020, the Company successfully raised a total of
€14.0 million gross (€13.0 million net) through a fundraise
from new and existing shareholders. The majority of these
proceeds are being used to commence expansion of
Clevegen through the MATINS trial, to support Traumakine
in the ongoing REMAP-CAP trial and to strengthen the
Companys balance sheet.
Post period in February 2021, the Company raised €15.0
million gross (approximately €14.4 million net) from new
and existing shareholders through an issuance of 3,521,127
new ordinary shares.
FINANCIAL POSITION
As at 31 December 2020, total cash and cash equivalents
held were €4.1 million (2019: €7.1 million).
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
risks associated with
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.
The Group made a net loss of €16.9 million during the
year ended 31 December 2020. It had a negative equity
of €1.8 million including an accumulated deficit of €96.6
million. As at that date, the Group had cash and cash
equivalents of €4.1 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 2021. 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
19
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 30
(2019: 24).
SHARES AND SHARE CAPITAL
During the period 1 January to 31 December 2020, the
Company, using the share authorities granted at the
Extraordinary General Meetings held on 25 October 2019,
issued a total of 3,500,000 new ordinary shares at an
issuace price of €4.00 (£3.48) per share.
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 2020 the total number of voting rights was
46,896,747.
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. The arbitration is ongoing and the
final arbitration award is expected to be issued by the
arbitration tribunal during the autumn 2021.
20
Toni Hänninen
Chief Financial Officer
24 March 2021
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 2020 are below.
RESEARCH AND DEVELOPMENT
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.
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.
DEPENDENCE ON KEY PERSONNEL AND
SCIENTIFIC AND CLINICAL COLLABORATORS
COMMERCIAL PRODUCTS AND MANUFACTURING
The biotechnology and pharmaceutical industries in which
Faron operates are very competitive. The Company’s
The Company’s success is highly dependent on the
expertise and experience of the Directors and key
management. Whilst the Company has entered into
21
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
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
22
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 24 March 2021.
23
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
intellectual property. The Company’s research
party
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, public grants 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.
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
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Corporate
Governance
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
24 March 2021
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.
After the year end 2020 and the UK leaving the European
Union, Faron has to follow applicable domestic laws of the
UK.
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
uncertainties set out in this document. As good corporate
24
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Compliance
COMPLIANCE WITH THE PRINCIPLES OF THE QCA CODE
The Principles of the QCA Code
Comply/Explain
Disclosure in the 2020 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, to 7 and 14 to 17
Pages 39 to 41
Page 41
Pages 21 to 23
Pages 30 to 31 and 42 to 43
Pages 27 to 29
Page 30
Page 24
Pages 24 and 26
10. Communicate how the company is governed
and is performing by maintaining a dialogue with
shareholders and other relevant stakeholders
Comply
Pages 30 and 32 to 38
25
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Board of
Directors
On 18 May 2020, Company’ held its Annual General
Meeting (AGM) using special arrancements due to ungoing
COVID-19 pandemic. The shareholders were encouraged
to participate by way of centralised proxy representation
and to follow the meeting by webcast. At the AGM 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
2020, the Board held 15 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.
26
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
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.
The Board considers there to be sufficient independence
of the Board and that all the Non-Executive Directors are
of sufficient competence and calibre to add strength and
objectivity to the Board, and to bring considerable experience
in terms of their knowledge of the scientific, operational and
financial development of biopharmaceutical products and
companies. Where necessary, the Company facilitates that
Non-Executive Directors obtain specialist external advice
from appropriate advisers.
The term of office of each Director expires on the closing
of the AGM immediately following 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 OY
ANNUAL REPORT 2020
Dr Frank Armstrong
Non-Executive Chairman
b. 1957
Matti Manner
Non-Executive Vice-Chairman
b. 1953
Dr Armstrong has held Chief Executive roles with five
biotechnology companies, both public and private,
including Fulcrum Pharma plc and CuraGen. He led
Medical Science and Innovation at Merck Serono and
was previously Executive Vice President of Product
Development at Bayer and Senior Vice President of
Medical Research and Communications at Zeneca.
Dr Armstrong is currently the Chairman of Caldan
Therapeutics and Enhanc3D Genomics, a Director of
Newcells Biotech and a Non-Executive Director of ECO
Animal Health Group plc, as well as a member of the
Senior Advisory Board at Healthcare Royalty Partners and
Epidarex Capital.
Dr Armstrong
received an honours degree
in
biochemistry and an MBChB, Bachelor of Medicine,
Bachelor of Surgery from the University of Edinburgh,
Scotland. He is a physician, a Fellow of the Royal College
of Physicians of Edinburgh and Non-Executive Director
of the University of Edinburgh’s governing body, the
University Court.
He was appointed to the Board as a Non-Executive
Director in September 2015.
Mr Manner was appointed a partner of Brander & Manner
Attorneys Ltd in 1980, having previously sat as a judge
at the Court of Appeal, Turku, Finland. He has significant
experience in national and international business deals,
corporate law and mergers and acquisitions, and has held
a number of Board memberships throughout his career.
He He is currently Chairman of Ruissalo Foundation
and
Länsi-Suomen Yleishyödyllinen Asuntosäätiö
Foundation and Vice-Chairman of Suomen Asianajajaliitto
Foundation, a member of the Board of Marva Media Ltd,
Satatuote Ltd, YH VS-Rakennuttajat Ltd and Nurmi-Yhtiöt
Ltd.
Mr Manner has experience of several trustee posts
including the Presidency of the Finnish Bar (Lawyers)
Association during the period of 1998 to 2004. He obtained
a Master of Law from the University of Turku, Finland, and
became an Honorary Chief Justice in Finland in 2013.
Mr Manner joined the board of the Company as
Chairman in 2007 having previously been the Chairman
of Faron Ventures Oy from 2002. He was appointed to the
Board as Non-Executive Vice-Chairman in October 2015.
27
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Dr Markku Jalkanen
Chief Executive Officer
b. 1954
Dr Gregory B. Brown
Non-Executive Director
b. 1953
Dr Brown has more than 35 years of experience in
healthcare and investment. Most recently, he founded
HealthCare Royalty Partners, a healthcare-focused private
asset management firm investing in biopharmaceutical
and medical products, where he currently serves as
a member of the Senior Advisor Board. In addition, Dr
Brown is currently Chief Executive Officer and a Director
of Memgen, and a Director of Caladrius Biosciences and
Aquestive Therapeutics. He previously acted as a Director
of Invuity between October 2014 and December 2015.
Prior to this, Dr Brown was a Managing Director at
Paul Capital Partners in New York, Co-Head of Investment
Banking at Adams, Harkness & Hill, and VP of Corporate
Finance at Vector Securities International.
He was appointed to the Board as a Non-Executive
Director in May 2017.
Dr Jalkanen has more than 25 years of experience
within biomedical research, biotechnology research and
development, and the biopharmaceutical
In
addition to his role as Chief Executive Officer, Dr Jalkanen
is an advisor for the only active Finnish life sciences fund,
Inveni Capital. Between 1996 and 2002, Dr Jalkanen was
the founding Chief Executive Officer and President of BioTie
Therapies Corp which went on to become the first publicly-
traded Finnish biotechnology company to list on Nasdaq.
industry.
Dr Jalkanen has been a member of several Boards for
both public and private companies including Inveni Capital
Management, Meddia Ltd and Priaxon AG.
He obtained a Masters
in Medical Biochemistry
from the University of Kuopio, Finland and subsequently
received a PhD
in Medical Biochemistry from the
University of Turku, Finland. He completed a side-laudatur
examination in Molecular Biology from the University
of Turku and completed his post-doctoral training at
Stanford University, California, USA, between 1983 and
1986. Dr Jalkanen obtained the position of Docent in
Biochemistry from University of Helsinki, FInland 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.
Dr Jalkanen has published over 130 peer reviewed
scientific publications in various highly ranked international
journals.
He was a founding member of the Company and has
been Chief Executive Officer since 2003.
28
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
John Poulos
Non-Executive Director
b. 1954
Leopoldo Zambeletti
Non-Executive Director
b. 1968
Mr. John Poulos has a wealth of expertise in global
corporate life sciences, having spent 38 years working for
AbbVie and Abbott. He served as Vice President, Head of
Business Development and Acquisitions for AbbVie from
2013 until 2016. He was also Group Vice President, Head
of Pharmaceutical Licensing and Acquisitions for Abbott
from 2005 until 2012. During his career with AbbVie and
Abbott, Mr Poulos 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 President GNK Advisors Inc.,
a Pharmaceutical Business Development firm, and is a
member of the Board of Memgen.
He was appointed to the Board as a Non-Executive
Director in May 2017.
During his 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. He started his career at KPMG as an auditor and,
since 2013, has been an independent strategic advisor to
life science companies on merger and acquisitions, out-
licensing deals and financing strategy.
Mr Zambeletti received a BA in Business from Bocconi
University in Milan, Italy.
Mr Zambeletti is a Non-Executive Director of Philogen,
Nogra Pharma, The Meatless Farm, Adler Ortho and
Baccuico.
He was appointed to the Board as a Non-Executive
Director in September 2015.
29
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
2020, the audit committee held two 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 2020, the nomination committee held
three 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.
The Directors have reviewed the results of the
most recent
Board self-assessment exercise and
and conducted a peer group review in 2020. The self
assessment showed and improvement compared to
prior year, and the peer group review showed that Faron
is offering competetive compensation compared to peer
group, and not adjustments were deemed necessary.
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
independent decision-making
formal
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 18
May 2020, the Board of Directors re-elected the Chairmen
and elected the other members of the Board committees.
REMUNERATION COMMITTEE
As of 18 May 2020, 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
2020, the remuneration committee held three meetings.
30
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Attendance at Board Meetings
During 2020 the Board held 15 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 2020
Board
Audit
Committee
Remuneration
Committee
Nomination
Committee
Executive Directors
Jalkanen Markku
Non-Executive Directors
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
15
15
14
14
15
14
3(3)
3(3)
2(2)
2(2)
2(2)
3(3)
3(3)
3(3)
31
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 2020 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.
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 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. An amendment to option plans 2015 and
2019 was resolved at the AGM held on 18 May 2020. The
amendment enables options to be transferred or pledged
after the conditions for share subscription have been
fulfilled under the relevant rules. Details of these option
plans are on pages 35 to 38.
PENSION
Faron has a law-defined contribution plans under which it
32
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
pays fixed contributions into a separate entity. The plans
cover all the employees of Faron including the Executive
Directors. Faron has no legal or constructive obligations
to pay further contributions if the fund does not hold
sufficient assets to pay all employees the benefits relating
to employee service in the current and prior periods.
OTHER BENEFITS
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
16.9.2015
6 months
NON-EXECUTIVE DIRECTORS’ SERVICE
CONTRACTS AND REMUNERATION
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.
33
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
Non-Executive Directors
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
323,500
85,992
14,460
423,952
83,000
48,000
42,000
41,000
47,000
83,000
48,000
42,000
41,000
47,000
34
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 Meetings of 16 May
2017 and 18 May 2020, respectively. 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. Share Option Plan 2019
was adopted by the Board on 20 November 2019 and
amended on 19 March 2020 based on an authorisation by
the Annual General Meeting of 28 May 2019, as amended
in the Annual General Meeting of 18 May 2020. Share
Option Plan 2019 allows the Company to offer options for
subscription free of charge to employees and directors of
the Group (including any non-executive members of the
Board) and any person who provides services to the Group.
Each option entitles the holder of the option to subscribe
for one ordinary share in the Company. Under the rules of
Share Option Plan 2019, an aggregate maximum number
of 2,000,000 options can be granted.
On 14 October 2020, the Board confirmed the grant
of a total of 690,333 “2019A” options under Share Option
Plan 2019. The “2019A” options are exercisable between
23 July 2021 and 23 July 2025 at an exercise price of
€3.80 per share, vesting 25% per annum over a period of
four years.
Total options
At 1
January
2020
Granted
during the
period
Exercised
during
the period:
At 31
December
2020
Average subs.
price per
shares, €
Jalkanen Markku
Armstrong Frank
Manner Matti
Brown Gregory
Poulos John
Zambeletti Leopoldo
320,000
120,000
80,000
160,000
60,000
80,000
30,000
40,000
30,000
40,000
30,000
80,000
30,000
610,000
230,000
0
0
0
0
0
0
360,000
220,000
110,000
70,000
70,000
110,000
840,000
4.60
3.96
3.96
4.34
4.34
3.96
35
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Details of 2015 Option Plan are as follows
2015A options
Date of
grant
At 1
January
2020
Granted
during the
period
Cancelled
during
the period
At 31
December
2020
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
16.09.2015
80,000
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
160,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
40,000
20,000
0
0
20,000
160,000
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
2015B options
Date of
subscription
At 1
January
2020
Granted
during the
period
Cancelled
during
the period
At 31
December
2020
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
18.11.2016
80,000
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
160,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
40,000
20,000
0
0
20,000
160,000
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
36
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
2015C options
Date of
subscription
At 1
January
2020
Granted
during the
period
Cancelled
during
the period
At 31
December
2020
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
16.11.2017
80,000
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
200,000
0
0
0
0
0
0
0
0
0
0
0
0
0
0
80,000
40,000
20,000
20,000
20,000
20,000
200,000
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
2015D options
Date of
subscription
At 1
January
2020
Granted
during the
period
Exercised
during the
period:
At 31
December
2020
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
21.05.2019
80,000
Armstrong Frank
21.05.2019
40,000
Manner Matti
21.05.2019
20,000
Brown Gregory
21.05.2019
20,000
Poulos John
21.05.2019
20,000
Zambeletti Leopoldo
21.05.2019
20,000
200,000
0
0
0
0
0
0
0
80,000
0
1.09
08.10.2018
30.09.2021
0
0
0
0
0
40,000
20,000
20,000
20,000
20,000
80,000
120,000
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
37
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Details of 2019 Option Plan are as follows
2019 options
Date of
grant
At 1
January
2020
Granted
during the
period
Cancelled
during
the period
At 31
December
2020
Subscription
price per
share, €
Date from
which
exercisable
Expiry
date
Jalkanen Markku
23.07.2020
Armstrong Frank
23.07.2020
Manner Matti
Brown Gregory
Poulos John
23.07.2020
23.07.2020
23.07.2020
Zambeletti Leopoldo
23.07.2020
0
0
0
0
0
0
0
120,000
60,000
30,000
30,000
30,000
30,000
300,000
0
0
0
0
0
0
0
120,000
3.80
23.07.2021
23.07.2025
60,000
30,000
30,000
30,000
30,000
300,000
3.80
23.07.2021
23.07.2025
3.80
23.07.2021
23.07.2025
3.80
23.07.2021
23.07.2025
3.80
23.07.2021
23.07.2025
3.80
23.07.2021
23.07.2025
At 31 December
2020
Executive
Jalkanen Markku(1)
Non-Executive Directors
Armstrong Frank
Manner Matti(2)
Brown Gregory
Poulos John
Zambeletti Leopoldo
Issued Share Capital
Share Options
Ordinary shares Percentage held
Ordinary shares
Average exercise price, €
3,226,677
6.88
360,000
64,792
551,035
46,490
0
17,461
3,906,455
0.14
1.17
0.10
0.00
0.04
8.33
220,000
110,000
70,000
70,000
110,000
940,000
4.84
3.96
3.96
4.34
4.34
3.96
(1) of which 2,100,565 are held by Markku Jalkanen
directly and 1,126,112 are held by Markku Jalkanen’s wife
Sirpa Jalkanen
(2) of which 528,890 are held by Matti Manner directly
and 22,145 are held by his wife
38
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Corporate
Governance
Statement
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 (both EU and UK
domestic laws after year end 2020), 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 Funding and
Investor Relations is able to communicate externally
on behalf of the Company, and the CFO is authorised to
comment on financial matters.
email: investor.relations@faron.com
Media and investor relations:
Consilium Strategic Communications
email: faron@consilium-comms.com
Stern Investor Relations
email: faron@sternir.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
licensees, business partners,
collaborators,
licensors,
39
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 21-23 of the 2020 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 a monthly 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 acted as the
Company’s nominated adviser and broker on AIM until
27 July 2020, after which it has served as the Company’s
broker. On the same date Cair Financial Advisers LLP was
appointed as the Company’s nominated advisor on AIM.
Sisu Partners Oy is the Company’s certified advisor on
First North.
CORPORATE SOCIAL RESPONSIBILITY (CSR)
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.
40
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Faron seeks to ensure that all staff have access to the
training they need both for their own development and to
enable them to deliver a high-quality work contribution.
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.
Responsibility and Review
The Board has overall responsibility for the Company’s CSR
strategy and for 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
24 March 2021
41
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Directors’
Report
The Directors present their report together with the audited financial statements for the year ended 31
December 2020.
DIRECTORS
FINANCIAL INFORMATION
During the year ended 31 December 2020 the following
persons have been members of the Board of the Company:
Executive
Dr Markku Jalkanen, PhD | Chief Executive 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
PRINCIPAL RISKS AND UNCERTAINTIES
For a discussion of the principal risks and uncertainties which
face Faron please see pages 21 to 23 of this document.
RESULTS AND DIVIDENDS
The Consolidated Statement of Comprehensive Income
for the year is set out on here.
The Company’s loss of the financial year after taxation
and other comprehensive losses was €16.9 million (2019:
€13.3 million).
The Company has no distributable equity and thus the
Directors do not recommend the payment of a dividend
(2019: nil).
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 Chief Financial Officer.
FINANCIAL KEY PERFORMANCE INDICATORS (KPIs)
For a review of the Group’s KPIs please see page 18
Financial Review.
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 2.7 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
42
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
ANNUAL GENERAL MEETING
The Company held the Annual General Meeting on 18 May
2020.
In 2021, the Annual General Meeting will be held on 23
April 2021. 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
On behalf of the Board
Frank Armstrong
Chairman
24 March 2021
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
banks in Finland. The Group’s treasury policy is reviewed
‘Financial assets’, note 19
annually. See note 2.16
‘Financial assets and liabilities’ and note 20, ‘Financial risk
management’ in the notes to the Financial Statements for
IFRS disclosure regarding financial instruments.
SUBSTANTIAL SHAREHOLDINGS
On 31 December 2020, the Company had been notified of
the following holdings of 3% or more of the issued share
capital of the Company.
Timo Syrjälä (*)
Tom-Erik Lind
6,590,348
14.05 %
3,804,572
8.11 %
A&B (HK) Company Limited
3,408,409
7.27 %
Markku Jalkanen (**)
3,226,677
6.88 %
Marko Salmi
2,717,163
5.79 %
Fjarde AP Fonden (The Fourth
Swedish National Pension Fund)
2,205,432
4.70 %
(*) of which 2,590,728 are held directly by Timo Syrjälä directly and
3,999,620 are held by Acme Investments SPF S.à.r.l., an entity which
is wholly owned by Timo Syrjälä
(**) of which 2,100,565 are held by Markku Jalkanen directly and
1,126,112 are held by Markku Jalkanen’s wife Sirpa Jalkanen
The information presented in the above table is consistent
with the Company’s best knowledge as at 31 December
2020.
43
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
2020
2019
2020
2019
3, 4
5
6, 7, 8
6, 7, 8
9
9
10
0
2,122
(13,879)
(4,897)
(16,654)
(389)
107
0
185
(10,237)
(3,049)
(13,101)
(224)
74
0
2,122
(13,879)
(4,947)
(16,704)
(388)
113
0
185
(10,237)
(3,080)
(13,132)
(215)
77
(16,936)
(13,251)
(16,979)
(13,270)
(10)
(11)
(1)
(9)
(16,946)
(13,262)
(16,980)
(13,279)
Other comprehensive income
-
-
-
-
Total comprehensive loss for the period
(16,946)
(13,262)
(16,980)
(13,279)
Loss per ordinary share
Basic and diluted loss per share, EUR
11
(0.37)
(0.36)
(0.37)
(0.36)
44
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
2020
2019
2020
2019
12
14
24
12
13
15
16
14
361
-
565
56
996
3,263
4,108
7,371
13
386
-
529
77
14
361
18
565
191
13
386
18
529
209
1,005
1,149
1,155
2,145
7,059
9,204
3,264
4,037
7,301
2,145
7,058
9,203
Total assets
8,367
10,209
8,450
10,358
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
Other liabilities
Total non-current liabilities
Current liabilities
Borrowings
Lease liabilities
Trade payables
Other current liabilities
Total current liabilities
2,691
92,015
2,691
78,916
2,691
92,015
2,691
78,916
(96,557)
(79,997)
(96,598)
(80,003)
2
-
-
17, 18
(1,849)
1,610
(1,892)
19
14
21
19
14
22
22
2,728
199
786
3,713
122
176
4,608
1,597
6,503
2,263
261
-
2,524
163
135
2,967
2,810
6,075
2,717
199
788
3,704
122
176
4,826
1,514
6,638
-
1,604
2,263
261
-
2,524
163
135
3,173
2,759
6,230
Total liabilities
10,216
8,599
10,342
8,754
Total equity and liabilities
8,367
10,209
8,450
10,358
45
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 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
Comprehensive loss for the period
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,004 thousand
Share-based compensation
17
7,18
-
-
-
-
-
(16,980)
(16,980)
13,098
-
13,098
-
386
386
13,098
386
13,484
Balance as at 31 December 2020
2,691
92,015
(96,598)
(1,892)
46
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 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
Comprehensive loss for the period
Transactions with equity holders of the Company
Issue of ordinary shares, net of transaction
costs EUR 1,004 thousand
Share-based compensation
17
7,18
-
-
-
-
-
13,098
-
13,098
Balance as at 31 December 2020
2,691
92,015
-
-
-
-
-
-
2
-
-
-
2
(66,768)
369
(13,262)
(13,262)
-
51
51
14,452
51
14,503
(79,997)
1,610
(16,946)
(16,944)
-
13,098
386
386
386
13,484
(96,557)
(1,849)
47
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Statement of Cash Flows
As at 31 December
Group Parent
€’000
Note
2020
2019
2020
2019
Cash flow from operating activities
Loss before tax
Adjustments for:
Received grant
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
(16,936)
(13,251)
(16,979)
(13,270)
5
8
9
9
10
18
(587)
283
149
117
10
386
-
238
158
(7)
11
51
(587)
283
148
129
1
386
-
238
155
(16)
9
51
(16,578)
(12,800)
(16,619)
(12,833)
(1,097)
1,641
(1,416)
1,173
(567)
731
(1,101)
1,653
(1,441)
1,041
(360)
688
Cash used in operations
(17,450)
(11,463)
(17,508)
(11,464)
Taxes paid
Interest paid
(1)
(28)
(9)
(51)
(1)
(28)
(9)
(51)
Net cash used in operating activities
(17,479)
(11,523)
(17,537)
(11,524)
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
Proceeds from grants
Payment of lease liabilities
24
12
12
17
17
20
20
5, 21
2.19
-
(137)
(5)
(142)
14,103
(1,004)
630
(122)
1,375
(195)
-
(100)
-
(100)
15,627
(1,175)
307
-
-
(151)
-
(137)
(5)
(142)
14,103
(1,004)
630
(122)
1,375
(195)
(0)
(100)
(0)
(100)
15,627
(1,175)
307
-
-
(151)
Net cash from financing activities
14,787
14,608
14,787
14,608
Net increase (+) / decrease (-)
in cash and cash equivalents
Effect of exchange rate changes on
cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
16
16
(2,834)
2,985
(2,892)
2,984
(117)
7,059
4,108
7
(129)
16
4,067
7,059
7,058
4,037
4,058
7,058
48
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Notes to the Financial Statement
1. CORPORATE INFORMATION
company
in Finland, with
biopharmaceutical
Faron Pharmaceuticals Ltd (the ”Company”) is a clinical
stage
incorporated
its headquarters at
and domiciled
Joukahaisenkatu 6 B, 20520 Turku, Finland. The Company
has a pipeline based on the receptors involved in regulation
of immune response in oncology, organ damage and bone
marrow regeneration.Faron Pharmaceuticals Ltd. is listed
on the London Stock Exchange’s AIM market since 17
November 2015, with a ticker FARN. On 21 November 2019
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 24 March 2021.
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
49
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
a level of revenue adequate to support the Group’s cost
structure.
denominated in foreign currencies are translated at the
foreign exchange rate ruling at the date of the transaction.
The Group made a net loss of €16.9 million during the
year ended 31 December 2020. At the end of the financial
year, it had total equity of €1.8 million negative including
an accumulated deficit of €97.0 million. As at that date,
the Group had cash and cash equivalents of €4.1 million.
In February 2021, the Company raised €15.0 million
gross through a directed share issue and at 28 February
2020 Parent Company had EUR 15.5 million cash and an
unaudited equity of EUR 10.9 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 2021. 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
of comprehensive
income
liabilities
and expenses. Non-monetary assets and
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
Faron Pharmaceuticals Ltd.’s existing
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
fees earned, are recognised as revenue at a point in time,
upon transfer of control over the license to the licensee.
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 2020, 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 period.
Since the Group has reported losses, inclusion of
unexercised options would decrease the loss per share
and therefore not taken into account in diluted loss per
share calculation.
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FARON PHARMACEUTICALS OY
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2.11. Income Tax
2.15. Inventories
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.
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 VAT refund and
restricted cash in the form of security deposits for rental
agreements. 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 four government loans with
a below-market rate of interest from The Finnish Funding
Agency for Technology and Innovation (formerly “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
52
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 February 2021, the Company
had at the end of February 2021 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
•
53
FARON PHARMACEUTICALS OY
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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:
•
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.
Share-based Compensation
The Group
for share-based
compensation. For share options management estimates
recognises expenses
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 a lot of detailed information about the services
performed. The services invoiced by Contract Research
Organisations consist of contributions of various
tasks
independent subcontractors and
completed may be reported with significant delays. Also
the clinical study sites, 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 the Company has implemented a detailed tracking
process to minimize any judgement needed.
the actual
2.22. New and Amended Standards and
Interpretations Adopted by the Group
New standards not to yet implemented by the Group:
Amendments to IAS 1 Presentation of Financial State-
ments and IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors. The purpose of the
amendments is to align the definition of ‘material’ across
the standards and to clarify certain aspects of the defini-
tion. The amendments clarify that materiality will depend
on the nature or magnitude of information, or both.
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
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
54
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 2020 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
milestone payments from Pharmbio only
if certain
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 2020 (EUR 0 thousand
in 2019).
All of the Group’s non-current assets are located in
Finland.
55
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
5. OTHER OPERATING INCOME
7. EMPLOYEE BENEFITS
€’000
Year ended 31 December
2020
2019
Grant from the European Union
Grant from Business Finland
Grant component of government
loans
Other income
Total operating income
587
162
152
1,221
2,122
-
-
-
185
185
Grant from the European Union comprise of direct funding
from the European Commission under the Horizon
2020 research and innovaton programme (for research
and technological development to support the Matins
clinical program). Grant from Business Finland is also
direct funding to support Cancer IO research. The grant
component of government loan comprise of indirect
financial benefit from the below-market interest of a loan
from Business Finland which has been granted to finance
Traumakine manufacturing. The other income consists of
the reimbursement of already occurred legal expenses by
the third-party recovery services provider as announced
by the Company on 30 December 2019.
€’000
Salaries
Pension expenses –
contribution-based plans
Social security contributions
Share-based compensation
Year ended 31 December
2020
2019
(3,593)
(2,711)
(480)
(116)
(386)
(417)
(97)
(51)
Total employee benefit expenses
(4,575)
(3,276)
Employee benefit expenses by function
Research and development expenses
(2,894)
General and administrative expenses
(1,681)
Total employee benefit expenses
(4,575)
(2,099)
(1,177)
(3,276)
The average number of personnel in 2020 was 30 (2019:
24). Share-based compensation information is included
in note 18 and management remuneration information in
note 24.
8. DEPRECIATION AND AMORTISATION
6. BREAKDOWN OF EXPENSES BY FUNCTION
€’000
Year ended 31 December
2020
2019
Research and Development Expenses
€’000
Materials and services
Employee benefits
Outsourced clinical
trials services
Other R&D costs
Depreciation and amortization
Total research and
development expenses
Year ended 31 December
2020
2019
(5,739)
(2,894)
(5,604)
(2,099)
(4,393)
(1,906)
(628)
(225)
(437)
(191)
Depreciation and amortisation
by type of asset
Depreciation for right-of-use-assets
(178)
(137)
Intangible assets - patents
Intangible assets
Machinery and equipment
(98)
(3)
(4)
(94)
(2)
(4)
Total depreciation and amortisation
(283)
(238)
Depreciation and amortisation by function
Research and development expenses
(225)
(13,879)
(10,237)
General and administrative expenses
(58)
Total depreciation and amortisation
(283)
(191)
(47)
(238)
General and Administration Expenses
€’000
Other G&A costs
Employee benefits
Communication
Depreciation and amortization
Total general and
administrative expenses
Year ended 31 December
2020
2019
(2,820)
(1,681)
(338)
(58)
(1,615)
(1,177)
(210)
(47)
(4,897)
(3,049)
56
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
9. FINANCIAL INCOME AND EXPENSES
€’000
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
Total financial expenses
Year ended 31 December
2020
2019
€’000
Year ended 31 December
2020
2019
9
98
107
(127)
(227)
(22)
(13)
(389)
-
74
74
(133)
(66)
(23)
(2)
(224)
Loss before tax
(16,936)
(13,251)
Income tax calculated at Finnish
tax rate 20%
Tax losses and temporary
differences for which no deferred
tax asset is recognised
Non-deductible expenses and
tax exempt income
Non-credited foreign withholding taxes
Taxes in the statement of
comprehensive income
3,387
2,650
(3,491)
(2,858)
104
(10)
(10)
208
(11)
(11)
Tax losses and deductible temporary differences for which
no deferred assets have been recognised, are as follows:
Total financial income and
expenses, net
(282)
(150)
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 22
thousand (2019: EUR 23 thousand).
The foreign exchange losses relate to euro value
changes of cash balances nominated in Pound Sterling.
Unrealised foreign exchange loss is EUR 117 thousand
and EUR 7 thousand for the years ended 31 December
2020 and 2019, respectively.
10. TAX EXPENSE
€’000
Tax expense
Total tax expense
Year ended 31 December
2020
2019
(10)
(10)
(11)
(11)
Income tax consists of foreign corporation tax.
The difference between income taxes at the statutory
tax rate in Finland (20%) and income taxes recognised in
the statement of comprehensive income is reconciled as
follows:
€’000
Year ended 31 December
2020
2019
R&D expenses not yet deducted
in taxation (1)
Tax losses carried forward (2)
Total
54,981
38,158
93,139
58,606
16,053
74,659
(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
2020
2019
Expiry within five years
Expiry within 6-10 years
Total
13,276
24,882
38,158
31
16,022
16,053
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 18,628 thousand
(2019: EUR 14,932 thousand).
57
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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.
12. INTANGIBLE ASSETS AND MACHINERY AND
EQUIPMENT
€’000
Intangible
assets
Machinery
and
equipment
11. LOSS PER SHARE
Book value on 1 January 2020
Loss per share is calculated by dividing the net loss by
the weighted average number of ordinary shares in issue
during the year.
Additions
Disposals
€’000
Year ended 31 December
2020
2019
Loss for the period
(16,946)
(13,262)
Weighted average number of
ordinary shares in issue
Basic and dilutive loss
per share (in €)
45,712,111
36,850,577
Accumulated depreciation/amortisation
(495)
(0.37)
(0.36)
Book value 31 December 2020
Depreciation/amortisation
Book value 31 December 2020
As at 31 December 2020
Acquisition cost
Accumulated disposals
As of 31 December 2020, Faron Pharmaceuticals Ltd. had
only share options outstanding. Number of potentially
dilutive
totalled
instruments currently outstanding
3,694,000 as of 31 December 2020 (31 December 2019:
1,540,900). Since the Group has reported a net loss, the
share options would have a further dilutive effect and are
therefore not taken into account in diluted loss per share-
calculation. As such, there is no difference between basic
and diluted loss per share.
Book value 1 January 2019
Additions
Disposals
Depreciation/amortisation
Book value 31 December 2019
As at 31 December 2019
Acquisition cost
Accumulated disposals
529
137
-
(102)
565
1,060
-
565
525
100
-
(96)
529
923
-
13
5
-
(4)
14
44
-
(30)
14
17
-
-
(4)
13
39
-
(26)
13
Accumulated depreciation/amortisation
(394)
Book value 31 December 2019
529
13. NON-CURRENT PREPAYMENTS AND OTHER
RECEIVABLES
€’000
As at 31 December
2020
2019
Production supplies
Other receivables
Total non-current prepayments
and other receivables
-
55
55
38
39
77
Group has written down production supplies due to
products’ shelf life extinction. Other receivables consist
mainly of restricted cash in the form of security deposits
for rental agreements.
58
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
14. RIGHT-OF-USE-ASSETS AND LEASING
LIABILITIES
€’000
31 December
2020
1 January
2020
Right-of-use assets
Office
Vehicle
Total right-of-use assets
Lease liabilities
Long-term leasing liability
Short-term leasing liability
Total leasing liabilities
359
2
361
199
176
375
366
20
386
261
134
395
The Company rented additional office premises during
2020, the addition on Right-of-use assets was EUR 152
thousand .
15. CURRENT PREPAYMENTS AND OTHER
RECEIVABLES
€’000
Prepayments
Other receivables
Receivable for production defects
VAT receivable
Group Parent
2020
1,993
740
434
96
As at 31 December
2020
2019
895
521
434
295
1,993
741
434
96
2019
895
521
434
295
Total current prepayments and other receivables
3,263
2,145
3,264
2,145
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 accrued invoices and
receivables from the third-party recovery services provider
as announced by the Group on 30 December 2019.
59
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
16. CASH AND CASH EQUIVALENTS
€’000
Bank accounts
Total cash and cash equivalents
Group Parent
2020
4,108
4,108
As at 31 December
2020
2019
7,059
7,059
4,037
4,037
2019
7,058
7,058
17. SHAREHOLDERS’ EQUITY
Movements in number of shares, share capital and reserve
for invested unrestricted equity were as follows:
€’000
1 January 2019
Issue of new shares, net of transaction costs
31 December 2019
1 January 2020
Issue of new shares, net of transaction costs
31 December 2020
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.
On 23 April 2020, the number of shares was increased
to 45,183,510 following the issue of 1,892,763 new shares,
On 24 April 2020, the number of shares was increased to
46,133,510 following the issue of 950,000 new shares,
on 28 April 2020, the number of shares was increased to
46,790,747 following the issue of 657,237 new shares.
On 22 May 2020, the number of shares was increased to
46,799,747 following the issue of 9,000 new shares. On 23
September 2020, the number of shares was increased to
46,814,747 following the issue of 15,000 new shares, On
30 November 2020, the number of shares was increased
to 46,896,747 following the issue of 82,000 new shares.
60
Total registered
shares (pcs)
Share
capital
Reserve for
unrestricted
equity
31,027,894
12,262,853
43,290,747
43,290,747
3,606,000
46,896,747
2,691
-
2,691
2,691
-
2,691
64,464
14,452
78,916
78,916
13,098
92,015
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
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 2019 and
2020, the Board recognised all relevant transactions in the
invested unrestricted equity reserve.
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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
61
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
2020
2015 Option Plan
2019
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
500,000
385,000
385,900
500,000
270,000
-
-
-
-
-
-
-
-
-
-
-
106,000
-
-
-
-
-
-
-
-
-
230,000
-
-
385,000
385,900
500,000
394,000
385,000
385,900
500,000
500,000
385,000
385,900
500,000
394,000
385,000
385,900
500,000
500,000
-
-
-
-
-
-
-
3.32
-
-
-
-
-
-
0.20
-
2020
2015 Option Plan
2019
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 2020 or 2019 based on
share options granted under the 2015 Option Plan. The
share based compensation expense for the Option Plan
2015 was EUR 0 in 2020 (EUR 51 thousand in 2019).
62
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Option Plan 2019
The Option Plan 2019 was approved at the Company’s
board of directors meeting on 20 November 2019 and
amended on 19 March 2020 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, Scientific Advisory Board, the management
team and other management and employees for no
consideration.
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 2.000.000 in aggregate, with
certain maximum limits per person. The details of the
plan are available on www.faron.com. 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 2019
grant options is euro equivalent of the average share
price at the London AIM list for the past 90 days prior to
the grant date. For the GBP to EUR price conversion, the
exchange rate of the European Central bank on the grant
date is used. The exercise price for ordinary shares based
on plan 2019 granted options in 2020 is €3,80.
Company’s board has confirmed the grant of a total of
690,333 options in the company in 2020 under the Option
plan 2019. The Options have been allocated under the
Share Option Plan 2019 and are exercisable between 23
July 2021 and 23 July 2025 at an exercise price of €3.80
per share, vesting 25% per annum over a period of four
years.
Key characteristics and terms of the option plan are
listed in the table below.
201 9 Option Plan
Maximum number of share options
Exercise price, EUR
Dividend adjustment
Beginning of subscription period
End of subscription period
Vesting conditions
2020
2,000,000
3.80
No
23 July 2021
23 July 2025
Service until the beginning of the subscription period
63
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
2020
2019 Option Plan
Number of share options
Outstanding at 1 January
Granted
Forfeited
Exercised
Outstanding at 31 December
Exercisable at 31 December
2020
2019 Option Plan
Determination of the fair value for the share options granted
Share price at grant date, EUR
Subscription price, EUR
Volatility, %(*)
Interest free rate, %
Expected dividends yield, %
Option fair value, EUR
2020
2,000,000
690,333
-
-
2,000,000
-
2020
4.7–5.56
3.80
62.76
0.01
0
1.83–3.08
(*) 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.
The share-based compensation expense for the Option
Plan 2019 was EUR 386 thousand in 2020 (EUR 0
thousand in 2019).
64
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 Business Finland R&D loans
Total financial liabilities measured at amortised cost
2020
151
4,108
4,259
2,115
2,839
4,954
(*) Prepayments are excluded as they are not considered to be financial instruments.
Group Parent
As at 31 December
2020
2019
334
7,059
7,393
2,967
2,426
5,393
151
4,037
4,188
2,293
2,839
5,132
2019
334
7,058
7,392
3,173
2,426
5,599
124 thousand (2019 EUR 107 thousand). Grant payments
received in advance of the incurrence of the costs the
grant is intended to compensate are deferred at the
reporting date and presented under advances received on
the balance sheet.
This section sets out an analysis of net debt and the
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.
Due to the short-term nature of the other receivables, their
carrying amount is considered to equal their fair values.
Borrowings in the Form of Business Finland R&D Loans
Fair value for the Business Finland 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 Business Finland loans was
EUR 2,839 thousand (2019 EUR 2,099 thousand).
Business Finland 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 Business Finland. For more information on
contractual maturities of the Business Finland R&D loans
and interests is provided in the note 19. The accrued
interest on Business Finland R&D loans amounted to EUR
65
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
€’000
Net debt
Cash and cash equivalents
Lease liabilities
Business Finland R&D loans- repayable within one year
Business Finland R&D loans- repayable after one year
Net debt
Group Parent
As at 31 December
2020
2019
2020
2019
4,108
(375)
(122)
(2,717)
894
7,059
(396)
(163)
(2,263)
4,237
4,037
(375)
(122)
(2,717)
823
7,058
(396)
(163)
(2,263)
4,236
Group
Parent
€’000
Cash and cash
equivalents
Borrowings
Total
Cash and cash
equivalents
Borrowings
Total
Net debt as at 1 Jan 2019
Cash flows
Foreign exchange adj.
Lease liability
4,067
2,985
7
-
Other non-cash movements
-
Net debt as at 31 Dec 2019
Cash flows
Foreign exchange adj.
Lease liability
Other non-cash movements
7,059
(2,834)
(117)
(2,132)
(307)
-
(396)
13
1,935
2,678
7
(396)
4,058
2,984
16
-
13
-
(2,132)
(307)
-
(396)
13
1,926
2,677
16
(396)
13
(2,822)
4,237
7,058
(2,822)
4,236
(508)
(3,342)
(508)
(3,400)
(375)
491
(117)
(375)
491
894
(2,892)
(129)
(375)
491
4,037
(3,214)
(129)
(375)
491
823
Net debt as at 31 Dec 2020
4,108
(3,214)
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, grants
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
66
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
are volatile. The 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 2020, the contractual maturity of
loans and interests was as follows:
€’000
2021
2022
2023
2024-
thereafter
Total
R&D loans
Repayment of loans
Interest expenses
Lease liabilities
Total
122
32
199
354
523
29
16
567
1,153
1,504
3,302
21
0
25
0
106
215
1,173
1,528
3,623
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
67
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
(b) Market Risk
21. OTHER NON-CURRENT LIABILITIES
€’000
Advance received
Total non-current liabilities
As at 31 December
2020
2019
786
786
-
-
Group received a grant of EUR 1,375 thousand from the
European Union. EUR 587 thousand is recognised as other
income and the rest of the grant is posted as advanced
received.
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 2020, the Group had cash and cash
equivalents of EUR 1,945 thousand, GBP 1,039 thousand,
CHF 76 thousand and USD 1,149 thousand (2019: EUR
6,611 thousand and GBP 380 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 Business Finland
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.
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
22. TRADE PAYABLES AND OTHER CURRENT
LIABILITIES
€’000
Trade payables
Clinical trial hospital fees
Accrued research & development costs
Accrued payroll
Other liabilities
Other accruals
Advances received
Total
23. 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
2020
2019
27
26
-
68
131
-
The Group’s operating lease commitments comprise of
lease commitments for machines and equipment with low
value leases of 3 to 4 years. 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 one becomes
payable upon the Group receives a certain amount of Net
Sales for Clevegen.
As announced by the Group on 2 October 2019 and
30 December 2019, Faron Pharmaceuticals Ltd. has
Group Parent
As at 31 December
2020
2,115
1,415
1,506
751
146
160
112
2019
2,967
849
811
603
306
166
75
2020
2,293
1,415
1,506
722
132
160
112
2019
3,173
849
811
558
300
166
75
6,205
5,777
6,340
5,932
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. The arbitration is ongoing and the
final arbitration award is expected to be issued during the
autumn 2021.
24. RELATED PARTY TRANSACTIONS
Parent and subsidiary relations of Faron Pharmaceuticals
Group on 31 December 2020:
Country
Group
holding
%
Group
voting
%
Companies owned by
the parent company
Faron Europe GmbH Switzerland
Faron USA LLC
USA
100
100
100
100
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
The Group identifies the following related parties:
Management and Board Shareholding
• 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, 2019
and 2020.
Key Management Personnel
The Company’s key management personnel consist of the
following:
• Members of the Board of Directors
• Management team, including CEO
Management(*) shareholding, 31 December 2020
Number of shares (pcs)
Shareholding, percentage
Board(**) shareholding, 31 December 2020
(excluding the shareholding of CEO)
Number of shares (pcs)
Shareholding, percentage
Total number of shares
outstanding at
31 December 2020 (pcs)
4,725,207
10.1 %
679 778
1.4 %
46,896,747
(*) Presented information for the Management includes the executive
directors of the Board
(**) Presented information for the Board includes only non-executive
directors.
€’000
Compensation of key
management personnel(*)
Salaries and other short-
term employee benefits
Post-employment benefits
Share-based payments
Year ended 31 December
2020
2019
Transactions with Related Parties
There are no additional related party transactions during
2019 and 2020 than already disclosed.
2,025
1,350
268
155
242
51
Total
2,448
1,643
(*) Presented information for the Management includes the executive
directors of the Board
The Management team was awarded 282,333 share
options during 2020 (2019: 265,000 share options). At
the end of the 2020, the number of outstanding options
and share granted to the Management team amounted
to 1,003,013 share options (at the end of 2019: 800,680
share options).
Non-executive Directors were awarded 580,000 share
options during 2020, (2019: 120,000 share options). At the
end of 2020, the number of outstanding options and share
options granted to the non-executive directors amounted
to 180,000 share options (at the end of 2019: 400,000
share options).
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
25. EVENTS AFTER THE BALANCE SHEET DATE
On 11 February 2021 Faron annouced that the Company
raised EUR 15.0 million thousand before expenses by way
of the placing of 3,521,127 ordinary shares at the Issue
Price of EUR 4.26 per share.
Result and Dividends
The statement of comprehensive income is on page 44.
The Group’s loss for the accounting period was
16,946,261.84 euro (2019: 13,261,911.93 euro).
The Board of Directors does not recommend the
payment of a dividend (2019: nil).
BOARD SIGNATURES
Turku, 24 March 2021
Frank Armstrong
Chairman
Markku Jalkanen
CEO
Gregory Brown
Matti Manner
John Poulos
Leopoldo Zambeletti
THE AUDITOR’S NOTE
A report on the audit performed has been issued today
Helsinki, 24 March 2021
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
71
FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
1 (3)
Auditor’s Report (Translation of the Finnish Original)
To the Annual General Meeting of Faron Pharmaceuticals Ltd
Report on the Audit of the Financial Statements
Opinion
In our opinion the consolidated and the parent company’s 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 Ltd (business identity code 2068285-4) for
the year ended 31 December 2020. 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 stated in the
notes, additional funding has not been confirmed by approval of the financial statements. This fact together with
other matters stated in the notes, indicates that a material uncertainty exists that may cast significant doubt on
the Company’s ability to continue as a going concern. Our opinion has not been 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 and the
parent company’s financial statements that give a true and fair view in accordance with International Financial
Reporting Standards (IFRS) as adopted by the EU, and comply with the statutory requirements. The Board of
PricewaterhouseCoopers Oy, Authorised Public Accountants, P.O. Box 1015 (Itämerentori 2), FI-00101 HELSINKI
Phone +358 20 787 7000, www.pwc.fi
Reg. Domicile Helsinki, Business ID 0486406-8
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
2 (3)
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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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
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 the
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.
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 March 24, 2021
PricewaterhouseCoopers Oy
Authorised Public Accountants
Panu Vänskä
Authorised Public Accountant (KHT)
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FARON PHARMACEUTICALS OY
ANNUAL REPORT 2020
Faron Pharmaceuticals Oy
Joukahaisenkatu 6, 20520 Turku Finland
Phone: +358 2 469 5151
Fax: +358 2 469 5152
Email: info@faron.com
75